The best-performing mall in a region is often the one no one expects.
People often associate retail real estate investing with major cities like Dallas, Miami, or Los Angeles because they seem safer due to larger populations, higher incomes, and greater demand.
But in retail real estate, what feels intuitive is not always what performs best.
When we tell investors we focus on enclosed malls in secondary and tertiary markets, they often react with polite skepticism. A city of 100,000 people? Isn’t that risky? Wouldn’t you prefer a major metro?
We would not. When analyzing competition, unit economics, and supply, a different pattern emerges. By the end, you'll see why small markets, when positioned right, can have better economics and less competition than big-city assets.
In a major metro, an enclosed mall competes with lifestyle centers, urban mixed-use developments, high-street retail corridors, outlet malls, and other enclosed malls within a reasonable drive. A Houston consumer has dozens of options for a Saturday afternoon.
In a city of 75,000 to 200,000 people, the enclosed mall is often the only game in town.
That is not a weakness. That is a moat.
To put that into perspective, consider a typical tertiary market: a city of 120,000 that anchors a trade area of 250,000 to 300,000 people within a 30-minute drive. There might be one enclosed mall in that entire radius, maybe a Walmart-anchored strip center on the highway, and a handful of standalone restaurants or small retail shops downtown.
Compare that to a primary market:
The difference is clear. In a tertiary market, the enclosed mall typically has exclusive rights within its trade area for categories like apparel, footwear, jewelry, and mid-range dining. National tenants understand this, which is why they keep signing leases in these locations.
And that competitive positioning does not just influence traffic. It directly impacts how stores perform at the unit level.
Here is where investor assumptions tend to break down. Most people assume that a store in a Class A mall in a gateway city generates dramatically better sales than the same retailer in a small-city mall. The gap is real, but much smaller than you might think.
At a high level, the numbers look like this:
A mall in a gateway city:
A mall in a tertiary market:
When you calculate the occupancy cost ratio, which is total occupancy divided by sales, the picture begins to change. A retailer paying $120 PSF on $600 PSF in sales is operating at about a 20% occupancy cost ratio. In contrast, a retailer paying $35 PSF on $375 PSF in sales is closer to 9–10%.
That difference is meaningful since, in many cases, the small-city store is more profitable per unit. Retailers closely monitor occupancy cost ratios, favoring secondary and tertiary markets with the best ratios and least overlap when selecting new store locations.
Which naturally raises the next question: if the economics are so compelling, why wouldn’t retailers want these locations?
Many believe national retailers only prefer big cities, but data shows they prioritize profitability, consistency, and store performance within trade areas. This increasingly leads them into secondary and tertiary markets.
ICSC defines a regional mall as 400,000 to 800,000 sq. ft. of GLA. In tertiary markets, these malls are often the highest-traffic commercial properties in the trade area.
For retailers like Bath & Body Works, American Eagle, or Foot Locker, a well-positioned mall in a mid-size city offers several advantages that are harder to replicate in major metros:
When the nearest competing mall is 60 or 90 miles away, the local trade area tends to be large and loyal. Consumers mainly decide whether to visit, and often, they do.
At the same time, retailer demand is being reinforced by developments on the supply side.
New retail development has slowed dramatically in recent years. Fewer projects are being built, and very few enclosed malls are being developed.
How supply constraints are reshaping retail site selection…
In tertiary markets, the impact is clearer. Remaining malls are often the last enclosed retail properties, creating a supply-constrained environment. Retailers have limited choices, and landlords hold more leverage than expected, enough to influence lease negotiations.
To understand how this plays out in practice, it helps to look more closely at how these markets are evaluated.
When we evaluate an enclosed mall in a small city, the trade area analysis is the foundation. We care about several specific metrics, but more importantly, how they work together to tell a complete story.
Population within a 30-minute drive: We aim for at least 150,000 to 300,000 people in the primary and secondary trade areas. The city may have 80,000 to 120,000 residents, but its influence extends to nearby counties and towns.
Competitive density: Measures the square feet of competing retail space within a radius. In tertiary markets, it’s often zero or one property, while in primary markets, it can be millions.
Household income and spending power: Median household income in many of these markets ranges from $50,000 to $70,000, which is below levels in gateway cities. However, the cost of living is also lower, so discretionary spending as a percentage of income is often similar, and sometimes even higher.
Employer stability: We examine key employers and local economic diversity. Areas anchored by a regional hospital, state university, and a mix of manufacturing and logistics are more resilient than those relying on a single employer.
Retail leakage: This refers to the money residents spend outside the trade area because the local availability of goods and services is insufficient. A high level of retail leakage actually indicates a positive sign, as it signals unmet demand that a well-occupied mall can potentially fulfill.
All these factors affect the long-term balance between supply and demand in the market.
The biggest misconception about tertiary market malls is that they are dying assets in dying towns.
Some are. And those should be avoided.
When you look at the properties that perform well, a few patterns tend to show up:
Well-located, well-operated enclosed malls in stable or growing small cities offer an undervalued risk-return profile. They generate strong cash flow relative to purchase price, face limited competition, and attract national tenants.
The institutional capital that chases Class A malls in gateway cities is not paying attention to these markets. That is fine by us.
Many investors instinctively focus on major markets. Larger cities appear more stable, more visible, and easier to understand. However, as with retail real estate in general, what seems intuitive isn't always where the best opportunities are. When you analyze how retail truly performs, where tenants are most profitable, and how supply and competition affect outcomes, a different picture starts to come into focus.
Smaller markets, when positioned correctly, often generate stronger cash flow, face less direct competition, and maintain more stable demand than many investors realize.
This shift in perspective is important. It opens the door to opportunities that are frequently overlooked, not because they lack fundamentals, but because they don't align with the usual narrative. For investors willing to follow the data instead of assumptions, this disconnect can offer significant advantages.
Retail real estate is changing, and so is where value is created. While big cities attract focus, some of the best opportunities are in places investors often miss.
Smaller markets, supported by strong trade areas, limited competition, and good economics, can deliver steady results. The key is not thinking that bigger is always better. It’s about understanding where retailers make the most profit, where supply is limited, and where consumers have fewer options.
That is often not in the largest cities.
In our next article, we will walk through how these investments are structured and what the return profile can look like for passive investors.