Investing in Charlotte: A 2023 Retail Sector Overview

Market Dynamics and Secondary Investment Landscape

In Charlotte, NC’s evolving retail market, significant growth and development are attracting real estate private equity investment. Insights from CoStar indicate a notable increase in consumer spending and retail expansion, especially in new and upcoming areas. This growth offers institutional investors valuable opportunities to sell their privately held partnership interests strategically. The role of a strategic partner is crucial in navigating the complexities of the market, with a focus on comprehensive market understanding, adherence to regulatory frameworks, and insightful trend analysis. Secondary market transactions, in particular, require partners who can provide deep market insights and operational expertise. The maturity of Charlotte’s retail sector opens doors for capital groups to invest or divest strategically, highlighting the need for a well-planned approach to investment decisions.

Strategic Insights for Institutional Investors

For institutional investors, the essence of success in secondary investments lies in precisely timing and valuing the sale of partnership interests, demanding a thorough grasp of market trends and future projections. Capital groups benefit significantly from alliances with experienced strategic partners adept in deal structuring, risk management, and portfolio optimization. These partnerships are vital in successfully managing secondary market transactions in a dynamic environment like Charlotte’s. Current market conditions, marked by changing consumer behaviors and evolving retail scenarios, call for a refined approach to investment strategies. Investors need to be quick in identifying growth opportunities and potential risks. The analysis underscores the substantial opportunities for value creation and capital optimization for institutional investors in Charlotte’s retail market, achievable through strategic partnerships, informed decision-making, and a deep understanding of local market dynamics.

Tight Retail Fundamentals and Changing Construction Trends

As of the second quarter of 2023, Charlotte’s retail market fundamentals remain tight despite decreased total leasing activity. This is partly due to limited speculative construction. Leasing activity in the trailing 12 months up to April 2023 slowed to 2.2 million square feet, down from 2.5 million square feet in the previous year. Although there was more new retail space initiated in 2022 compared to 2021, a significant portion of this construction was built-to-suit. The current 650,000 square feet under construction is approximately half the average amount from 2013-2017. Over the past year, net absorption exceeded 1.7 million square feet, primarily in freestanding general retail and neighborhood centers, with minimal closures in struggling mid-end malls. The retail vacancy rate has reached a near-all-time low of 3.0%, a substantial decrease from the peak of nearly 7% in early 2020.

Leasing Trends, Power Centers, and Retailer Resilience

There’s a notable shift in leasing trends, with retailers taking less space per lease. The average lease size in Charlotte has decreased to 3,638 square feet, compared to 4,040 square feet between 2015 and 2019 and 5,451 square feet from 2000 to 2004. Independent restaurants have been a driving force behind this trend of smaller leases, as evidenced by recent leases like The Dumpling Lady and The Good Wurst. Power centers, particularly in suburban areas, have shown remarkable resilience. These centers have witnessed the highest net absorption as a percentage of inventory, with tenants absorbing 2% of total inventory in these big-box centers over the past year, reducing vacancy rates to 1.8%. Suburban power and neighborhood centers, predominantly from the 1990s to early 2000s, are being repurposed by fitness centers, entertainment venues, and discounters. For instance, Conn’s HomePlus and Crunch Fitness signed significant leases. The largest lease in 2023 so far was signed by grocer Harris Teeter. Despite Bed Bath & Beyond’s bankruptcy leading to the closure of five area stores, the demand for space in power centers remains high, as indicated by a new tenant backfilling a 35,000-square-foot space in South Charlotte’s Arboretum power center.

Retail Rent Growth and Market Resilience

Charlotte stands out as one of the leading markets for retail rent growth, with annual gains of around 6.5%, surpassing inflation rates. The city’s residential expansion and a robust financial services sector, which continued to add jobs throughout the pandemic, largely drive this remarkable growth, contributing to a rapid recovery. The trend in Charlotte, along with other Southeastern metros, indicates a potential to outperform national trends in rent growth. Despite its significant growth, the market remains comparatively affordable, with nominal rents still below the national average. This affordability is a key factor in attracting tenants, particularly those seeking smaller spaces in neighborhood centers. These centers have seen the fastest rent growth at 7.8%, while big-box power center rents are also increasing significantly at 8.0% annually. Though temporarily increasing power center vacancies, the recent closure of Bed Bath and Beyond locations presents opportunities for property owners to reset rents higher in well-positioned big boxes.

Submarket Dynamics and Rent Premiums

In Charlotte’s submarkets, especially those surrounding uptown, rent premiums are significantly higher than the metro-wide average. Uptown’s rents are 60% above the metro-wide average and 15% higher than the next most expensive neighborhood despite having a vacancy rate approximately three times the market-wide rate. This indicates a strong demand for premium retail space in these areas. Suburban submarkets continue to excel, showing above-average rent growth compared to the market-wide trend. All eight suburban submarkets in the Charlotte area have demonstrated above-average rent growth, underscoring the continued appeal and potential of these areas for retail investment and development. This trend highlights the diverse opportunities available across different parts of the city, catering to a variety of retail needs and preferences.

