The Unanchored Strip Center Space

The unanchored strip center sector has evolved into one of the most dynamic areas of commercial real estate. Once considered a secondary retail format, these neighborhood shopping hubs now attract significant attention from a diverse set of investors.

 

Matthews Real Estate Investment Services recently hosted a roundtable discussion featuring leading strip center owners, operators, and investors to explore the factors fueling this asset class’s rise, strategies for success, and challenges on the horizon. The panel, convened by Jeff Enck, First Vice President, represented a who’s who of the strip center space—from long-time pioneers to newer entrants drawn to the sector’s compelling fundamentals. Their insights highlighted why this previously overlooked niche has become a focal point for many investment groups today.

 

Why Strip Centers?

In the 1990s, strip centers were often opportunistic projects on leftover parcels of land. Population growth during this period and through the 2000s allowed for spec strip centers to be built in a variety of locations, with over 51,000 multi-tenant properties being built over these two decades. Over time, rising rents and increasing demand brought more structure and the strip center landscape has undergone a significant transformation. Early adopters entered the space despite skepticism fueled by the rise of e-commerce, led by Amazon, which cast doubts on the future of traditional retail. Several panelists began investing in strip centers during this period, a contrarian move at the time.

 

Going back to 2017, when Amazon acquired Whole Foods, many thought that this signaled the end of brick-and-mortar retail. Then came COVID, which cemented that belief. However, in the post-COVID era, the narrative shifted. Retail occupancy rates surged to impressive levels, with many markets reporting 95-96% occupancy, and unanchored retail strips achieving record-high performance. Today, brick-and-mortar retail has become a key part of the logistics ecosystem. They excel in convenience, offering easy access, high visibility, and functional simplicity, ensuring steady customer traffic.

 

Kristen Neyland of Crow Holdings described strip centers as the “multifamily of retail,” highlighting their flexibility. When one tenant leaves, the space can be quickly prepared for the next. Rafat Shaikh from Safeway Group observed, “I haven’t seen this in the last 40 years for the strip center…there are so many tenants in the market. And we lose one tenant, and we have four tenants looking.” This adaptability, combined with essential services—like salons, medical clinics, and quick-service restaurants—ensures these centers remain resilient.

 

Additionally, the lack of new supply has increased demand, and strip centers offer attractive yields compared to other sectors. John Morgan Jr of SouthCoast Centers remarked, “when you have no new supply and increased demand on top of tenants thriving, then that is compelling.” They stand out as an investment category with positive leverage, strong fundamentals, and potential for cap rate compression.

 

 

Where is the Opportunity?

Strip centers’ historical ownership by private individuals creates opportunities for value-add strategies. Many of these owners have left value on the table due to poor management or under-leasing.

 

Michael Godfrey from Stablewood noted that location remains critical, with successful centers often situated in “healthy tissue” markets—areas with strong population density, household income stability, and growth potential. Additionally, strip centers are generally neighborhood-focused, severing local communities, which ensures steady demand and resilience. These attributes—ownership dynamics and prime locations—have been pivotal in drawing investors to this asset class.

 

When evaluating a strip center for acquisition, vacancy rates and the opportunity for value-add improvements are key considerations. Seasoned rents are often one of the biggest attractions to the strip center model. These properties frequently have rental rates significantly below market, offering opportunities to unlock value. For instance, rents in some centers might be $10 to $15 below those of outparcel locations anchored by well-known brands like Starbucks or Chipotle.

 

 

Derek Waltchack from Shannon Waltchack highlighted cyclical rent growth in the sector: “There’s these moments in time when rents really grow in the space. And then usually supply comes online and douses it…and then you have 10 years of nothing being built…I think we’re in a really good place right now.” Regarding rent levels he said, “at some point, you price out certain business models that can no longer afford [the top tier rents].”

 

One strategy shared by participants involves focusing on second or third-generation assets. By the time these properties change hands, rents often stabilize and become more predictable. This approach avoids assets with initial lease terms, where rents may decline over time, and prioritizes properties with established tenant bases and room for incremental rent growth.

 

Leveraging Market Knowledge and Long-Term Strategy

A deep understanding of local markets is essential for making informed investments. Familiarity with a property’s nuances and surrounding submarket provides an intrinsic advantage. Tools like sales aggregators, demographic data, and traffic counts are critical in unfamiliar markets, but the rent roll remains the most revealing indicator. Analyzing the rent roll offers insights into tenant quality, property stability, and long-term potential, helping investors make confident decisions even in new territories.

