Why Retail Real Estate Is Winning in 2026 | Rising Rents and Cap Rate Upside

Aaron Strole (00:00)
Cap rates are tricky in office right now. What I do see is it increasing the occupancy. Cap rates are driven by several things, though, right? So and part of it is the interest rate. So as interest rates have been going up, it’s been pushing those cap rates up, regardless of what’s going on. And a lot of people still see office as risky. I do think there’s opportunity right now for in office because so many people are afraid of it. And anytime you have people that are afraid to invest in something,

That’s normally a great time to get in.

Scott Bursey (02:02)
Welcome back to the *Real Estate Pros* podcast powered by Investor Fuel. I’m your host, Scott Bursey. Glad you’re with us. Today we’re joined by Aaron Strole the founder and owner of Capital Asset Management, a leader in the commercial real estate.

Space who manages a robust portfolio across retail, office, industrial, and medical office assets, while also handling complex association management. His firm’s ability to navigate the shifting sands of today’s market, especially with interest rates and evolving leasing demands, makes him the perfect guest to help us understand where the smart money is moving. Listeners, you can expect to learn how to

Keep your assets performing even when the broader market is feeling the squeeze. Aaron, welcome to the show.

Aaron Strole (02:50)
Great to be here. Thank you, Scott.

Scott Bursey (02:51)
It’s awesome having you here, my friend, and to help our listeners get up to speed. Please give us the ninety second highlight reel of how your career ignited and where you’re pouring your fuel now.

Aaron Strole (03:02)
Yeah, so I started off actually in business strategy with IBM many, years ago. Kind of my I call it my previous career and previous life overall. and I had the genius idea to quit that. and just as the Great Recession was starting to happen, and but got the opportunity in commercial real estate.

and actually we were helping out some lending. My wife and I started the business together and she was more on the lending side and we’re helping somebody with some of that. And they said, Hey, listen, you guys know everything about our properties. why don’t you actually manage them for us? so with no good thing on the horizon, I started off in commercial real estate. and that was well, it’s been over 17 years now, and that was a little bit of our beginning.

But what I think I’ve brought to that and what really helped us propel is my background and business and strategy. A lot of people that started off in this industry, they were property managers. They’re like, hey, I’m a great property manager. I’m gonna be a property management company and start my own company, right? I was coming from a different perspective. I really didn’t know much at all about property management at the time, but I knew about business and how to run a business and how to make it successful, great people, great processes, technology, all of that.

And we grew up from there. and so, first 10 years I’d say was pretty like tough and slow, a lot of learning. And then over like the last five or so years, we’ve done some acquisitions, we’ve gotten really big foothold in the marketplace. we are the largest locally owned commercial real estate company now in Phoenix area. And yeah, and so we’ve gone from there.

Scott Bursey (04:40)
That’s just incredible. Thank you for sharing that journey. And Aaron, what really caught my attention about you was the way that you’ve been able to maintain such high level operational efficiency across so many distinct asset classes. Even when the rest of the industry is scrambling to adjust the rate environment. And curious to know, building on that, what do you see as the firm’s biggest strength in keeping tenant retention high despite the current

Interest rate environment.

Aaron Strole (05:10)
Yeah, so and this comes back to a lot to our people as well, and to what we’ve done to operate better, right? So I’ve I had my idea and background. I’m I love technology. And even when COVID hit and everything, we were one of the first ones, we’re on Teams meetings, we’re meeting remotely, all these things to keep things going, right. But there’s this constant desire to say, how can we do it better?

And fuel that process efficiency, right? So we say, okay, for example, we’d come out with month reports every month, big long 50, 60 more pages. Here’s like 20 different reports on your property, everything you should know about the rent role, what’s happening with tenants, renewals, all those kind of things that are important for our clients to make good decisions. Originally we were putting those together, each one, pull out the income statement.

Pull out the rent wolf. So now, so we said, okay, this is pretty simple, but we said there’s a schedule report. Let’s use that. Let’s create the best report we can. Now we just click a button and that report happens. So now our monthly report happens within minutes. We review it, we make sure it’s great. So it gives us more time to review it. But the other big thing that makes a difference is we have talented people that are out there. We don’t want them spending their time just on doing administrative tasks, right? What they’re doing now is they’re out at that property more.

