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December 12, 2013

Empty strip mall? Here’s how to fill it

  • Six industries are set to quickly expand during the next five years and represent promising tenant targets for lessors.
    • By AGATA KACZANOWSKA
    IBISWorld

    mug
    Kaczanowska

    Swathes of strip malls still stand unfinished and empty across America since the recession bankrupted local businesses and sent commercial construction activity on a downward spiral. Over the three years to 2011, the value of commercial building construction plummeted 12.6 percent annually, on average.

    While still a ways away from making a full recovery, a recent rise in credit access is slowly encouraging retailers to open additional locations in strip malls while interest rates stay low. To expand their market reach, many vendors are franchising their businesses and relying on local support to establish a successful business in a previously untapped market.

    Because business owners are increasingly building storefronts in regions they are unfamiliar with, it is important for lessors to keep tabs on retail trends throughout the economy. Small establishments, as opposed to anchor stores, can represent particularly attractive opportunities because they often achieve faster growth than well-established chains.

    IBISWorld has identified six industries that are composed of profitable, small retailers or service providers that are set to quickly expand during the next five years and represent promising tenant targets for strip mall lessors. These businesses will boom due to rising business-to-business transactions, or thanks to expanding consumer spending and interest in their wares.

    A strong foundation

    Industries expected to rapidly expand into new locations during the next five years include real estate agency franchises and lumber and building material stores. Strip malls, which benefit from high traffic exposure, are prime locations for these types of establishments. Growth in these two industries, though seemingly unrelated at first glance, signals a long-awaiting return in demand for real estate and construction-related products and services.

    Real estate agency franchises and lumber and building material stores are estimated to add a combined total of 19,230 locations during the five years to 2018.

    1. Real estate agency franchises

    Pent-up demand for residential housing and for commercial real estate will provide the impetus for an influx of new real estate agency franchises. Real estate agents and brokers are mostly paid on a commission basis, which results in stable industry profit, averaging about 7.5 percent of revenue, making such businesses a prime lending candidate.

    Though industry consolidation will continue as larger real estate firms acquire franchises to expand into new geographic markets, smaller business owners will also increasingly connect with existing franchises to leverage their operational support and resources to attract new customers.

    IBISWorld estimates that the number of industry establishments, or franchise locations, will expand at a 5.2 percent average annual rate to about 40,995 during the five years to 2018. These franchises are expected to expand into small, office-like suites that are often spattered throughout strip malls.

    2. Lumber and building material stores

    Increased consumer spending on home improvements and an upturn in the construction markets will drive demand for lumber and building material stores as the economy’s recovery gains momentum, pushing up industry revenue 9.5 percent to $102.6 billion in 2013. Although profit will only account for an estimated 1.9 percent of revenue in 2013, rising sales are expected to benefit the industry’s bottom line.

    Because rent and wage costs are largely fixed, profit generally expands in line with revenue. Therefore, increased spending on home improvements and renewed activity in the residential housing sector show promising signs of success for operators of lumber and building material stores.

    Increasing revenue and rising profitability will invite small and non-employer operators into the industry, especially in areas that are more remote and underserved. Because about 69.1 percent of operators employ fewer than five workers, most businesses will seek out loans to start up or expand.

    Lumber and building material store expansion is forecast to surge at a 3.6 percent annualized five-year rate to 61,072 locations in 2018. These businesses are expected to occupy medium-size leases in strip malls and other shopping centers where they can best showcase their wares, attract curious consumers and conveniently service construction contractors.

    Consumer-driven expansion

    Other retailers that are expected to add a significant number of new locations during the next five years include single-location, full-service restaurants, pizza restaurants, jewelry stores and health stores. Consumers are increasingly spending on the products and services that these industries provide as disposable income rises.

    3. Single-location, full-service restaurants

    Intense competition in single-location, full-service restaurants will continue during the next five years as consumers resume spending on luxuries like eating out. And, although profitability varies greatly between operators, IBISWorld estimates that earnings before interest and taxes average a healthy 6.2 percent of revenue.

