Retail Real Estate Investing: What Works Now and What Doesn't
FAM Capital | Investor Education Series
Retail real estate has a reputation problem. People hear the word retail and they think dead malls, empty storefronts, and an industry being eaten alive by Amazon. And if that is all you see when you look at retail, you are looking at the wrong part of the market. The reality is that retail real estate is not one thing. It is dozens of different formats, tenant types, and strategies, and the difference between what works and what does not work has never been more clear than it is right now.
E-commerce did not kill retail. It accelerated a trend that was already happening. Bad retail was dying before Amazon showed up. Poorly located centers, commodity-based tenants selling products that are easier to buy online, and oversupplied markets were already losing ground. E-commerce just made it faster and more visible. But the retail that survived is stronger for it. There is less competition for quality spaces. The tenants that remain are the ones with business models that require a physical location. And the investors who understand the difference between retail that works and retail that does not are finding some of the most stable, cash-flowing assets in real estate.
This article breaks down where the opportunities are in retail investing right now, what formats and tenant types to focus on, what to avoid, and how to evaluate a retail property so you are investing in the part of the market that is thriving rather than the part that is disappearing.
What Works: Grocery-Anchored Retail
Grocery-anchored retail is the gold standard of retail real estate investing. It has been for decades and nothing about the current market has changed that. If anything, the case for grocery-anchored centers has gotten stronger as weaker retail formats have fallen away and the remaining demand has concentrated around necessity-based shopping.
The anchor grocery store is the engine that makes the entire center work. It drives traffic. People go to the grocery store every single week, most of them multiple times a week, regardless of what the economy is doing. A recession does not stop people from buying food. A market correction does not stop people from buying food. That traffic is constant, predictable, and largely immune to the economic cycles that devastate other retail formats. Every other tenant in the center benefits from that traffic. The nail salon next to the grocery store gets walk-in customers who are already there to buy groceries. The dry cleaner at the end of the strip gets drop-offs from people who stopped at the grocery store on the way home from work. The sandwich shop gets lunch traffic from grocery store employees and nearby workers. The anchor creates an ecosystem, and every tenant in that ecosystem benefits.
Grocery stores also sign long-term leases. Ten years is common. Fifteen and twenty-year leases are not unusual. When a grocery chain commits to a location, they are making a significant investment in build-out, equipment, and supply chain logistics. They are not leaving after three years. That lease stability is rare in retail and it provides a foundation of predictable income that you can build the rest of the center around. You know that 40% or 50% of your gross revenue is locked in for the next decade or more with a credit-worthy tenant. That changes the entire risk profile of the investment.
The combination of recession-resistant traffic, long-term lease stability, and the halo effect on surrounding tenants is why grocery-anchored retail trades at lower cap rates than other retail formats. Investors pay a premium for it because the income is as close to guaranteed as retail gets. And for passive investors evaluating a retail syndication, a grocery-anchored center with strong co-tenants in a good location is one of the lower-risk retail investments you can make.
What Works: Service-Based Retail
The second category of retail that continues to perform well is service-based businesses. These are tenants whose entire business model requires a customer to physically show up. You cannot get a haircut on Amazon. You cannot get your nails done through an app. You cannot ship your teeth to a dentist for a cleaning. These businesses are structurally immune to e-commerce disruption because the service itself cannot be digitized or delivered to your doorstep.
- Hair salons
- Barbershops
- Nail salons
- Dental offices
- Urgent care clinics
- Physical therapy practices
- Gyms
- Martial arts studios
- Tutoring centers
- Tax preparation offices
- Insurance agencies
- Shipping and packaging stores like UPS and FedEx locations
These are all businesses that need a physical space in a convenient location where their customers can walk in and receive a service. They have been operating in strip centers and retail corridors for decades and the rise of e-commerce has not touched their business model.