They’re meeting with those tenants more. They’re making sure that tenant is happy with what’s going on. Or if there is a problem, they’re responsive to it. They have more time to answer that question and fix the problem. That’s the number one thing when it comes to tenant retention is that communication and that relationship with your tenants and making sure that they’re happy with how the property’s going.

Scott Bursey (06:49)
Aaron, that is a powerful perspective. Thank you for sharing that. Digging into your operations, where are you seeing the most friction in managing your office and retail portfolios right now?

Aaron Strole (07:01)
So offers and retail, although they have a lot of similarities, can be very different, as you may know. I think with retail, honestly, it’s become easier lately. there hasn’t been much new development, right? because it it’s very expensive to develop now. And if you look at developing a new property, and we actually have one that we developed recently, you have to get rents around forty five to fifty-five a square foot in order for that to work.

Not very many attendants are doing that, right? So most of the time, there aren’t there isn’t a whole lot of development left. That has actually caused the occupancy to go up on retail quite a bit and for a lot of stability in retail. and rents are going up every year because of that too. So that’s been a big factor on the retail side. So what we’re trying to do also, there’s still that flight to quality on the retail side as well. So we’re always saying every year, how can we make this property better?

maybe it’s a landscaping, maybe the asphalt needs to get done, maybe it’s a new fascia on the property. Making it so it has that curbapill and that pop as you come in is important. Office has been much more of a challenge, right? So on the office side, what we’re doing a lot with our clients is saying, yeah, if you have a space that’s 10, 20,000 square feet, we can lease space out.

We’re on that, up to like that seven to eight or so thousand square feet pretty quickly. So building out those spec suites. So some of our managers have become very good at that as well. Courtney Stern being one of our portfolio managers overseeing our office perspective says, Okay, here’s how we can do some nice get rid of that carpet, put in some nice vinyl planking, make it very clean, put in some new lighting, defy the space up. Now it’s a 5,000 square foot space.

So when we have spaces that are around that square footage or less, we’re very highly occupied as well too. And that’s what we tell our clients all the time. Like we, make that space ready. Tenant can tenants can just move in and they and they’re ready to go. but if you have that big 15,000, 20,000 square foot space that needs some work, you’re gonna have a hard time.

Scott Bursey (09:07)
Solid point. And thinking about the future, Aaron, what is one major opportunity you’re currently capitalizing on in the medical office space that most investors might simply be overlooking?

Aaron Strole (10:08)
That’s a great question. medical office is pretty hot right now. And that’s one thing we do talk to our clients about that have regular office space, especially if they have some additional plumbing. That’s a challenge, right? With medical office, is you need some water in those spaces for the doctors and other people. And if it’s not already there, it can be very expensive. But a lot of our buildings do have some of that infrastructure, and we’re saying, hey, convert some of those over.

One of them being Forum 44 was tradition more traditional office. Now about half the space is medical office. So putting in a little bit of those extra as far as plumbing and services helps out a lot. And making that space that really is a great space that people want to work out of. That lobby that maybe has a conference room in it as well that people can share, having them do that.

Making that wow factor as soon as you go in can help out a lot. people talk a lot about gyms. Honestly, I’ll tell you that most people when they when they rent a space, they’re like, does it have a gym? And they go and look at it. great, check the box. They’re probably not using it, but it’s good to have a little something there because it then they’re like, okay, this helps me and maybe with my employees when they’re here. so it’s having some of those features and everything that gets that lease done. It takes a little more investment.

Then you lease that.

Scott Bursey (11:26)
Are you seeing those trends translate into better cap rates for your clients?

