Mapping Profitability: Unveiling the Hidden Forces Driving Strip Center Investments in the Western U.S.
Introduction
Strip shopping centers – typically open-air retail centers under 40,000 SF – have shown resilience in recent years across Western U.S. markets. Strong consumer demand for convenient, in-person shopping and dining has kept vacancies low and supported rent growth, even as e-commerce and rising interest rates pose challenges. This report analyzes current market trends, risk factors, cap rate trends, tenant mix, financing options, and provides a comparative overview of key Western markets (Las Vegas, Phoenix, Denver, Southern California). We also include case studies of recent strip center transactions (around 24,000 SF) to illustrate real-world investment metrics. All data and insights are recent (2023-2024) and geared toward equity investors preparing an investment deck.
Market Trends Influencing Strip Center Investments
Robust Demand and Low Vacancies: Retail vacancy rates in many Western markets are at or near historic lows due to strong tenant demand and limited new construction. For example, Las Vegas’s retail vacancy was ~5.1-5.7% in mid-2024, a 15-year low (Retail Market Update – Q2 2024 – Nationwide Overview & Las Vegas Highlights - Blue West Capital). Phoenix hit record-low availability of ~4.6% in early 2024 amid surging demand (Retail Market Update – Q1 2024 – Nationwide Overview & Phoenix Market Highlights - Blue West Capital). Denver’s vacancy fell to ~3.9% by late 2023, reflecting exceptionally tight conditions (). Southern California’s vacancy hovers in the mid-single digits (e.g. ~4% in Orange County, ~6% in the Inland Empire) (Q4 2023 Retail Market Report | Orange County, CA) (Brad's Blog - My Take on the 2nd Quarter 2023 Retail Real Estate Data for SoCal’s Inland Empire - Progressive Real Estate Partners). Tenant rep brokers report difficulty finding quality space for clients in such a supply-constrained environment (Brad's Blog - My Take on the 2nd Quarter 2023 Retail Real Estate Data for SoCal’s Inland Empire - Progressive Real Estate Partners) (Brad's Blog - My Take on the 2nd Quarter 2023 Retail Real Estate Data for SoCal’s Inland Empire - Progressive Real Estate Partners).
Shifting Retailer Strategies: Tenant mix is evolving to emphasize experiential and necessity retail. Food and beverage, discount/off-price retailers, and entertainment uses are leading absorption (Retail Market Update – Q1 2024 – Nationwide Overview & Phoenix Market Highlights - Blue West Capital) (Retail Market Update – Q1 2024 – Nationwide Overview & Phoenix Market Highlights - Blue West Capital). In Las Vegas, fast food/QSR outlets now generate the highest foot traffic (14 million monthly visits as of mid-2024) – indicating consumer preference for dining and quick-service convenience (ReD Report: Retail Summary: Second Quarter 2024) (ReD Report: Retail Summary: Second Quarter 2024). National chains in fitness (gyms), grocery, and “experiential” concepts (e.g. indoor recreation like pickleball) are expanding to fill larger vacancies (Retail Market Update – Q1 2024 – Nationwide Overview & Phoenix Market Highlights - Blue West Capital). Meanwhile, smaller storefronts are being leased by service-oriented tenants (salons, clinics, financial services) and popular fast-casual restaurants (Retail Market Update – Q1 2024 – Nationwide Overview & Phoenix Market Highlights - Blue West Capital). Open-air neighborhood centers have benefited from consumers’ return to in-person shopping and dining post-pandemic, especially for services and experiences that e-commerce can’t replace.
Limited New Supply & Redevelopment: New retail construction in these markets is modest, focused mostly on pre-leased build-to-suits or anchored centers. In Denver, only ~6% of the retail pipeline is speculative; most projects are build-to-suit for specific tenants () (). High construction costs and developers’ caution have kept new supply low. In Phoenix, only ~1.1 million SF delivered in the past year (a fraction of demand) (Retail Market Update – Q1 2024 – Nationwide Overview & Phoenix Market Highlights - Blue West Capital), and older retail sites are sometimes redeveloped into other uses (e.g. multifamily) in dense areas (). In Southern California, there is a trend of repurposing obsolete retail (especially old big-box or mall spaces) for higher uses like apartments (Q4 2023 Retail Market Report | Orange County, CA). This lack of new inventory contributes to landlord-favorable conditions – driving rents upward due to competition for space (Brad's Blog - My Take on the 2nd Quarter 2023 Retail Real Estate Data for SoCal’s Inland Empire - Progressive Real Estate Partners) (Brad's Blog - My Take on the 2nd Quarter 2023 Retail Real Estate Data for SoCal’s Inland Empire - Progressive Real Estate Partners).
