Strip center

Underwriting a Strip Center

CREMODEL · underwriting notes

Two credit pads carry the income and nine shops carry the risk. The rent roll is where a strip center is won or lost, and the vacancy is where the money goes.

An established strip center looks simple on a cap rate and behaves nothing like it. The income is not one number, it is eleven leases with different terms, different escalations, different recovery structures and different odds of renewing. Two of them are corporate credit on fifteen-year leases. Nine of them are small businesses on five-year leases that will roll twice inside your hold.

The pads are not the same asset as the shops

A bank branch and a quick service restaurant on fifteen-year corporate leases with 10% increases every five years are a bond. They need no allowance, they renew, and a buyer will pay a low cap rate for them. A 2025 trade in Brevard County, Florida put a 2,350 square foot Fast casual restaurant and a 3,425 square foot national bank branch on exactly those terms and sold at a 4.6% cap on roughly $355,700 of net operating income.

The shops behind them are a different business. Five-year terms, 55% to 70% renewal probability, and every roll costs you an allowance, a commission and several months of downtime. Model each one separately or you will systematically understate what the center costs to run.

What one vacancy actually costs

A 2,400 square foot dark former restaurant is not simply 2,400 feet of missing rent. It is the allowance to get a new operator open, second-generation restaurant space runs to roughly $45 a foot of landlord allowance, against $10 to $25 for ordinary second-generation retail, plus a 6% commission on the full term, plus three or four months of free rent, plus the months it sits empty before any of that starts. Put those in the year you will actually write the check and the return changes.

Recoveries are per lease, not per center

The recoverable pool is a number per square foot: common area maintenance, taxes and insurance. What each tenant reimburses depends on its lease. A triple net tenant pays its pro rata share plus an administrative fee. A gross tenant pays nothing and you absorb it. A base year tenant pays only the growth above its stop. Averaging across the center hides the gap, and the gap is real money.

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