Aaron Strole (11:31)
Cap rates are tricky in office right now. What I do see is it increasing the occupancy. Cap rates are driven by several things, though, right? So and part of it is the interest rate. So as interest rates have been going up, it’s been pushing those cap rates up, regardless of what’s going on. And a lot of people still see office as risky. I do think there’s opportunity right now for in office because so many people are afraid of it. And anytime you have people that are afraid to invest in something,

That’s normally a great time to get in. Now, when is it going to shift? I think it’s already starting to shift, but that’s the magic question. When is the right time? I think it’s starting to happen. we’re seeing our occupancy go up in office overall. That class A office mostly, that flight to quality once again, but it is happening. And I think people that can get in now with the higher cap rates, you have two things going for you. have people that see that as a high risk that’s driving up that rate.

And you see the interest rates. as the interest rates go down, eventually, hope we all hope, right? You’re just gonna get the benefit of that.

Scott Bursey (12:33)
Wondering when you look at the current volatility and interest rates, what is the biggest threat you’re keeping an eye on for your industrial assets?

Aaron Strole (12:42)
For industrial assets and interest rates, it that once again goes towards what is my cost of capital and it’s driving up those cap rates. industrial has been very hot in Phoenix. And one of the big factors there has really been overdevelopment. everybody wanted to build industrial for a long time. And there’s still some development, but you’ll probably notice if you look at it.

Development starts to go down now. People are building less industrial in Phoenix. Not say it stopped, but there’s less going on. And that has a lot to do with how much has already been done and the absorption rates just weren’t keeping up with the new development. Now you’re starting to see the occupancy go up some. And you know, the interest rate factor, I think people will be more interested as that drops down. But cap rates often for industry are still lower too.

because you tend to have bigger tenants that are more stable and more likely to keep cash flowing. So that risk factor is less and that’s bringing down that’s bringing down the rates for those kinds of assets.

Scott Bursey (13:47)
That makes a lot of sense. And it’s interesting to look at the association management side of things. What is one thing commercial owners are getting wrong about association management that’s hurting their ROI?

Aaron Strole (14:00)
Okay, so we do some association management. Ours is mostly of office buildings. So yeah, so when we have an association, it’s normally a collection of smaller office buildings. and what happens there on associations, and honestly, they don’t like to pay very much to maintain their properties, right? It’s normally a board. You got like three to five people in the association. They’re saying, hey, here’s what we’d like done to the property.

And they’re trying to keep costs down all the time. And what I normally tell them is invest still, like these are your properties. You are the owners of these properties, and there’s multiple of them. You still want to invest your property, right? You want so you want someday to be able to sell it to somebody else. you want the other businesses to be successful there. So let’s spend that money on making, could do the more modern painting or whatever you need to do. Make sure those reefs are taken care of well.

So all the things that we do in the same, thing with like a retail center or a large office building, it’s a lot of the same components, but you have a small group of people that all have to agree and pay for it. And convincing them to do those things are a little bit tougher and sometimes they’re more cost conscious than some of the other people. but investing in that is the big key. It all comes back to making sure you’re investing well in your property that you have.

Scott Bursey (15:17)
Before we dive any deeper, what has made the biggest difference for you over your career when it comes to networking?

Aaron Strole (15:25)
When it comes to networking, I I’ve always been one, I I’ve never been like that super outgoing social person, right? So what I find with networking is finding people that have the same issues I have as well. I like to talk to other owners, other business owners, other CEOs, or other people that are, help to manage the company and think about how we’re doing things.

And then talk about the things you know. And that’s what I tell everybody when you whether you’re doing a podcast or you’re giving a presentation or giving a speech somewhere or anything, talk about what you know and be curious. so that that’s always been one of my life lessons is to be curious. if you don’t understand something and maybe you’re like, I don’t understand, but I’m a little worried about doing this, or I don’t know if I want to put myself out there.

Change that mindset to like, what would that be like to be out there? What would make my company more successful? What question could I ask that might give me information to help or what people might help me that I could partner with or talk to that might help me do better? Then it flips it from being something you’re worried about and that socializing to something that like gives you power and saying, okay, now I’m excited about this. I I’m inquisitive about it.

And it’s it changed that mind sp mind space around it.

Scott Bursey (16:48)
That’s exactly how you build long term wealth. I love that. And Aaron, in this current cycle of tightening capital and shifting leasing demand, what is the one move an asset manager needs to make today to ensure their portfolio survives the next eighteen months?