Investor Interest Shifting to Retail: Given these solid fundamentals, retail strip centers are drawing increased interest from investors, including those from other sectors. Market observers note more multifamily-focused investors now targeting retail centers because retail cap rates (yields) are higher than multifamily cap rates in many markets ([PDF] RETAIL MARKET REPORT - NAI San Diego). For instance, in San Diego, retail cap rates are several basis points higher than apartment yields, prompting multifamily investors to pursue retail acquisitions ([PDF] RETAIL MARKET REPORT - NAI San Diego). Additionally, with office sector challenges, some capital is reallocating into neighborhood retail (seen as a more resilient asset class in the post-COVID environment). Private buyers, 1031 exchange investors, and newly formed retail REITs are actively seeking well-located strip centers that offer stable cash flow and potential upside.
Consumer Spending Patterns: High inflation in 2022-2023 has pressured consumer budgets, which influences tenant performance. Shoppers have become more value-conscious, benefiting discount retailers and forcing restaurants to adapt. Major fast-food chains (e.g. McDonald’s, Yum! Brands) saw profit margins squeezed and responded with value menus and loyalty programs (Retail Market Update – Q2 2024 – Nationwide Overview & Las Vegas Highlights - Blue West Capital) (Retail Market Update – Q2 2024 – Nationwide Overview & Las Vegas Highlights - Blue West Capital). Essential retail (grocery, convenience stores, pharmacies) and “affordable luxury” retailers have generally performed well, keeping strip center occupancy strong. Markets like Las Vegas also enjoy a boost from population and tourism growth – the Vegas region is a “top market” for retail thanks to a fast-growing population and millions of visitors, driving up retail sales and tenant expansion (ReD Report: Retail Summary: Second Quarter 2024) (ReD Report: Retail Summary: Second Quarter 2024). These trends support investor confidence in strip centers as a viable play even amid broader economic uncertainties.
Risk Factors and Mitigations
Investing in strip centers comes with certain risks, but proactive strategies can mitigate them:
E-Commerce and Changing Retail Behavior: The rise of e-commerce remains a long-term risk, especially for tenants selling commoditized goods. Mitigation: Focus on leasing to internet-resistant tenants – restaurants, service providers (salons, clinics, gyms), grocers, dollar stores, and experiential retailers that require physical presence. Having a diverse tenant mix heavy in “daily needs” and service-oriented users insulates a strip center from online competition. Many centers now incorporate curbside pickup and omni-channel features (e.g. Amazon lockers, in-store pickup) to complement e-commerce rather than suffer from it.
Tenant Credit and Turnover: Smaller strip centers often lease to local or regional businesses, which may have higher default risk than national brands. A few tenant closures can significantly impact NOI. Mitigation: Diligent tenant credit underwriting and spreading risk across a balanced mix of national credit tenants and local favorites. For example, securing at least one anchor or mini-anchor with a strong covenant (such as a well-known grocer, fitness chain, or established franchise) provides income stability. Diversify tenant types to avoid reliance on any one sector. Additionally, use personal guarantees or letters of credit for local mom-and-pop tenants when possible, and maintain a reserve for re-leasing costs.
Economic and Demographic Cycles: Strip centers depend on healthy local economies. Markets like Las Vegas can be cyclical (tied to tourism and population inflow), and a recession or dip in consumer spending could raise vacancies. Mitigation: Select locations with favorable demographics (growing population, solid incomes) and visibility. Essential-needs anchors help ensure traffic even during downturns. In volatile economies, underwrite with conservative occupancy and rent growth assumptions and have a proactive leasing plan. In Las Vegas, for instance, focusing on dense residential areas (e.g. Henderson or Summerlin submarkets with <3% vacancy (Retail Market Update – Q2 2024 – Nationwide Overview & Las Vegas Highlights - Blue West Capital)) can offer more stability than tourist-dependent corridors.