 

At M&P Shopping Centers, Jeremy Rosenthall described a long-term ownership philosophy drives a focus on tenant retention. Keeping tenants in place often outweighs the costs of replacing them, such as commissions, downtime, and tenant improvement allowances. This approach balances providing competitive rents with supporting tenant success, ensuring stability for the property and the tenants alike. Long-standing ownership, dating back to properties acquired in 1964, has allowed the company to maintain flexibility in adapting to tenant needs while ensuring mutual growth.

 

John Morgan Jr also highlighted the challenges of a short-term hold strategy for unanchored retail centers, stating, “these assets are very tough for a three-year hold and exit period. I find it interesting that [most people on the panel] have very long-term horizons.”

 

Success with the Strip Center Tenant Mix

While strip centers value credit tenants for their perceived stability, the importance of local and regional tenants cannot be overstated. A balanced tenant mix—typically one-third corporate, one-third regional, and one-third local—is critical to creating synergy and ensuring properties operate effectively. Tom Hahn from Prudent Growth Partners added, “we like easy to backfill kind of spaces with modest rents. [And] every center that we have now has probably a medical tenant, or a veterinarian clinic, or dentist.” On an operational level, he emphasized the importance of supporting tenants with capital inducements like HVAC replacements to ensure renewal at modest rent increases.

 

Local tenants bring unique value through their connections to the community, offering the neighborhood flair and familiarity that many customers prefer over generic corporate chains. These businesses often build loyal followings, becoming household names in their markets. Mom-and-pop tenants stand out for their transparency and responsiveness. Kristen Neyland explained that “unlike national tenants, whose decisions are often made in corporate boardrooms with little room for flexibility, local operators make decisions at the dinner table, allowing for better collaboration with landlords.” This relationship dynamic was especially evident during COVID, when local tenants proved far more resilient and communicative than many corporate credit tenants, who were often slower to respond and more rigid in their negotiations said Ron Chanin from Riverwood Properties whose firm started as a developer in the early 90s. They looked at all different alternatives and the unanchored model was the easiest to enter.

 

Moreover, local operators can sometimes outperform their corporate predecessors. For instance, a local pizza shop might generate significantly higher sales than the national tenant it replaced. This raises the question of whether sales performance should sometimes outweigh traditional credit considerations. A strong local or regional operator with a vested interest in their business and a proven track record may offer more stability than a faceless national chain.

 

Dusty Batsell from Baceline Group discussed the difference between communication styles of local tenants versus nationals “We see them more and we’ve got a better relationship with them, a more personal relationship with them.” Batsell highlighted the importance of constant communication, especially with local tenants, which helps mitigate performance issues early.

 

Expanding Investment Opportunities

For portfolios traditionally focused on grocery-anchored shopping centers, unanchored strip centers present a compelling opportunity to broaden investment options. Dusty Batsell described Baceline’s evolution: “When Baceline started, we kind of had our hands in everything…over the course of the first five to ten years, what we saw to be most successful and most resilient was retail, and in particular, more of the unanchored, multi-tenant.”

 

In markets like Chattanooga, Tennessee, where there might be only one or two grocery-anchored centers available, unanchored strip centers offer dozens of additional assets to pursue. These properties leverage the same operational efficiencies and fundamentals valued in grocery-anchored assets.

 

This approach allows investors to scale and capitalize on the strong fundamentals already experienced across retail while remaining aligned with a core strategy focused on driving growth through small-shop leasing. By expanding into unanchored strip centers, portfolios can access new markets and opportunities without deviating from proven operational models.

 

Ryan Moore from Last Mile Investments posed a compelling question about the unique opportunities in the sector, stating, “what other sector today has capital markets opportunity, meaning potential cap rate compression being dislocated from four and five caps of industrial and multifamily?” He emphasized the importance of focusing on sales over traditional credit metrics, asking “At what point should we be talking about sales, not credit?” Moore highlighted the value of experienced operators, explaining that a 40-unit operator with a 30-year track record, personal investment, and commitment to the business can often outperform others. He noted, “we’ve gained interesting insights into franchise businesses. If you were to look at the franchise sales or corporate-owned sales, you’d quickly see who is best suited to run those stores, even with national brands.” From his perspective, success hinges on adding traffic, enhancing merchandising, and prioritizing tenants who can generate the most sales to support the rent.

