Top 10 Cities To Buy Retail Properties for Less Than $2.5M

Retailers remain in expansion mode across the country despite the headwinds of rising inflation and interest rates.

One reason for optimism: Retail sales (excluding auto, gasoline, and non-store retailers, which best capture brick-and-mortar retail sales), reached a new record high of $378 billion in June, according to data from CoStar, the publisher of LoopNet. That figure is 22% higher than pre-pandemic levels even after adjusting for inflation.

Large national retailers are following population and job growth in emerging metros, but CoStar data shows that there are still significant retail property discounts in many markets with growing customer bases and buying power, especially in the Midwest and the Carolinas. All the markets on this list are trading at a much lower price per square foot than the national average of nearly $240 per square foot, while still reporting low vacancy rates and other signals of strong demand and forecasted rent growth.

Based on data and analysis from CoStar Analytics, LoopNet developed this list of 10 markets with the most promising opportunities for non-institutional investors seeking to buy retail properties priced up to $2.5 million.

To determine the markets, we evaluated those with:

• Population over 100,000
• Aggregate retail asset value of more than $3 billion
• Current retail vacancy rate of less than 4.5%
• Forecasted annualized rent and market price growth over the next three years greater than 2.5%
• Less than 0% forecasted change in vacancy over the next three years
• Forecasted average market sale price of less than $2.5 million over the next three years

Based on these criteria, the top markets to buy retail properties under $2.5 million are:

1. Minneapolis, Minnesota
2. Kansas City, Missouri
3. Columbus, Ohio
4. Birmingham, Alabama
5. Greenville, South Carolina
6. Columbia, South Carolina
7. Visalia, California
8. Fayetteville, North Carolina
9. Spartanburg, South Carolina
10. Panama City, Florida

“These are markets that are of a decent size, have tight fundamentals that are not expected to loosen, are forecasted to see rents and pricing grow by at least 2.5% per year over the next three years, and have an average deal size under $2.5 million,” said Brandon Svec, national director of retail analytics at CoStar. “These markets have the right combination of, strong forecasted demand and [net operating income] growth that should be supportive of value creation.”
The markets are ranked in order by total retail asset value (or retail market size).

Here's a closer look at each of the top retail markets:

In addition to being the largest market on this list, Minneapolis-St. Paul also enjoys a high concentration of well-paying jobs, with an unemployment rate of just 2.3%. The metro’s median household income of nearly $94,000 ranks the highest in the Midwest, and in the top 12 among major metros nationally. The Twin Cities is also a very affordable metro, with an average rent-to-income ratio of 18.5% for market-rate apartments, much less than the industry benchmark of 30%. Rent-to-income ratio represents the percentage of monthly income a tenant spends on their rent.

“Minneapolis’ economic diversity and strong underlying market fundamentals make it one of the most stable retail markets in the country, equipped to withstand an uncertain economic landscape and provide strong returns for the foreseeable future,” said Brian Anderson, a Minneapolis-based director of market analytics at CoStar. “While perhaps not the first area that comes to mind when thinking of retail destinations, residents of the Minneapolis-St. Paul metro have long had ample opportunities to spend their disposable income.”

The Twin Cities’ retail market is large and very active, with nearly 1,000 retail deals closing in the 12 months ending in June. The average retail sale closed at $169 per square foot, up from 2021 but still representing a large discount from the national average. The average cap rate was 7.2%, and the Twin Cities’ retail vacancy rate was 3.2%, compared to the national vacancy rate of 4.4%.

Additional Metrics:

• Rent Per Square Foot: $18
• Median Household Income Growth: 8.4%

With nearly $22 billion in retail assets, Kansas City is the second-largest market on this list. There is over 1 million square feet of retail space under construction, the most in over three years in the metro. Job growth remains steady at 2.9%, or about 31,000 new jobs, per year.

