Open-Air Retail Defies the Odds With Service-Oriented Businesses

Three months later, private equity giant Bain Capital announced a partnership with real estate investment firm 11North Partners to acquire open-air shopping centers across the United States and Canada.

“Today, open-air retail centers benefit from a confluence of tailwinds and strong real estate fundamentals that create an attractive risk-return opportunity,” 11North founder and CEO Brian Harper said in a statement at the time. 

Martha Kelley, a managing director at Bain, told Commercial Observer that open-air retail showed strong momentum from an investor-owner perspective.  There’s a flexibility there when it comes to the retailer mix,  she said.

“When you look at the data for the last few years, you see very strong leasing velocity in open-air retail centers,” she said. “About 100 million square feet of leasing has been done. These centers are in some ways more experiential.”

The two deals underscore the investor and tenant appeal of open-air retail — better known as strip malls or neighborhood shopping centers. They appear to be benefiting from a number of tailwinds, indeed, including the persistence of hybrid work (meaning a ready consumer base with time to pop in for things in the middle of the day), consumer cravings for ready convenience, and the ongoing travails of conventional indoor malls. 

Numbers from 2023 and 2024 suggest a rapid rise in demand for space in open-air strip malls and neighborhood retail hubs, despite the tenacity of e-commerce on sites like Amazon. 

Open-air owners leased 6.4 million square feet of newly available space in the second quarter of 2023, according to brokerage JLL (JLL) working off CoStar data. Vacancy stood at 5.3 percent, a decline from 5.7 percent a year before and from around 7 percent in 2021. There were 3.7 billion square feet of open-air retail in the U.S., with 10.9 million square feet under construction.

A March 2024 report from analytics firm Placer.ai showed that foot traffic at open-air shopping centers was positive in the first quarter of 2024 at 1.6 percent when compared to the pre-pandemic first quarter of 2019. On the other hand, foot traffic at indoor shopping malls (read: more conventional malls) was still off 5 percent, though a lot better than the first quarter of 2022, when the number stood at 30 percent. Open-air malls were at 27.4 percent at that time.

“Service-oriented neighborhood strip is hot right now,” said Don Tepman, the real-life retail investor behind “Strip Mall Guy” from X (formerly Twitter). “When you go to a restaurant, or go to the dentist, or go to a studio, those service-oriented businesses don’t really care about Amazon.”

What’s more, visits to outdoor shopping centers were up 10.1 percent year-over-year in March, according to Placer.ai. That was slightly more than the 12-month gain for indoor malls. 

“Both formats are well positioned,” Ethan Chernofsky, Placer.ai’s senior vice president of marketing, said in an email. “So long as they focus on the right mix of tenants, there is no reason to expect one to be better positioned on a wider scale. With that said, there are distinct advantages to having an indoor experience when the weather presents challenges and obvious advantages to leveraging an outdoor orientation when the weather is pleasant.”

Open-air retail also benefits from hybrid work trends that took hold during the pandemic and have largely endured. Those toiling from home can visit the stores and fast-casual restaurants such as Chipotle and Panera in these centers during a workday, providing a stable customer base that wasn’t there before 2020. Back then, these same customers would’ve been at the office in a central business district.

Discount grocery stores and dollar stores also are likelier to be found in open-air retail hubs than in conventional malls. Discount grocers such as Aldi and Lidl in particular have been on growth tears since the pandemic, opening dozens of new locations nationally. 

“Tenant demand keeps growing,” Tepman said. “Starbucks wants to open some 3,000 new locations. You have Chipotle, T.J. Maxx — all these retail concepts that have all these goals they’re telling Wall Street about, but no one is building new strip retail. The overall vacancy rate is around 4 percent. But if you look at what I call the great location vacancy rate, that’s probably well under 1 percent.”

Open-air also continues — oddly enough — to benefit from brick-and-mortar’s lingering troubles. That includes the hundreds of big-box retail locations that have shuttered nationally in  recent years. Concepts like Bed Bath & Beyond have been replaced “for the most part” by more relevant concepts in open-air settings, said Carl Wunderlich, Stamford, Conn.-based director of retail services at Cushman & Wakefield.

“Over the last seven, eight years, all of the empty spaces for the most part have been backfilled,” he said. “There’s been demand for that space, and relatively quickly.”

And, even if customers only dash in and out to pick up a takeout lunch, they might see the other stores in a particular open-air center and make a mental note of it, and come back, particularly if it’s convenient.

“Sheer visibility is a part of that,” Wunderlich said. “You may go into Chipotle, grab your food and leave, but because it’s in that strip center, you may frequent the other establishments. You could do something at CVS, mail something at the post office, and have your lunch at Chipotle. The convenience factor is very hot. The parking tends to be very convenient at these strip centers.”

Ironically, then, it might be the convenience of strip malls et al that helps them combat the convenience of e-commerce, and therefore remain surer bets in the eyes of investors.

“When we look back at the retail apocalypse narrative that was so dominant pre-pandemic, it was centered around the idea that convenience trumps all and the ability to buy online would slowly dominate all shopping,” Placer.ai’s Chernofsky said. “What the post-pandemic environment has proven is how misguided and exaggerated that notion truly was.”

Ripco Real Estate is a brokerage that does business with numerous retailers and landlords in New York and Florida who want an open-air concept, said Peter Ripka, co-founder and partner in the company. Open-air retail fits into the pattern of how people want to live post-COVID, he says. 

“People love going into supermarkets,” Ripka said. “Coming out of COVID, with more people working from home and cooking at home and eating at home, they’ve really embraced going to the supermarket. In COVID they were essential, and coming out of COVID people have continued on with the habits.”

In the end, it’s the combination of habits and trends — both retail-related and those related to office work after COVID — that’s buoying open-air retail. They’re helping brick-and-mortar retail in general, including to a lesser degree indoor malls, twist around a storyline that seemed to be inexorably marching toward only one sad ending.