Competitive Supply & Overbuilding: If a market over-develops retail, strip centers could face pressure on rents and occupancy. Currently, new supply is limited in most Western markets, but some fast-growing suburbs (parts of Phoenix or Inland Empire) are seeing new retail projects. Mitigation: Target locations with high barriers to entry – infill neighborhoods or fully built trade areas where new competition is less likely. Alternatively, invest in centers with unique draws (exclusive anchor tenants or specialty offerings) that differentiate them from generic strip malls. Monitoring planning pipelines and zoning constraints can help avoid markets at risk of oversupply.
Interest Rate and Refinancing Risk: A key current risk is higher interest rates which have raised debt costs and put downward pressure on values. Cap rate expansion (as detailed below) can erode property values. Mitigation: Use prudent leverage and consider locking in fixed-rate debt to hedge against rate volatility. Ensure initial debt service coverage is healthy (most lenders now want DSCR ≥ 1.30x or better, given higher rates). Some investors structure deals with interest rate caps or hedges if using floating debt. Underwriting should also account for an exit cap rate higher than entry, as a cushion.
Management and Operational Challenges: Strip centers require active management – handling multiple tenants, CAM (common area maintenance) reconciliations, and keeping the center attractive to shoppers. Issues like homelessness or loitering can particularly impact open-air centers’ appeal. Mitigation: Invest in property upkeep, security, and community engagement. Strategies include regular security patrols, good lighting, and working with local authorities or programs to manage loitering (Brad's Blog - My Take on the 2nd Quarter 2023 Retail Real Estate Data for SoCal’s Inland Empire - Progressive Real Estate Partners). A well-maintained center retains tenants and keeps customers coming. Professional property management and attentive landlord service can also foster tenant loyalty, reducing turnover.
In summary, the fundamental risks (tenant default, market softening, cost of capital) are real, but top-performing strip centers mitigate these through strategic tenant selection (favoring needs-based and service retail), strong locations, and conservative financial structuring.
Cap Rate Trends and Expected Returns
Cap Rate Expansion: Cap rates for strip centers in the Western U.S. have generally risen over the past 18-24 months, mainly due to the jump in interest rates. After hitting historic lows in 2021-2022, retail cap rates expanded in 2023 by roughly 50-100 basis points. In Las Vegas, average retail cap rates rose by over 0.5% through 2023 (Retail Market Update – Q2 2024 – Nationwide Overview & Las Vegas Highlights - Blue West Capital). Sales data show Vegas retail deals averaging a ~5.7% cap in early 2023 (Second Quarter 2023 Las Vegas Retail Market Report - MDL Group), increasing to about 6.2% by late 2024 (Fourth Quarter 2024 Las Vegas Retail Market Report - MDL Group). A similar trend played out in Phoenix and Southern California: in the Inland Empire (SoCal), cap rates climbed from ~5.2% in 2022 to “the 6% range in 2024” (over 100 bps increase) (). Higher borrowing costs have forced buyers to demand higher yields, moving cap rates upward.
Current Cap Rate Levels: As of late 2023/early 2024, typical multi-tenant strip center cap rates are in the mid-5% to mid-6% range, varying by market and asset quality. Multi-tenant strip centers in Inland SoCal averaged ~6.2% cap in mid-2023 (Brad's Blog - My Take on the 2nd Quarter 2023 Retail Real Estate Data for SoCal’s Inland Empire - Progressive Real Estate Partners), whereas single-tenant net lease retail (e.g. standalone fast food or bank pads) averaged much lower (~4.7% in that sample) (Brad's Blog - My Take on the 2nd Quarter 2023 Retail Real Estate Data for SoCal’s Inland Empire - Progressive Real Estate Partners). Phoenix retail centers averaged around 6.0% cap in Q1 2024 ([PDF] PHOENIX RETAIL - Kidder Mathews). Denver’s retail sales in 2023 similarly averaged a ~5.8% cap rate (). Prime coastal California assets trade at lower caps (often high-4% to 5% for well-located, credit-anchored centers), while secondary or tertiary submarkets see caps in the high-6% to even 7% range for smaller or higher-risk strips. For example, a fully leased strip center in suburban SoCal sold in 2024 at a 6.2% cap, whereas a large single-tenant gym property with a shorter lease traded near a 7% cap () (). Las Vegas strip centers generally fall in between – good neighborhood centers were trading around the mid-5% to low-6% range in 2022-2023, and now more in the high-5% to ~6.5% range, depending on tenant quality and lease term.
