Not all retail tenants are created equal. And the distinction between service retail and goods retail matters a lot when a buyer is evaluating your property.
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Classify each tenant by type: Service (salon, dentist, insurance, fitness) vs goods (clothing, gift, electronics) vs food. This tells the buyer story about your building’s resilience. -
Track tenant tenure by category: Service tenants typically stay longer. Goods tenants have higher turnover. Document this difference. -
Document anchor tenant quality: If you have a restaurant, analyze: how long have they operated, do they have personal guarantee, what’s the concept, are they turning tables? This directly affects building valuation. -
Calculate service-to-goods ratio: What percentage of your NOI comes from service tenants vs goods retailers? Higher service mix supports lower cap rates.
Service retail: the survivor
Barber shops, nail salons, dry cleaners, dentists, tax prep offices, tutoring centers, insurance agencies, fitness studios. These businesses sell a service that has to be delivered in person. You can’t get a haircut on Amazon. You can’t do your taxes through a vending machine. These tenants are what I call “Amazon-proof.”
Service vs Goods Retail Cap Rate Comparison
On identical 10,000 SF strip centers with $80K NOI in Carolina markets:
- Heavy service retail (salons, dentists, offices): 6.5-7.5% cap = $1.07M-1.23M value
- Mixed service/goods split: 7.5-8.0% cap = $1.0M-1.07M value
- Heavy goods retail (clothing, gifts): 8.5-9.5% cap = $840K-940K value
A strip center filled with service tenants is one of the most defensive retail investments you can own. The tenant base is stable, the businesses are usually locally owned and operated, and the demand doesn’t go away during economic downturns.
Goods retail: the risk factor
Clothing boutiques, electronics stores, gift shops, bookstores. These tenants sell physical products that can absolutely be bought online. Some will thrive because they offer a unique in-store experience. Many won’t. The failure rate for goods retailers is significantly higher than for service retailers.
When I see a strip center in Greensboro with three goods retailers and two service tenants, I’m discounting the goods retail income because the risk of those tenants leaving or failing is higher. A strip center with five service tenants gets a tighter cap rate.
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Food service: somewhere in between
Restaurants and food tenants are a mixed bag. A locally owned pizza place that’s been there ten years? Pretty safe. A trendy new concept from a first-time restaurateur? Risky. Restaurants fail at a higher rate than almost any other business type. But when they work, they’re great anchors that drive foot traffic to the rest of the center.
I look at the specific tenant, not just the category. A Subway or Domino’s has franchise support and brand recognition. A one-off restaurant depends entirely on the operator.
What this means for your building’s value
If your retail building is heavy on service tenants, you’re in a strong position. That’s exactly what buyers want right now. If you’ve got mostly goods retailers, the income might look the same today but the risk profile is different, and the cap rate will reflect that.
Seller takeaway
If your retail center is heavy on service tenants, you’re positioned well. If you have mostly goods retailers, understand that buyer risk assessment will affect pricing. Call Jim at 980-600-3839 to review your tenant mix and what it means for your sale value.
Selling retail in Charleston or anywhere in the Carolinas? Call me. 980-600-3839.
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