At First National Realty Partners, our primary investment focus is retail shopping center assets. But, not all shopping centers are the same. In fact, the unique characteristics of any given shopping center can have a significant impact on the risk and return of investing in it. For this reason, it is important for investors to be aware of how they are classified, and what the risks and benefits are of each.
The International Council of Shopping Centers (ICSC) is a trade organization that has published widely accepted definitions of commercial shopping center types.
General Purpose Centers
The first major grouping of commercial shopping center types is known as the “general purpose center.” This is one where a shopper can go to purchase general items like food, clothing, and electronics. Under the heading of a general purpose center, there several subtypes that investors should be aware of:
- Super-Regional Mall: A super-regional center is a large shopping center that typically covers around 800,000 square feet of gross leasable area (GLA), with three or more anchor tenants who occupy 50% to 70% of the total leasable space. Typical anchor tenants include department stores, movie theaters, discount department stores, or entertainment businesses.
- Regional Mall: A regional shopping center is similar to a super-regional mall—just smaller. They typically have 400,000 to 800,000 square feet of leasable space and around two anchor tenants. They are typically enclosed with inward-facing stores connected by a common walkway, and the anchor tenants fall into the same categories as a super-regional mall.
- Community Center: The next step down in size is a Community Center, which tends to be in the range of 125,000 to 400,000 square feet in size. Physically speaking, they are typically laid out in a strip or may have an “L” or “U” shape, and the tenants tend to be focused on general merchandise or convenience-type offerings.
- Neighborhood Shopping Center: Continuing down the scale in size, a neighborhood center is 30,000 to 125,000 square feet in size. This is a convenience-oriented concept, and the retailers are typically discount stores, supermarkets, drug stores, or large specialty discount stores.
- Strip Center: Finally, the smallest general purpose shopping center is less than 30,000 square feet in size and does not have an anchor. Physically, this is an attached row of stores that are managed as a coherent retail center. The tenants are focused on convenience, and typically include mini-marts and traditional convenience stores.
Within this group, the investment risk/return profile varies significantly. For example, the scale and tenant diversification of a larger community center means they tend to carry less risk than a strip center.
Benefits and Risks of a General Purpose Center Investment
Diversification is the primary benefit of investment in a general purpose center. The tenant base typically caters to a wide variety of shoppers, which means these tend to be popular stops if they have a desirable location.
However, many of the tenant businesses in general purpose centers—especially those that are commodity-based businesses, such as clothing and electronics—are particularly vulnerable to e-commerce-driven disruption.
Specialized Purpose Centers
Whereas a general purpose center tends to cater to a wide variety of shoppers and businesses, a specialized purpose center tends to have a narrower focus. There are four subtypes:
- Power Center: Starting with the largest of these subtypes, a so-called power center is one that is 250,000 to 600,000 square feet in size. It has three or more anchor tenants and serves a trade area of 5 to 10 miles. Typical tenants include “category killers” like home improvement and warehouse club stores.
- Lifestyle Center: A lifestyle center is one filled with upscale national chain specialty stores, along with dining and entertainment options in an outdoor setting. They tend to be 150,000 to 500,000 square feet in size with up to two anchor stores, serving a trade area of an 8- to 12-mile radius.
- Factory Outlet: A factory outlet center contains manufacturer and retailer outlet stores selling name brand goods at a discount. They tend to be 50,000 to 400,000 square feet in size and serve a larger trade area of 25 to 75 miles.
- Theme / Festival Center: A theme or festival center is focused on leisure. These contain retail and service-oriented offerings with entertainment as an overall theme. They are 80,000 to 250,000 square feet in size and serve a trade area of 25 to 75 miles. Typical tenants are restaurants and entertainment businesses.
Benefits and Risks of a Specialized Purpose Center Investment
The major benefit of a specialized purpose center investment is the stable cash flow that these tenants can produce. However, their narrow focus can make space difficult to re-lease, and the high occurrence of entertainment tenants means that the success of these centers can be closely tied to consumer discretionary income. This makes them particularly vulnerable to a prolonged economic contraction.
Limited Purpose Property
A limited purpose property is just that—one that serves a very narrow customer base. The major subtype here is airport retail, which is a consolidation of retail stores in a commercial airport.
The major benefit of investing in airport retail is that there is a significant amount of pedestrian traffic built into the location, as well as a limited amount of competition. However, airport retail is a very niche real estate space that can require more governmental approvals than a typical retail space.
Factors to Consider in a Commercial Shopping Center Investment
With a retail investment, one of the biggest factors to weigh is the property’s location. Aside from that, potential investors should consider:
- The Tenant Mix: Is the mix of tenants consistent with the theme of the shopping center and the demand in the current market?
- Parking: Adequate parking is an incredibly important component of a retail property’s success. The size of the parking lots must be commensurate with the size of the center.
- Competition: Retail is a very competitive space and it is not unusual for there to be several shopping centers within the same primary trade area. This means that investors should consider the unique advantages of their target center and determine if they provide an advantage over the competition.
If these factors are favorable, then the property may be worthy of an investment.
Interested In Learning More?
First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. We leverage our decades of expertise and our available liquidity to find world-class, multi-tenanted assets below intrinsic value. In doing so, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
If you are an Accredited Investor and would like to learn more about our investment opportunities, contact us at (800) 605-4966 or email@example.com for more information.