Service-based tenants also tend to be sticky. A hair salon that builds a client base in a location does not want to move. Their customers know where they are. Their reputation is tied to that location. Moving means losing clients, rebuilding visibility, and starting over on signage and marketing. This stickiness is good for landlords because it means lower turnover, longer effective occupancy, and tenants who are motivated to renew their leases even if you push rents at renewal.
The risk with service-based tenants, particularly smaller local operators, is that individual businesses fail. A hair salon can close because the owner retires. A restaurant can close because the food was bad. An insurance agency can close because the agent moved. These are small businesses and small businesses have higher failure rates than national chains. The mitigation is diversification of your tenant mix and structuring your leases to protect the landlord, which we will cover later in this article.
What Works: Small Business Strip Centers in Growing Areas
There is a category of retail real estate that flies under the radar of most institutional investors but can produce excellent returns for smaller operators and syndicators: strip centers anchored by a mix of small local businesses in areas experiencing population and commercial growth.
These are not glamorous properties. They are typically 5,000 to 20,000 square feet of retail space divided into four to ten units, occupied by a mix of local service providers, small restaurants, and neighborhood-serving businesses. They do not have a national anchor tenant. They do not have the traffic guarantees that come with a grocery store. What they do have is a location in an area where new residents are moving in, new businesses are opening, and demand for local services is growing.
The key to making this type of retail investment work is the tenant mix. You want businesses that complement each other and draw different customers at different times throughout the day:
- A coffee shop that draws morning traffic.
- A lunch spot that draws midday traffic.
- A hair salon that draws appointment traffic throughout the afternoon.
- A convenience store or small market that draws evening traffic from residents on their way home.
When the mix is right, the center has activity from morning to evening and each tenant benefits from the traffic the others generate. When the mix is wrong, you have a cluster of businesses that all draw the same customers at the same time and the center feels dead the rest of the day.
These properties can be strong value-add candidates as well. A strip center with below-market rents, deferred maintenance, and a couple of vacant units in a growing area is exactly the kind of asset where a hands-on operator can create significant value. Clean up the property, improve the signage and curb appeal, fill the vacancies with complementary tenants, and push rents to market. The improvement in NOI translates directly to an increase in property value.
What Doesn't Work: The Retail You Should Avoid
Not all retail is created equal, and there are formats that most investors should avoid entirely unless they have deep expertise and a very specific thesis for why a particular deal is the exception.
Traditional Enclosed Malls
The enclosed regional mall is the format that has taken the most damage over the past two decades, and the trend is not reversing. The malls that are thriving are the top-tier Class A properties in affluent markets with luxury tenants and experiential offerings. Those assets trade at prices that are out of reach for most private investors. The Class B and C malls are the ones that are struggling, and they are struggling because their tenant base was built on department stores and mid-range national retailers, both of which have been devastated by e-commerce and changing consumer behavior.
When a department store anchor closes, the co-tenancy clauses in other tenants' leases often allow those tenants to reduce their rent or terminate their leases entirely. One anchor closure can trigger a cascade of departures that empties the mall. Repositioning an enclosed mall is extraordinarily expensive and complex. Most investors should stay away.
Retail Dependent on a Single Anchor
Any retail center where a single tenant represents 50% or more of the gross revenue is a concentrated risk. If that tenant leaves, you lose half your income overnight and the remaining tenants may lose the traffic that made their locations viable. This applies to big box anchored centers, single-tenant properties leased to national retailers, and any configuration where the economics of the center depend on one lease.
There are investors who do well with single-tenant net lease properties, but that is a specialized strategy that requires deep credit analysis of the tenant, an understanding of lease rollover risk, and the ability to absorb or re-tenant the space if the tenant defaults. For most investors, diversified tenant mixes are a safer approach.
Commodity Retail
If a tenant is selling products that are easier, cheaper, or more convenient to buy online, that tenant's long-term viability is questionable. This is the category of retail that e-commerce hit hardest, and there is no reason to think the pressure will ease. Clothing, electronics, books, home goods, sporting goods, and general merchandise are all categories where online retailers have significant and growing market share. A strip center full of tenants selling these types of products is competing with Amazon on convenience and price, and that is a competition that physical retail cannot win.