Expected Returns: Equity investors in strip centers typically target an attractive spread above debt and risk-free rates. With 10-year Treasuries around ~4-5% in late 2023, and lending rates ~6-7%, investors are seeking going-in cap rates that can deliver cash-on-cash yields in the high single digits after leverage. A 6% unlevered cap can translate to ~9-10% cash yield at 60% LTV financing, for instance. Many investors underwrite an IRR in the low-to-mid teens on a 5+ year hold, factoring in some NOI growth and a conservative exit cap. Notably, strip center fundamentals are providing real rent growth (supporting future NOI increases). Phoenix saw asking rents surge ~8.4% year-over-year in 2023 (Retail Market Update – Q1 2024 – Nationwide Overview & Phoenix Market Highlights - Blue West Capital), and Las Vegas posted ~3-4% annual rent growth recently (Retail Market Update – Q2 2024 – Nationwide Overview & Las Vegas Highlights - Blue West Capital), which can boost returns. However, given the higher cap rates today, pricing has adjusted – for example, one retail REIT’s dispositions in Q4 2023 were at an average ~6.5% cap (indicating buyers are indeed pricing in higher return requirements) (2023 Q4 REIT Earnings Report).
Investors should calibrate return expectations to each market’s profile. Sun Belt markets like Las Vegas and Phoenix offer slightly higher going-in yields (and stronger growth prospects), whereas coastal California offers lower current yields but ultra-stable long-term cash flow. The risk/return profile of strip centers has improved relative to some other asset classes – as noted, retail yields now handily beat multifamily yields in many areas, which is attracting cross-over capital ([PDF] RETAIL MARKET REPORT - NAI San Diego). Overall, an equity investor can expect mid-single-digit to low-double-digit annual returns from a stabilized strip center investment, with upside if they can drive rent growth, lease up any vacancy, or improve the tenant mix over time.
Typical Tenant Mix and Leasing Dynamics
Tenant Mix: Strip centers under 40,000 SF are usually anchored by one or two key tenants (if any) and a mix of smaller inline tenants. Given their size, many ~24,000 SF centers are unanchored or mini-anchored. Common anchor/major tenants for centers in this size range include:
Neighborhood Grocers or Markets: e.g. ethnic grocery stores, specialty organic markets, or convenience marts. (Larger grocery chains usually need bigger centers, but a 10-20k SF grocer can fit a strip center and serve as a strong traffic driver.)
Discount and Daily Needs Retailers: Dollar stores (Dollar Tree, 99 Cents Only), drugstores (though pharmacies often require ~10-15k SF), or beverage markets (liquor store chains). These draw frequent visits and tend to be e-commerce resistant.
Food and Beverage: Quick-service restaurants and cafes are staple tenants. It’s common to have several food options: sandwich shops, pizza takeout, ice cream, coffee (e.g. Starbucks or local cafes), fast-casual eateries, etc. If the center has pad sites or endcaps, a drive-thru QSR (Quick Service Restaurant) is highly desirable (e.g. a Starbucks, Chick-fil-A, or popular regional drive-thru). Such drive-thru pads have been in extremely high demand and command premium pricing (Retail Market Update – Q2 2024 – Nationwide Overview & Las Vegas Highlights - Blue West Capital).
Personal Services and Medical: Nail salons, hair salons/barbers, massage or spa services, and dry cleaners often fill small bays. Additionally, “medtail” tenants (medical offices in retail space like urgent care, dental clinics, physical therapy) have expanded, providing stable, needs-based uses. Fitness studios or small gyms (yoga, pilates, martial arts) are also common and help increase daily foot traffic.
Specialty and Others: Pet supply stores or pet grooming, learning centers/tutoring, cell phone retailers, bank branches, and insurance or real estate offices are other typical occupants. In markets like Las Vegas, even cannabis dispensaries (where legal) have taken strip center spaces due to their high revenue per SF, although these come with unique considerations.
A healthy strip center tenant mix is balanced between national/regional brands and local businesses. National brands (franchises, chains) offer credit stability and draw, while local tenants can provide unique services and often will pay market rents for good locations. For example, a strip center might have a Starbucks or Subway alongside a local nail salon, a family-run restaurant, and a regional insurance office.