“The Kansas City retail market is one of the largest in the United States, and 588 retail deals have closed in the past year. That was a material increase compared to the five-year average sales count,” Svec wrote in a CoStar market report.

Kansas City’s retail vacancy rate stands at 4.3%, and the average sale closed at $165 per square foot, well below the national average. The market cap rate is 7%.

Additional Metrics:

• Rent Per Square Foot: $16.79
• Median Household Income Growth: 7.3%
• Annual Rent Growth: 5.5%

The last Midwest entrant on the list, Columbus enjoys one of the strongest retail markets in the region with a 3.9% vacancy rate. Annual rent growth, last reported at 6.9%, beats nearly all other markets in the Midwest as well as the national average of 4.4%.

Like other markets on this list such as Columbia, South Carolina, Columbus is a state capital as well as home to a large public university. Intel recently broke ground on a new $20 billion microchip factory in suburban New Albany, Ohio, promising thousands of new jobs and a growing base of local retail consumers.

“Demand has improved notably over the past year due to an uptick in leasing activity and slower pace of space give-backs,” said Elizabeth Ptacek, a Cleveland-based senior director of market analytics at CoStar. “The market is expected to remain tight in coming years.”

Additional Metrics:

• Sale Price Per Square Foot: $153
• Average Cap Rate: 7.7%
• Median Household Income Growth: 8.4%

Birmingham is the largest metropolitan area in Alabama and continues to log consistent population growth, adding nearly 53,000 new residents between 2010 and 2021. Birmingham was also quick to regain jobs lost during the pandemic, with the city now reporting a 2.5% unemployment rate. These trends lend themselves well to an expanding, albeit transitioning, retail market.

“Like many other markets, we’re seeing a pronounced resurgence in retail demand,” said Bill Kitchens, a Dallas-based director of market analytics at CoStar. “Meanwhile, retail developers are moving at a more conservative pace. Together, these two factors are fostering tightening vacancy rates.”

More national retailers, such as Burlington and Nordstrom Rack, are now opening or expanding in Birmingham.

The retail vacancy rate in Birmingham is 3.5%, with the retail market sale price averaging $145 per square foot.

Additional Metrics:

• Average Cap Rate: 7.6%
• Median Household Income Growth: 8.8%
• Rent Per Square Foot: $14.74

Greenville sits roughly halfway between Atlanta and Charlotte, North Carolina, on Interstate 85 and continues to attract new office and industrial users, as well as new residents seeking less expensive housing. The metro’s population recently surpassed 1 million, raising its profile with national and upscale retailers.

“Redevelopment, rather than new construction, has characterized the retail market in the Carolinas in recent years,” said Chuck McShane, a Charlotte-based director of market analytics for the Carolinas at CoStar. “This has helped keep the retail vacancy rate low, as very little speculative retail development has occurred here over the past decade. While new construction does follow new (residential) rooftops here, most new retail centers are heavily preleased. More creative retail developers have sought out the large inventory of early 20th-century textile mills for mixed-use redevelopment in urban neighborhoods near downtown Greenville and Spartanburg.”

New retailers entering the market include Floor & Decor, Ashley and several national grocers. Greenville’s vacancy rate is 3.6%, according to CoStar data, and average deals trade for much less than the national average, at $154 per square foot.

Additional Metrics:

• Average Cap Rate: 7.1%
• Rent Per Square Foot: $15.91
• Median Household Income Growth: 8.6%

Between a state capital, public university and one of the nation’s largest army bases (Fort Jackson), Columbia has long had a stable employment and customer base. One in five residents work in government, but large office tenants such as BlueCross Blue Shield of South Carolina and Aflac have entered the market in recent years, leading to new retail development.

“Transformative projects like the city’s ‘Bull Street District’ follow the popular adaptive reuse trends happening across the Carolinas that have provided new urban experiences for consumers and retailers to take advantage of,” said AJ Abston, regional market analyst for the Carolinas at CoStar.