The test is simple. Ask yourself: does this tenant provide something that requires the customer to physically be there? If the answer is no, the tenant is vulnerable to e-commerce disruption regardless of how well the business is doing today.
Lease Structure: Matching the Lease to the Tenant
The lease structure in retail real estate matters more than it does in residential investing because the terms are individually negotiated and the financial impact of getting the structure wrong is significant. But there is no single lease structure that works for every retail property. The right structure depends on the tenant.
Triple net leases are the goal with larger, more established tenants. National chains, grocery stores, corporate-backed franchises. Under a NNN lease, the tenant pays base rent plus their share of property taxes, insurance, and common area maintenance. Your income as the landlord is predictable because your exposure to rising operating costs is minimal. The tenant handles most of the variable expenses. This structure works because these tenants have the financial sophistication and resources to manage those obligations reliably.
Modified gross leases are the better fit for smaller local business tenants. Under a modified gross structure, the landlord and tenant share operating costs in a defined way, but the landlord retains more control over maintenance, insurance, and property tax payments. This matters because smaller tenants often do not have the experience or discipline to maintain a property to the standard you need. If you hand a small local business full NNN responsibility for their space, you may end up with deferred maintenance, lapsed insurance, or unpaid tax obligations that come back on you as the property owner. Modified gross lets you keep control of those critical items while still passing through a fair share of operating costs.
Regardless of which lease structure you use, built-in rent escalations are essential. Your income needs to grow over time. Annual increases of 2% to 3% are standard. Some leases use CPI adjustments. Some use fixed dollar increases. The mechanism matters less than the principle: if your rent stays flat for five years while your costs increase, your margins shrink and your property loses value. Every retail lease should include a clear, enforceable escalation schedule.
How to Evaluate a Retail Property
Retail properties require a different evaluation framework than residential properties. The fundamentals still apply: location, income, expenses, condition, and debt structure. But retail adds several layers that you need to assess.
Tenant quality is the first thing to evaluate. Who is in the building and how strong are their businesses? A center with a grocery anchor, a national pharmacy, and a mix of established local service providers is a fundamentally different risk profile than a center with a payday lender, a discount furniture outlet, and three vacant units. Look at the tenant roster and ask yourself whether these businesses will still be operating in five years. If you are not confident, the income projections built on those leases are not reliable.
Lease rollover is the second critical factor. When do the leases expire? If 60% of the center's leases expire within the next two years, you have significant re-leasing risk regardless of how strong the current tenants are. Staggered lease expirations are ideal because they spread the risk of turnover across multiple years rather than concentrating it.
Traffic and visibility are next. A retail property needs people driving or walking past it. Traffic counts, intersection proximity, signage visibility from the road, and ease of access (can customers turn into the parking lot easily from both directions?) are all factors that directly impact the viability of the retail tenants. A center that is hard to see, hard to get to, or in a low-traffic location will always struggle to attract and retain quality tenants.
Finally, look at the competition. What other retail is nearby? Is the market oversupplied with similar retail space? Are there new developments coming that will add competing inventory? A center that is performing well today can be undermined by a new development a mile away that offers newer space at competitive rates and pulls tenants away. Understanding the competitive landscape is essential to underwriting the long-term stability of the property.
The Bottom Line
Retail real estate is not dying. Bad retail real estate is dying, and it has been dying for years. The retail that works today is grocery-anchored, service-based, and necessity-driven. It serves customers who have to physically show up. It sits in locations with strong traffic and growing populations. It is leased to tenants whose business models cannot be replicated online.
The investors who understand this distinction are finding stable, cash-flowing assets with long-term lease structures and built-in income growth. The investors who treat all retail as the same are either avoiding the asset class entirely and missing opportunities, or investing in the wrong formats and getting burned. Know what works, know what does not, and evaluate every retail deal through that lens.