Leasing Dynamics: Leasing in strip centers is almost always done on NNN leases, where tenants pay base rent plus their share of operating expenses (property taxes, insurance, CAM). Typical lease terms: smaller inline tenants often sign 3-5 year initial leases (sometimes up to 10 for established businesses), usually with options to renew. Major tenants or anchors sign longer leases – often 10 years plus options (as seen with the fitness anchor in an IE center having 5 years remaining plus four 5-year options ()). Annual rent escalations around 2-3% per year (or 10% every 5 years for some national tenant leases) are common, which help the owner keep up with inflation.
Landlords today have strong negotiating leverage in many markets due to low vacancy. Landlord concessions (free rent, large TI allowances) are minimal for quality space (Retail Market Update – Q2 2024 – Nationwide Overview & Las Vegas Highlights - Blue West Capital). In-demand spaces (like a rare vacancy in a prime center) may lease quickly at increasing rents. For instance, in Inland Empire, top-tier small-shop spaces achieved $3.00-$4.00/SF NNN per month in rents, and even inline space in mature centers was leasing at $2.25-$3.00/SF NNN (Brad's Blog - My Take on the 2nd Quarter 2023 Retail Real Estate Data for SoCal’s Inland Empire - Progressive Real Estate Partners). By contrast, larger anchor spaces lease for less per SF (e.g. $1.00-$1.50 NNN in that market) (Brad's Blog - My Take on the 2nd Quarter 2023 Retail Real Estate Data for SoCal’s Inland Empire - Progressive Real Estate Partners). Rent growth has been positive across markets – e.g. Vegas saw asking rents up ~28% from 2020 to 2024 (ReD Report: Retail Summary: Second Quarter 2024), Phoenix saw an ~8% jump in 2023 (Retail Market Update – Q1 2024 – Nationwide Overview & Phoenix Market Highlights - Blue West Capital) – though rent growth may moderate going forward as leases catch up to market.
Co-tenancy and Kick-Out Clauses: A leasing consideration in strip centers is co-tenancy clauses – smaller tenants sometimes demand that an anchor remains in place or a certain occupancy is maintained, or they get rent relief or the right to leave. In small <40k SF strips, this is less of an issue if there is no single dominant anchor, but if a grocery or gym anchors the center, other tenants might have co-tenancy provisions tied to that anchor being open. Owners must navigate these carefully. Similarly, strong national tenants may negotiate kick-out clauses (the right to terminate if their sales don’t reach a threshold). These factors can affect the stability of cash flows. Mitigation includes maintaining good relationships with anchor tenants and actively marketing any anchor space well in advance if a vacancy is anticipated, to satisfy co-tenancy requirements promptly.
Overall, leasing for well-located strip centers has been brisk. Many markets report quick backfilling of spaces from any chain closures. For example, when some big-box chains (Bed Bath & Beyond, Party City) closed stores in 2023, their spaces in Denver were re-leased rapidly, turning net absorption back positive () (). In smaller centers, vacated shops are often backfilled by expanding local businesses or new franchises, given the strong demand for retail space.
Financing Options and Lender Preferences
Debt Financing Landscape: Financing strip center acquisitions has been challenging but improving as lenders warm up to retail again. The rapid rise in interest rates in 2022-2023 made debt more expensive (current mortgage rates for retail are roughly 6%–7%+ for fixed-rate loans (Shopping Center Loan Rates - 6.68% as of February 2025)). This reduced the loan amounts lenders would offer (to meet debt service coverage) and required sponsors to contribute more equity. However, as retail fundamentals exceeded expectations (low defaults, strong NOI growth), lenders are regaining confidence in the sector (Lenders are shopping for retail - The Crittenden Report). By late 2023, industry experts noted that “retail lending [will] loosen” – more lenders are looking to finance retail, especially with the office sector in disfavor (Lenders are shopping for retail - The Crittenden Report).
Lender Types and Preferences: For stabilized strip centers, life insurance companies are often the best source of non-recourse loans at attractive rates (Lenders are shopping for retail - The Crittenden Report). Life insurers prefer low-leverage, high-quality deals (e.g. 50-65% LTV on a grocery-anchored or well-tenanted center) and can offer 10+ year fixed terms. Banks (regional and community banks) actively lend on smaller retail centers, but they typically require a banking relationship – often asking borrowers to hold 10-30% of the loan amount in deposits at the bank (Lenders are shopping for retail - The Crittenden Report). Banks may offer 5-7 year terms with amortizations of 25-30 years, and many will want recourse (personal guarantee) for strip centers, particularly if tenants are local or leases are shorter.