    New technologies will make restaurant operations run more efficiently, which typically supports profitability and, in turn, attracts new entrants into the industry. For example, restaurants will implement new systems using websites, text messages and social networking sites for contacting customers and making bookings. Technological investment will also improve back-of-house operations, including labor scheduling and product ordering systems.

    The number of establishments is expected to total 220,125 in 2018, representing 1.3 percent annualized growth from 2013. They will benefit from high-profile spots in strip malls where they can easily tempt potential diners.

    4. Pizza restaurants

    Pizza restaurants will also benefit from rising consumer spending on eating out as unemployment falls. Although the industry is expected to expand, pizza restaurants will continue to contend with rising competition from other retail food outlets and consumers’ preferences toward healthier foods. As a result, pizzerias will get creative with their menus and offer more products made with fresh ingredients to satisfy consumer demand.

    With revenue expected to rise consistently, IBISWorld anticipates more of these restaurants to pop up over the next five years. From 2013 to 2018, establishment numbers are forecast to increase at an average rate of 3 percent per year to 89,009. Pizza restaurants are also estimated to be slightly more profitable than single-location, full-service restaurants, earning an average profit of 6.4 percent of revenue.

    Pizza restaurants will particularly benefit from strip mall locations near neighborhoods, so patrons can choose between conveniently stopping by for a slice, ordering takeout or dining out close to home.

    5. Jewelry stores

    As the economy enters a full-blown recovery during the next five years, new entrants and reemerging companies will push jewelry stores into a period of fast-paced expansion. Rising discretionary spending will enable jewelry stores to raise their prices and earn higher profit, which will attract additional firms and investment in expansion activities. Consequently, IBISWorld projects that the number of jewelry stores will grow at an annualize five-year rate of 2.3 percent to 65,749 in 2018.

    Strip malls are particularly attractive to industry operators because they are typically well lit and provide additional security to protect their merchandise. Despite relatively high security costs, profit is estimated to total 9.2 percent of industry revenue. As luxury spending rebounds during the next five years, profit is anticipated to climb even further to 13.2 percent of revenue by 2018, making this industry a low-risk leasing opportunity.

    6. Health stores

    Rising demand for dietary supplements, the emergence of healthcare legislation and the aging of the American population will boost demand for health stores during the next five years. Rapid growth in the supplement and sports nutrition segments and the recent uptick in available real estate have encouraged operators to open additional locations despite mounting competition from mass merchandisers and online retailers.

    Due to heightening competition and rising rent and wage costs over the next five years, industry profit is expected to average about 5.5 percent of industry revenue in 2018, a slight decrease from 2013. However, strong revenue growth is expected to make up that decrease in terms of higher dollar amounts.

    Small start-ups that are knowledgeable about health are entering the industry to capitalize on rising consumer demand for expert nutritional advice from salespeople. As a result, the number of stores is forecast to expand at a 1.9 percent annualized rate to 64,146 in 2018. To attract consumers on the go, health stores will benefit from highly visible locations in strip malls, such as corner shops or storefronts near major roadways.

    The way to growth

    With a bump in real estate investments from pension funds, real estate investment trusts, credit unions and investment banks, small businesses will slowly but surely fill the high number of vacancies that currently characterize strip malls across America. The aforementioned retailing industries are poised to lead an expansion into markets that are rebuilding in the post-recession era, enabling them to negotiate mid- to small-size leases for retail space. Therefore, the low cost of financing and renting is likely to result in higher returns for retailers, which will benefit lessors.

    New stores are paving the way for investment into the construction of shopping malls, department stores, food retail outlets, entertainment facilities and warehouses. Many underserved American communities are hoping for such expansion, and will benefit from the small business loans that can enable endeavoring retailers to establish a storefront in their town.

    Agata Kaczanowska is a research manager at IBISWorld, overseeing a team of analysts. She holds bachelor’s and master’s degrees in economics from American University and has contributed field research in collaboration with the University of Sofia, Bulgaria.


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