The retail vacancy rate in Columbia is 3.7%, while retail properties sell for an average of $146 per square foot.

Additional Metrics:

• Average Cap Rate: 8%
• Rent Per Square Foot: 15.74
• Median Household Income Growth: 7.9%

The population in many coastal markets shrank last year, but Visalia's increased by nearly 5%. People who love the great outdoors enjoy Visalia’s location near Yosemite and Sequoia national parks, and the San Joaquin Valley city is also strategically located along State Route 99, which makes it a natural stopping point between Fresno and Bakersfield.

“With people increasingly turning here from more expensive coastal areas, potential household buyer power has increased in tandem with that population shift,” said Joshua Ohl, a San Diego-based director of market analytics at CoStar. “That could provide a lift to local retailers as the consumer base expands.”

New national retailers entering Visalia include Ross, Mor Furniture, Boot Barn and dd’s Discounts. The overall retail vacancy rate in Visalia is 2.7% and the average retail property sold for $194 per square foot so far in 2022, representing a significant discount from the national average. The average Visalia retail cap rate sits at 6.7%, according to CoStar data.

Additional Metrics:

• Median Household Income Growth: 8.9%
• Rent Per Square Foot: $18.07

Fayetteville enjoys economic stability thanks to the presence of Fort Bragg, and its affordability relative to other growing Sun Belt cities such as Charlotte and Raleigh, North Carolina. Projects like Segra Stadium, home of the Fayetteville Woodpeckers minor league baseball team, continue to provide transformative opportunities for both residential and commercial tenants and investors.

“The Carolinas have seen major developments along its major thoroughfares including I-95 and I-40 due to its importance within the trade and transportation sector, along with education and health services,” Abston said. “Rent growth in Fayetteville has continued to rise as more in-migrants choose mid-size markets as their home.”

The vacancy rate in Fayetteville is 3.8%, while the average retail sale traded at $165 per square foot.

Additional Metrics:

• Average Cap Rate: 7.9%
• Rent Per Square Foot: $16.00
• Median Household Income Growth: 10.6%

Spartanburg is home to BMW’s largest global factory, which supports several suppliers and administrative support businesses in the market.

The retail vacancy rate in Spartanburg is 4.3%, while the average deal trades at $115 per square foot.

Additional Metrics:

• Average Cap Rate: 8.5%
• Median Household Income Growth: 7.9%
• Unemployment Rate: 3%

Like other markets on this list, Panama City is enjoying an influx of new residents, with its 2.7% population growth from July 2020 to July 2021 ranking 15th among all U.S. metro areas. Panama City’s population is also relatively young compared to other smaller Florida markets, while still including more affluent baby boomers and Generation Xers.

“This metro area — particularly its northern part — is seeing increased development of apartments and for-sale housing,” said Chris LeBarton, a director of market analytics at CoStar.

The Publix grocery chain recently opened a new store off U.S. Highway 231, nodding to this development. National retailers entering the market include Planet Fitness and Academy Sports + Outdoors. The retail vacancy rate in Panama City is just 1.2%, and the average retail deal traded at $167 per square foot. The market cap rate is 6.8%.

Additional Metrics:

• Rent Per Square Foot: $15.68
• Median Household Income: $70,273
• Unemployment Rate: 2.6%

Again, this list is meant to showcase markets with tight fundamentals, strong forecasted demand and other commonalities that should result in growth over the next three years. But as investors know, all real estate is local, and the outlook of individual properties will be based on various factors.

“That’s just to say that buying indiscriminately within these markets does not guarantee success,” Svec said. “Focus first on location within these markets, targeting assets with good visibility and traffic (foot or car, depending on the density) and strong nearby demographics.”

Targeting vacant properties or properties with expiring leases could present even more upside.

“Given positive demand and limited available space, investors should feel more confident taking on assets with some current or near-term vacancy, so long as the location is strong and the discount in price warrants the upfront investment costs,” Svec said.