The CMBS (commercial mortgage-backed securities) market had slowed in 2023, but is expected to pick up for retail in 2024 (Lenders are shopping for retail - The Crittenden Report). CMBS loans can provide higher leverage (up to ~70% LTV) and non-recourse financing, which might appeal for larger strip center deals (> $5 million). Borrowers need to have a clean property (no environmental or major deferred maintenance issues) and a strong stable rent roll to go CMBS. Debt funds and bridge lenders are another option if the center has some vacancy or needs a reposition – they offer short-term, interest-only loans (often floating rate 8-10%+ interest) to allow time for lease-up or renovations, then expect the borrower to refinance into permanent debt.
Underwriting and Terms: Lenders in this environment are conservative on underwriting rent income. They may stress test for higher vacancy or mark rents to market if some are above-market. Debt service coverage ratio (DSCR) requirements have risen – many lenders want DSCR of 1.30–1.40x on in-place NOI given rate volatility. Loan-to-value ratios are often capped around 60-65% for retail unless it’s a very strong anchor or a credit tenant roster. Interest-only periods might be available for well-leased centers (life companies sometimes give IO for a portion of the term). Amortization is typically 25 years on bank loans, 30 years max.
Lender preferences heavily favor centers that are “fully leased centers with solid tenants” (Lenders are shopping for retail - The Crittenden Report). A property that is 90-100% occupied with a stable mix of national/regional tenants will attract far more financing options than one that’s 70% leased or filled with unknown mom-and-pops. Centers anchored by essential retail (grocery, pharmacy) or high-traffic generators (home improvement store next door, popular QSR on a pad, etc.) are viewed as lower risk. Strong historical occupancy and location demographics (traffic counts, population density, median incomes) also boost lender comfort.
Recourse vs. Non-Recourse: Smaller balance loans (<$5-10M) from banks often require recourse to the borrower. Non-recourse can be obtained via CMBS or life co, but the deal must be solid. In the current climate, some borrowers are offering limited personal guarantees to get better terms from banks – for example, a partial recourse that burns off once certain leasing milestones are hit.
In summary, financing is available for strip centers, and likely to become more readily available as lenders recognize the sector’s resilience. Lenders are selective, favoring deals with strong occupancy, good tenant mix, and experienced sponsors. An investor should be prepared to bring more equity or additional collateral to the table if the center has any hair (like upcoming major rollover or needed CAPEX). On a positive note, 2024 may see more competitive lending: “retail [will] be seen as a stronger asset type by lenders” since fundamentals and loan performance have been so solid (Lenders are shopping for retail - The Crittenden Report). This could lead to slightly improved loan proceeds or rates for quality strip center acquisitions going forward.
Comparative Analysis of Western U.S. Markets
Strip center investment conditions vary across Western U.S. markets. The table below summarizes key metrics and trends for Las Vegas, Phoenix, Denver, and Southern California:
Key Takeaways: All these markets enjoy strong occupancy and positive rent trajectories, though the pace of growth varies. Phoenix and Las Vegas, as Sun Belt markets, combine low vacancies with higher rent growth – attractive for investors seeking both yield and upside. Denver and SoCal offer stability; Denver’s growth is steady if unspectacular, while Southern California’s coastal assets are prized for long-term security (albeit at lower initial yields). Cap rates reflect these differences: SoCal coastal strip centers may trade in the 5% range or lower for trophy locations, whereas Las Vegas/Phoenix neighborhood centers are more often in the mid-5% to low-6% range, and some secondary suburban deals can be mid-6% to 7%. The Inland Empire example shows cap rates in the 6–7% range after the recent rise (), significantly above coastal markets ().
Another point of comparison is investor composition: In markets like Denver and SoCal, private local investors and 1031 exchange buyers dominate recent transactions (with institutional buyers holding off amid higher rates) () (). In Las Vegas and Phoenix, we see both local players and out-of-state investors (even new REITs) actively acquiring strip centers, drawn by the growth narrative and relative value.
