Shopping Centers: Continue to Deliver Opportunity & Returns

January 9, 2025 | Charleston, SC – Today’s constant news flow can make potential investors hesitant to enter the commercial real estate market, especially with retail shopping centers. However, fundamentals show that shopping centers are a stable and attractive investment. Seasoned investors know that strategic purchases during downturns can reduce risks and yield higher returns as markets recover.

Why Shopping Centers Are a Smart Investment

Despite concerns over bankruptcies and closures, major tenants like Aldi and Burlington continue expanding, keeping well-located shopping centers in high demand and vacancy rates low. While interest rates have risen, market liquidity remains strong with plenty of capital available for quality assets. For sellers willing to adjust pricing, now is an ideal time to sell, as investor demand is high and competing inventory is limited.

Investors are shifting their focus from cap rates (the rate of return on an investment property) to cash flow and yield. Yield-driven investments are appealing because they provide steady income over time. Current retail vacancy rates, at around 5.6%, are at their lowest levels since 2007, which bodes well for future rent growth. Shopping centers offer a unique opportunity to generate consistent income, particularly as retail vacancies remain stable and new construction is limited.

Jordan Gomez, VP Investment Advisor at SIG, says necessity-based, daily-needs retail offers the most security for investors. “A well-located neighborhood shopping center provides stability, steady foot traffic, and resilience in economic downturns, making it an ideal investment. Anchored by essential services like grocery stores and pharmacies, these centers serve the daily needs of local communities, ensuring consistent customers. With long-term leases from reliable tenants and less reliance on trendy retail, neighborhood centers offer dependable cash flow and lower vacancy risk. They thrive in growing residential areas, providing income security and potential appreciation as the community expands.”

Overcoming Market Challenges

While some retailers, like Party City, have closed stores, these closures create opportunities for investors to re-lease spaces, often at higher rents. Although tighter lending conditions may raise concerns, banks still offer favorable options for well-positioned shopping centers with strong fundamentals.

Buyers should focus on value-added opportunities, where properties can be improved through re-tenanting, facility upgrades, or optimizing the tenant mix. These strategies can significantly boost net operating income and property value, with yields potentially rising from 7% to 20%. This upside potential makes retail shopping centers an appealing prospect for savvy investors seeking to unlock hidden value.

The Bright Future

The retail sector is expected to grow, driven by rising disposable incomes and increased consumer spending. As new retail developments have slowed, supply remains tight, supporting rent growth. Landlords in high-demand markets like Miami and Nashville are already benefiting by raising rents and securing long-term tenants.

For those worried about rising interest rates, it’s important to remember that markets tend to adjust. Although financing costs may be higher now, increased lender competition is likely to stabilize or lower rates in the near future. This environment remains favorable for investors focused on securing quality properties with strong tenants and long-term growth potential.

In conclusion, shopping centers offer a compelling opportunity for investors looking for stable, income-generating assets with the potential for long-term appreciation. The fundamentals of retail real estate—low vacancy rates, rising rents, and limited new supply—make it a resilient and attractive asset class. Whether you’re an experienced investor or new to the field, now is the time to consider the long-term benefits of shopping center investments.

Jordan Gomez is a Vice President – Investment Sales Advisor at Sands Investment Group (SIG).

Learn more at SIGnnn.com, LinkedIn, Facebook and Instagram.

See the article here as published in Wealth Management 2025 Market Outlook.