Identifying and Capitalizing on Undervalued Retail Real Estate Assets

The retail real estate market in 2025 is a study in contrasts. While suburban and Sun Belt regions-such as Phoenix, Dallas, and Charlotte-have thrived amid low vacancy rates and robust demand, non-Sun Belt markets remain largely overlooked. This divergence presents a compelling opportunity for contrarian value investors willing to look beyond the headlines. By analyzing structural shifts, localized fundamentals, and repurposing trends, investors can identify undervalued assets in secondary markets and position themselves for long-term gains.

The Sun Belt's Resilience and the Non-Sun Belt's Potential

The Sun Belt's dominance is well-documented. As of early 2025, the national retail vacancy rate stands at 4.3%, with suburban and Sun Belt markets reporting vacancy rates as low as 2.5% in Class A centers, according to Retail Investment Benchmarks 2025. This tightness is driven by population migration, hybrid work models, and the rise of experiential retail. For instance, Phoenix and Dallas have seen strong absorption in grocery-anchored centers and mixed-use developments, supported by infrastructure investments and job growth, according to CBRE's retail outlook.

Yet, outside these hotspots, secondary markets like Buffalo, Oklahoma City, Tucson, and Indianapolis are quietly gaining traction. These cities exhibit stable economic indicators, improving infrastructure, and relatively lower property prices. While specific 2025 vacancy and cap rate data for these markets are sparse, broader trends suggest undervaluation. For example, Indianapolis reported a multi-tenant retail vacancy rate of 0.4% in Q1 2025, according to the Indianapolis retail report. Similarly, Oklahoma City's retail market maintained a 5.4% vacancy rate in H2 2024, as shown in CBRE's Oklahoma City figures.

Metrics to Watch: Cap Rates, NOI, and Adaptive Reuse

Cap rates for non-Sun Belt retail assets are stabilizing. Nationally, prime retail properties-especially those with long-term leases to essential retailers-trade at sub-5% cap rates, while higher-yield opportunities (e.g., dollar stores, pharmacies) command 7%+ yields, according to a CBC Worldwide report. In Indianapolis, for instance, a Kroger-anchored center traded at a 6.1% cap rate in early 2025, signaling renewed investor confidence in grocery-anchored assets (as reported in Retail Investment Benchmarks 2025).

Net operating income (NOI) growth is another critical metric. With retail vacancies near historic lows, landlords have maintained or modestly increased rents, driving steady NOI. In Buffalo, for example, suburban retail centers benefit from repurposed big-box stores converted into fulfillment hubs or mixed-use spaces, enhancing cash flow potential, as Investing in CRE observes.

Adaptive reuse further amplifies value. Former department stores and big-box locations in non-Sun Belt markets are being repositioned for e-commerce logistics or experiential retail, reducing supply constraints and attracting diverse tenants, according to J.P. Morgan insights.

Strategic Opportunities for Contrarian Investors

1. Target Necessity-Based Retail: Grocery-anchored centers and single-tenant properties (e.g., pharmacies, banks) remain resilient. These assets offer stable cash flows and lower cap rates compared to malls, which face 8.9% vacancy rates, per Cushman & Wakefield MarketBeat.
2. Leverage Population and Job Growth: Cities like Oklahoma City and Tucson are seeing infrastructure investments and population inflows, creating tailwinds for retail demand, as XEquity Investors shows.
3. Repurpose Underutilized Assets: Secondary markets with distressed properties-such as shuttered big-box stores-offer value-add opportunities through adaptive reuse.

Risks and Mitigation

Macro risks, including interest rate volatility and climate-related disruptions, persist. However, non-Sun Belt markets are less exposed to these pressures than coastal or urban hubs. Diversifying across property types (e.g., combining grocery-anchored centers with experiential retail) and focusing on long-leased assets can mitigate downside risk, as a Cheetah Content article notes.

Conclusion

The retail real estate landscape in 2025 rewards those who dare to look beyond the obvious. While Sun Belt markets continue to shine, non-Sun Belt cities offer compelling value through low vacancy rates, stable cap rates, and adaptive reuse potential. By focusing on necessity-based retail, leveraging population trends, and repositioning underutilized assets, contrarian investors can capitalize on mispriced opportunities and build resilient portfolios.