In essence, investors can expect slightly higher risk/higher return in Vegas and Phoenix, and lower risk/lower return in prime parts of SoCal, with Denver sitting in a middle-ground profile. Portfolio strategy might involve balancing acquisitions – e.g., a Las Vegas center for yield and a SoCal center for stability. However, all markets noted have favorable supply-demand dynamics for strip retail as of 2024, underpinning the investment thesis for this asset type.
Case Studies and Recent Transactions (Under 40,000 SF Strip Centers)
To illustrate current market pricing and dynamics for strip centers in the ~24,000 SF range, below are several recent deals and case studies from Western U.S. markets:
Las Vegas (Henderson), NV – Gibson Center (10,523 SF): A small strip center built in the 2000s, 100% leased to multiple tenants, sold in December 2024 for $3.4 million (about $323/SF) (Fourth Quarter 2024 Las Vegas Retail Market Report - MDL Group). The cap rate was approximately 6.2% (in line with the Q4 2024 Las Vegas average) (Fourth Quarter 2024 Las Vegas Retail Market Report - MDL Group). The buyer was a private local investor, while the seller executed a disposition after stabilizing the center. This deal reflects Vegas investors’ willingness to pay around a mid-6% cap for well-leased neighborhood strips. Henderson’s strong demographics (growing residential area) likely supported the pricing.
Surprise (Phoenix), AZ – Shops at Prasada (34,000 SF portion): In an off-market deal (closed January 2025), Curbline Properties REIT acquired 7 acres of a newly developed retail center in suburban Phoenix for $32 million (Curbline Buys Slice of Retail Center Near Phoenix for $32M) (Curbline Buys Slice of Retail Center Near Phoenix for $32M). The purchase included 34,000 SF of shop space leased to high-profile eateries: Shake Shack, Starbucks, Torchy’s Tacos, Einstein Bros Bagels, and Portillo’s (Curbline Buys Slice of Retail Center Near Phoenix for $32M) (Curbline Buys Slice of Retail Center Near Phoenix for $32M). The price equates to $941/SF (Curbline Buys Slice of Retail Center Near Phoenix for $32M) – an exceptionally high per SF valuation, implying a low cap rate (likely mid-4% to 5% range). The center was 89% pre-leased as part of a larger power center development anchored by Target and other majors (Curbline Buys Slice of Retail Center Near Phoenix for $32M). Case Insights: Investors are willing to pay premium pricing for new construction strip centers with trophy tenants in high-growth areas. The buyer paid all-cash, indicating confidence in long-term lease value. This case highlights the bifurcation in the market – top-tier assets with national tenants in booming suburbs can command cap rates far below the averages.
San Bernardino, CA – Esporta Fitness @ University Towne Center (32,800 SF): In June 2024, a single-tenant portion of a center (a 32.8k SF building occupied by LA Fitness’s “Esporta” brand) sold for $9.3 million ( ~$285/SF ) (). The cap rate was just under 7% (), reflecting the tenant had only 5 years left on the primary lease term. The seller was a private investor who used a 1031 exchange to sell, and the buyer likely underwrote either renewing the gym or re-leasing the big box. Case Insights: Even though this was a single-tenant deal, it’s part of a strip center environment (a larger shopping center). The relatively high cap rate (near 7%) shows how short lease term or re-leasing risk is priced in by investors. Contrast this with longer-leased assets in the same market trading much lower (the next case).
Chino, CA – Shoppes at Rancho Del Chino (15,500 SF): A multi-tenant strip center shadow-anchored by Home Depot (the strip is in the parking lot of a Home Depot) sold in April 2024 for $7.4 million ( ~$479/SF ) (). Despite being fully leased at sale, it was marketed as a value-add because rents were ~25% below market averages (in-place rents just under $30/SF NNN) (). The closing cap rate was 6.2% (). The buyer, a private investor, likely saw upside in marking leases to market over time. Case Insights: This deal illustrates a typical small strip center trade: ~15k SF, fully occupied, in a strong retail node (next to a big anchor store, ensuring traffic). The 6.2% cap reflected both the stability (fully leased) and the upside (below-market rents). It’s a good example of a yield/value-add hybrid play common in 2023-24 – investors can get a mid-6% current return with the prospect of increasing NOI via lease renewals at higher rates.
