Investment Viability and Potential of Outdoor Shopping Centers in the U.S.
Introduction
Outdoor shopping centers have emerged as a resilient and dynamic segment within the retail real estate market. Long valued for their accessibility, convenience, and adaptability, these spaces are redefining the traditional retail experience. Given the challenges of economic uncertainty, evolving consumer behavior, and rising construction costs, investing in outdoor shopping centers offers a solid opportunity for growth. This white paper explores the trends, data points, and actionable strategies guiding this sector, enabling investors to make informed decisions.
Current Market Trends Driving Growth
1. Tight Supply and High Demand
The U.S. retail market's tight supply of quality space has created a climate of opportunity. The Q4 2024 U.S. retail availability rate was just 4.7%, with only 4 million sq. ft. of new completions—52% lower than the previous quarter. This constrained supply, coupled with strong tenant competition, has kept demand buoyant. Amid this environment, outdoor shopping centers distinguish themselves by offering curated tenant mixes and vibrant atmospheres that appeal to consumers.
2. Strength of Regional Markets
Secondary markets have stepped into the spotlight, with 13 markets recording over 1 million sq. ft. of positive net absorption in Q4 2024. Noteworthy are cities like Albuquerque with 7.1% annual rent growth and Boston at 6.7%, showcasing strong leasing activity fueled by population growth and enhanced economic opportunities.
3. Resilience Amid Health Crises
During the COVID-19 pandemic, outdoor shopping centers proved their structural and operational advantages. Open-air designs naturally aligned with health safety requirements, retaining tenants and foot traffic when enclosed malls struggled. This track record demonstrates their ability to adapt while maintaining relevance during disruptive events.
4. Consumer Preferences for Experiences
The rise of e-commerce has driven physical retail to reposition itself. Outdoor shopping centers aren’t just about shopping—they provide dining, entertainment, and social experiences consumers can't replicate online. Additionally, wellness and fitness concepts, as well as co-working spaces, are becoming common tenants, diversifying the appeal of these centers.
Factors Supporting Outdoor Shopping Center Investments
1. Shift Towards Experiential Retail
Shoppers are increasingly drawn to spaces with unique, engaging experiences. Experiential retail blends leisure and commerce, offering cafes, restaurants, boutique stores, and entertainment hubs alongside traditional retail. This multi-use nature aids in retaining foot traffic and bolsters rental income for property owners.
2. Economic and Demographic Trends
Population shifts to suburban and secondary markets have driven demand for accessible retail hubs. States like Texas lead in terms of development and absorption. Houston, for instance, saw 2.4 million sq. ft. of construction on a rolling-four-quarter basis, benefiting from a growing consumer base.
3. Impact of E-commerce Adaptation
While e-commerce challenges traditional retail, the physical presence of outdoor shopping centers complements online strategies. Increasingly, these centers host "click-and-collect" models, making shopping seamless for tech-savvy consumers. Hybrid businesses, which combine online platforms with flagship retail locations, find outdoor centers an ideal solution.
4. Rising Rents and Asset Value Growth
Rental growth has been robust, with the average year-over-year rent up 2.5% to $23.80 per sq. ft. Markets like Albuquerque and San Francisco have outperformed, highlighting the importance of placement and quality tenant profiles.
5. Controlled Supply and Construction Costs
With the pace of new retail construction curtailed by tight financing and material shortages, existing properties gain competitive edge. Outdoor shopping centers present a lagging development speed yet benefit from significant barriers to new entrants, driving demand for current assets.
Case Studies
1. Legacy West – Plano, Texas
Legacy West highlights the incredible potential of outdoor shopping centers. It blends retail, dining, entertainment, and office spaces to create a vibrant mixed-use community. Anchored by high-profile tenants and frequented by affluent customers, it leverages its location and thoughtful curation to maintain high occupancy rates and rental growth despite economic fluctuations.
2. The Grove – Los Angeles, California
The Grove offers a prime example of sustained consumer engagement. Its open-air design, luxury focus, and event-based programming allow it to successfully compete against both e-commerce and nearby competitors. The pandemic saw limited impact on tenant retention or foot traffic here, further underscoring the relative resilience of outdoor centers.
3. Santana Row – San Jose, California
Santana Row's integration of retail, residential, and lifestyle amenities mirrors broader development trends. This strategy attracts tech workers in a booming regional economy. Its pedestrian-friendly layouts and tenant innovations serve as templates for maximizing engagement while tapping into new demographics.
Regional Growth Patterns
Midwest Strength
Markets like Chicago, Cincinnati, and Detroit collectively contributed 7.2 million sq. ft. of net absorption in 2024, validating their relevance for retail investment.Western Boom
Cities like Las Vegas and Orange County feature heavily in net absorption rankings, driven by economic diversification and inward migration.Suburban Renaissance
The broader preference for suburban living post-pandemic has enhanced the viability of outdoor retail hubs, with regions like Texas seeing 6.9 million sq. ft. of completions in 2024 alone.
Actionable Recommendations
Focus on Secondary Markets
Strong absorption rates and robust rent growth in secondary markets like Albuquerque, Boston, and Orlando make them ripe for retail investment.Diversify Tenant Mix for Longevity
Prioritize leasing to tenants offering services and experiences alongside retail. Include restaurants, fitness centers, and entertainment operators to drive traffic and foster loyalty.Adopt Technology Integration
Strategically deploy digital solutions like mobile apps, seamless parking payment systems, and real-time analytics platforms. These investments enhance tenant and shopper satisfaction.Leverage Mixed-Use Development
Combined retail, residential, and office projects attract diversified leasehold income streams and align with evolving consumer lifestyles.Prepare for Regulation and Economic Risks
Monitor policies impacting financing or zoning, particularly in high-growth states. Diversify investments to buffer market-specific risks.Invest Where Growth Outpaces Supply
Select properties in regions with lagging new development and high demand. Focus on Texas, California, and the Midwest.
Conclusion
Outdoor shopping centers offer a compelling investment avenue in a market defined by limited supply and surging demand. Rooted in consumer preferences, demographic shifts, and economic resilience, these spaces balance traditional retail with innovation. By capitalizing on rising rents, thriving secondary markets, and experiential trends, investors have the opportunity to position themselves at the forefront of a versatile and lucrative sector.
For investors eyeing long-term value and stability, now is the time to prioritize outdoor retail spaces in strategic growth markets.