REAL ESTATE NEWS

New retail construction has slowed significantly as developers struggle to make new projects pencil. The cost to build a new retail center is roughly $250 to $300 per square foot, which is difficult to support with today’s market-rate rents. Still, significant demand remains, especially for retail strip centers in growing communities.

The lack of new supply is creating an opportunity for older, dated retail centers to have a fresh start through strategic upgrades, says Danny Gonzalez, VP and Associate Director at Matthews Real Estate Investment Services. For owners willing to complete a capital improvement plan, there is a big opportunity to elevate second-generation retail properties.

A New Opportunity for Old Retail

Retail investors and developers are struggling in the current market. High construction and land costs have made new construction challenging, but consumer demand remains sky high for retail experiences. The solution to meet high retail demand without building a new asset: revitalize existing retail properties. It’s a strategy that many owners are pursuing under the current market fundamentals.

“It’s really tough for a lot of tenants to make sense of the rents they have to pay here because of how high the land costs are for the developers when they go into the property,” explains Gonzalez. “So, as a result, we are seeing second-generation strip centers starting to pick up.”

Properties that are 20 to 30 years old are ideal candidates for revitalization. Many are well-located assets that can well serve today’s tenants and consumers. “You can make sense of revamping these decades-old strip centers,” says Gonzalez. “They're still beautiful properties. They are very usable, and tenants can have much better long-term viability at these types of sites.” In addition, these properties – even after upgrades – offer much more competitive retail rents.

Taking Steps to Upgrade Vintage Retail Properties

Much of the existing retail stock is dated. According to the Comm Buildings’ Building Age Data, the average age of a shopping center at the end of 2024 was 39 years old. However, properties that are older than 20 years will likely need significant repairs due to deferred maintenance, like roof repairs, new mechanical systems or parking adjustments, before other capital improvements to reposition the center can be made.

“There are a lot of inherent issues with the older buildings themselves,” says Gonzalez. “The typical lifespan of a roof, for example, is about 20 years. These upgrades are the biggest cost when we're selling some of these older buildings.”

In addition, some buildings need code adjustments to meet new requirements, like stormwater retention and Americans with Disabilities Act (ADA) regulations. In many instances, these repairs may be significant. Owners of dated properties perform these upgrades either to sell the asset to a new operator at a higher cost – because investors are looking for retail opportunities – or to operate themselves and drive income growth. Vintage retail properties may be overlooked, but with these upgrades, they offer significant upside for investors.

For more insights and thought leadership from Matthews Real Estate Investment Services, click here.

Source: GlobeSt/ALM