 

Institutional Involvement

The strip center space, long dismissed as a secondary or fragmented asset class, has gained significant traction with institutional investors. “Historically, smaller deal sizes and fragmented ownership kept large institutions at bay, creating opportunities for smaller firms to unlock value,” said Marco Macali from North Pond Investments. However, this dynamic is shifting as institutions increasingly recognize the potential of niche sectors. Drawing parallels to the early adoption of self-storage, student housing, and more recently, last-mile industrial, strip centers are emerging as the next frontier for institutional capital. These sectors require robust data, headlines, and “air cover” to install confidence, and recent high-profile trades, like Crow’s involvement and Curb’s IPO, have provided the needed validation.

 

Strip centers are particularly appealing due to their straightforward and resilient nature. Rob Holuba from CenterSquare described strip centers as “loaves of bread,” these rectangular properties on highly trafficked roads are simple to divide into homogenous suites and easy to backfill. This reliability, coupled with a clear investment thesis supported by performance data, has made the sector more defensive and attractive to large-scale investors. While institutional investors once saw risk, they now see opportunity, with strip centers offering a compelling alternative for capital deployment.

 

Holuba discussed the approach to scaling with smaller-sized properties, emphasizing the importance of process consistency. He explained, “At CenterSquare, it’s really all about the process. You use the exact same contract, perform the same due diligence, rely on the same third-party vendors—everything has to operate on repeat to achieve that kind of scale. Ultimately, though, you take what the market gives you.”

 

What Makes a Good Strip Center?

Strip centers rely on strong real estate fundamentals, such as being situated on a hard corner, offering easy access, ensuring high visibility, providing effective signage, and featuring demand-driving tenants and appropriately sized suites. These fundamentals are critical to the success of convenience-based retail. For example, when a shopper considers stopping at a center, their decision often hinges on factors like ease of parking, quick egress and ingress, and overall convenience—elements that drive customer traffic and tenant success.

 

Christian Chamblee at Ziff Real Estate Partners summed up the sector’s appeal, “the strip center space is probably the most functionally unapologetic place or an investment vehicle that we have…it’s just pure convenience. It’s easy, in most cases, to get in and out. It’s visible.”

 

Adam Greenbaum discussed AGW’s founder, who built one of the largest laundromat operations in North America, brought a tenant’s perspective that provided valuable insights into what makes a retail center successful. This “boots on the ground” experience shaped their understanding of tenants’ needs and how landlords can support their success. He explained, “it’s about truly understanding what differentiates a strong retail site from a weak one and recognized the illusions that might lead someone to misjudge a location. It also involves thinking critically about build-up costs and the landlord-tenant relationship.” Greenbaum added, “Strip centers are like the multifamily of retail with increased backfill ability. But you can’t say yes to every tenant. It’s not just about leasing quickly—it’s about understanding what their P&L will look like.”

 

Challenges and Scaling Strip Centers

Scaling in the strip center market requires a disciplined approach, balancing smaller asset sizes with institutional capital demands. Success hinges on investing in operational infrastructure and standardizing processes, from acquisitions to leasing and due diligence. Platforms must align their capital strategy with operational capacity, addressing the market’s fragmented ownership while avoiding inefficiencies. Building strong broker relationships is equally critical, as these partnerships ensure access to opportunities and smooth transactions with non-institutional sellers who often present unique challenges. Flexibility, adaptability, and reliability in deal-making are key to becoming a preferred buyer.

 

Value creation in strip centers is often achieved through focused asset management. By addressing inefficiencies like neglected CAM reconciliations or vacant spaces, properties can experience significant value increases—often a 30–40% equity bump within 18–24 months. However, timing is critical, raising questions about whether to hold assets for incremental rent growth or reinvest gains into new opportunities to accelerate returns. With an average hold period of 3.5 years, this strategy allows for adaptability to market conditions while maintaining investor priorities and balancing cash flow improvements with optimal exit timing.

 

Looking ahead, the prospect of a recession or soft landing poses challenges and opportunities. Lower interest rates could increase transaction volumes and 1031 exchange activity, but heightened competition may follow. The institutionalization of strip centers, currently only 10–15% of the market, is expected to grow, redefining the landscape over the next decade. Platforms prepared to navigate these changes, leveraging operational efficiency and strong relationships, will be well-positioned to capitalize on the opportunities this evolving sector presents. The next few years are poised to shape the trajectory of this market, offering significant potential for forward-thinking investors.