Las Vegas, NV – KinderCare @ Buffalo Dr. (12,931 SF): While not multi-tenant, it’s notable that even smaller retail assets like childcare centers attracted investor interest. In May 2023, a KinderCare daycare property (single-tenant retail classified use) in Vegas sold for $7.475 million (~$578/SF) (Second Quarter 2023 Las Vegas Retail Market Report - MDL Group). This likely corresponded to a cap rate in the mid-5% range given the high price per SF and the tenant’s long-term lease. It underscores that essential-service retail (education/daycare in this case) commanded strong pricing. For strip center investors, it’s a reminder that outparcel or single-tenant sales (e.g., a pad building in a strip center) can fetch low cap rates if the tenant is desirable, thus boosting overall asset valuation if subdivided.
Each of these case studies highlights different aspects of strip center investments:
Cap Rate Variation: Newer, Class A strips with strong tenants can trade at very low caps (as seen in Phoenix). Typical neighborhood strips in good locations trade around 6-6.5% (Las Vegas, Chino case). Those with shorter leases or more perceived risk trade higher (~7% or more, e.g. the Esporta fitness deal).
Pricing per SF: There’s a huge range ($300/SF up to $900/SF) depending on rent levels and tenant caliber. High rents (from premium tenants) justify high sale PSF. In contrast, a basic fully leased strip might trade in the $250-$400/SF range in many markets, as seen in Vegas and IE examples (Fourth Quarter 2024 Las Vegas Retail Market Report - MDL Group) ().
Value-Add Potential: Investors are actively looking for embedded upside, such as below-market leases or minor vacancies to fill. The Chino strip with 25% below-market rents is a prime example () – it sold fully leased, but essentially the buyer is planning on raising rents to drive value, a common strategy in strip center deals.
Active Buyer Pool: The buyers in these cases were predominantly private investors or specialized retail investors (including a new REIT in one case). This aligns with broader trends: private capital is seizing opportunities while many institutional buyers (REITs, funds) have been net sellers or on the sidelines in 2023 (). The Curbline REIT acquisition shows new players emerging to focus on convenience retail.
Overall, recent transactions affirm that well-located strip centers remain in demand, even as pricing adjusts to the interest rate environment. Investors are carefully picking their spots – paying top dollar for the best assets, or seeking higher cap rates on assets with some lease risk or upside potential. For a ~24,000 SF strip center investment, one can benchmark these cases to gauge pricing and return expectations in the current market.
Conclusion
Strip center assets in the Western U.S. present a compelling investment profile in 2024. Market fundamentals are strong – vacancies are at historic lows across Las Vegas, Phoenix, Denver, and Southern California submarkets, and tenant demand (especially for food, services, and essential retail) is robust. These positive trends, combined with limited new supply, have driven steady rent growth, supporting property income even as capitalization rates have risen.
Investors should navigate the space with an eye on risk management: favor tenant mixes that are resilient to e-commerce and economic swings, underwrite conservatively to account for higher financing costs, and be mindful of lease rollover exposure. The current cap rate environment (mostly 5.5%–6.5% for neighborhood strips) offers a much better entry yield than other property types, but also indicates the need for thoughtful business plans to achieve target returns (e.g. growing NOI through lease-up or rent increases).
Financing for retail is available and expected to become more accessible as lenders recognize the sector’s outperformance. Well-leased strip centers with solid tenants are finding favor among banks, life insurers, and even CMBS lenders – especially as other sectors falter – making it feasible to secure debt for acquisitions (Lenders are shopping for retail - The Crittenden Report). In preparing an investment deck, equity investors can highlight that strip centers have proven their resilience through the pandemic and beyond, with many markets reporting “fundamentals of the retail market are very positive” (Brad's Blog - My Take on the 2nd Quarter 2023 Retail Real Estate Data for SoCal’s Inland Empire - Progressive Real Estate Partners).
Comparatively, Las Vegas stands out for growth potential (and slightly higher risk/return), Phoenix for its booming expansion and rent surges, Denver for stability, and Southern California for its entrenched strength and capital preservation quality. By studying recent transactions, investors can calibrate expectations: whether pursuing a stable 6% yield or a value-add play to drive returns into the teens, the Western U.S. strip center landscape offers opportunities tailored to different strategies. With prudent acquisition criteria and active asset management, strip centers can deliver reliable cash flow and upside in a diversifying portfolio – all underpinned by the daily needs and local services that these centers continue to fulfill in their communities.