Current Retail Construction Trends and Tenant Preferences

Around 650,000 square feet of retail space is under construction in Charlotte, and builders expect to complete much of it within the following year. This marks an increase from the low levels of 2021 but is still below the construction volumes of the early 2010s. Notably, nearly two-thirds of the space under construction has already been pre-leased, demonstrating a more cautious approach by retail developers. This shift reflects changes in tenant preferences, moving from larger shopping centers to freestanding retail and smaller or mixed-use centers located closer to consumers’ homes. This trend highlights the evolving landscape of retail development, prioritizing proximity to residential areas and adapting to changing consumer behaviors.

Growth in Suburban Counties and Major Retail Projects

The suburban counties of Charlotte, including Lancaster, Union, Cabarrus, and York, have been the focal points for retail growth in the metro area. These areas have seen a surge in neighborhood center properties, aligning with the increase in residential developments. Notable projects include the Christenbury Village shopping center in Cabarrus County, Red Stone Phase II in Lancaster County, and a Publix-anchored center in Marvin, Union County. Other significant developments include Riverbend Village in suburban Northwestern Charlotte, integrating a grocery-anchored retail center with residential and office spaces, and the Commonwealth mixed-use project in Plaza-Midwood, an artsy urban neighborhood near uptown. These projects signify a broader trend towards mixed-use developments that combine retail, residential, and office components, catering to the diverse needs of the growing suburban populations.

Urban Redevelopment and Transformation Projects

In urban Charlotte, transformational projects are reshaping the landscape. Canopy’s Indigo CLT is repurposing a former industrial facility near the LYNX Blue Line Extension into a space featuring creative offices, a brewery, a coffee shop, and a fitness center alongside residential units. The historic Savona Mill in West Charlotte is undergoing renovation by Atlanta-based Portman Holdings, with plans to deliver retail and office space later in 2023. Additionally, redevelopment plans for large properties such as Crosland’s Eastland Yards, the site of the former Eastland Mall, include a mix of multifamily, senior housing, and retail spaces. The Charlotte City Council is considering proposals for this project as of March 2023.

Furthermore, discussions about redeveloping the high-vacancy Epicentre downtown entertainment complex, now renamed Queen City Quarter, are in the early stages. The City of Charlotte has also chosen White Point Partners for the redevelopment of the Charlotte Transit Center, which will feature ground-floor retail. These urban redevelopment efforts reflect a focus on revitalizing and repurposing existing spaces to meet the evolving demands of the city’s residents and visitors.

Impact of Rising Interest Rates on Retail Sales Volume

As of mid-2023, rising interest rates have contributed to a slowdown in retail sales volume in Charlotte. Despite a strong close to 2022 near record levels, the total sales volume experienced a significant downturn in the fourth quarter of 2022 and the first quarter of 2023. Over the past 12 months, approximately $883 million in retail transactions were completed, with over 90% of these transactions occurring in 2022. One example is the redevelopment play of the 1972-built strip center Dilworth Station. Virgina-Based Kettler purchased the property for $13.5 million. This trend indicates a cautious approach from investors in response to the changing economic environment, particularly the impact of increasing interest rates on the retail market.

Retail Market Dynamics and Investment Trends

Retail prices in Charlotte have risen by over 50% in the past decade, nearly double the national average growth rate, reflecting the city’s robust rent growth, population increase, and job expansion. Consequently, the price gap between Charlotte’s market, currently at $230 per square foot, and the U.S. average has narrowed from 22% to just 4% over the past five years. National buyers, particularly public REITs, continue to drive most sales, showing increased interest in Charlotte due to its favorable employment and demographic profile. These investors primarily focus on fully leased discount- or grocery-anchored neighborhood centers, essential goods providers, and revitalizing areas and entertainment centers for investment opportunities. Despite the overall market resilience, some larger centers like the Epicentre entertainment complex in uptown, Northlake Mall in Northern Mecklenburg County, and Carolina Place Mall in Pineville have faced challenges, including high vacancies and financial distress. The Epicentre went into foreclosure in the third quarter of 2022. Northlake Mall is in receivership, and lenders have placed Carolina Place Mall on a CMBS watchlist due to a looming loan maturity and vacancies exceeding 20%. These developments indicate selective market pressures, especially in larger retail centers.

Closing Remarks

In conclusion, Charlotte’s retail market presents a landscape of both challenges and opportunities. As we navigate the nuances of rising interest rates and their impact on sales volume, along with the robust growth in retail prices and changing investor preferences, it’s evident that strategic analysis and informed decision-making are more crucial than ever. For investors, developers, and retailers looking to capitalize on Charlotte’s dynamic retail environment, understanding these market trends and shifts is vital to making successful investments and developments. To gain deeper insights and tailored strategies for navigating this complex market, we invite you to contact Lumicre for comprehensive commercial real estate analysis. Our team of experts provides you with the necessary data, analysis, and guidance to optimize your investments and projects in this vibrant and evolving market.