Aaron Strole (17:48)
Great question. and there’s lots of things you can do. It varies some by asset as well, right? One of the biggest mistakes, and I’ve touched on this before, is not investing in your asset you already have. They’re like they’re chasing another asset, they have other priorities, other things. Reinvest some of that money in your asset is one of the biggest things you can do. Retail right now is particularly hot.

And I do recommend highly a lot of people getting into it. You’ll notice that cap rates are still kind of high on retail. and that’s probably because interest rates are high, people aren’t sure what’s going to happen in the future, retail’s always been a little bit scary. but if you get in now, there’s a couple things that have that are happening, is you still have rental rates going up. So, and I’d say right now, I think five to seven percent occupancy is very high as well.

You have cap rates up. A lot of people that can get in now will have the benefit of someday of that cap rate going down. And you’re just gonna make money off of that, right? Potentially. Hopefully it happens. We never know, right? We don’t have that crystal ball, but that has that potential. And in the meantime, you have the benefit of getting those higher rental rates over time as they continue to increase. And that goes back to what I was talking about earlier. Is development costs are so high.

That to provide to develop new there’s virtually, little development, new development happening right now in retail and an office for that matter. so you’re not getting new competition out there, and that’s going to continue to drive up the rental rates. Now, there’s gotta be some limit to that because the owners of those small businesses out there that lease those spaces, they still have to look at what are my sales and can I afford that higher rent. But

that right now the options are either you are getting those regular increases or you’re not having a place you can stay, because there just isn’t any new development and there’s and the occupancy on most of the buildings are very high right now.

Scott Bursey (19:47)
Pure gold. Thank you for dropping that knowledge. And Aaron, you have dropped a tremendous amount of knowledge here today. But is there any additional words that you like to leave with our listeners?

Aaron Strole (19:59)
I would say, they always say, hey, when’s a good time to buy? And then, I always say, Hey, buy now and hold is always a good thing, right? And but I also do think now is a pretty good time to do that because the cap rate situation is depressing prices. Some interest rates are higher now, it’s harder to get in, but it’s a good time to get in. the other thing I’d say as far as investing and what I believe in for investing, what I believe in for my company.

a thing that I always say is better together. And we operate as a team. I think that’s one of our biggest things that’s made us successful as a company is the teamwork we have, whether it’s our accountants, whether it’s our property managers, whether it’s in, the brokerage. If we’re all focused on solving problems together and doing things together, we’re creating better things for our client and it makes the job easier and more fun as well too. And a lot of that relates to investing too. I know partners can be hard.

But when you have a partner that brings things to the table, maybe they’re bringing some capital to the table, maybe they’re bringing great ideas. All of my re all my investments in real estate have been with other partners and it served me well through the good times and through the bad times to be more successful, particularly the bad times, right? When you have those people to lean on to help you and to diversify.

So, one of the things I’ve most of my investments have been like 20 to 25% owner. And now we’re able to buy four or five properties rather than having all of our eggs in one basket. So that thought of having partners and teammates and those people that you work with, although it can be a challenge, is also the most rewarding and often successful way of doing it.

Scott Bursey (21:41)
Unity and collaboration. I love it. And for those of our listeners that want to keep this conversation moving, stay in your lane or collaborate with you, what is the best way for them to reach you?

Aaron Strole (21:52)
can reach me on my email. It’s [email protected] You can call me 602-753-7530. So you can reach out to me in any way. love to hear me from people. We have lots of great opportunities for people who are interested in investing. and just love talking to people about what we do in our business.

Scott Bursey (22:15)
Awesome. Aaron, you really brought the fuel today. Thank you so much for joining us on the *Real Estate Pros Podcast*.

Aaron Strole (22:22)
Thanks for having me, Scott. Enjoyed it. Thank you.

Scott Bursey (22:24)
And to our listeners, we appreciate you. If you receive value from today’s episode, please subscribe. We’ll be filling your tanks with the lineup of elite guests, just like Aaron Strole who are accelerating and setting the pace for the rest of the industry. Until next time, keep your standards high and your vision clear. We’ll see you on the next episode, everyone.