Raleigh 2023: A Detailed Look at the Retail Real Estate Market

As of the third quarter of 2023, Raleigh’s retail market has seen a net absorption of 530,000 square feet over the past year, a figure below the historical average yet significant given the low vacancy rate and limited new supply. The retail inventory has decreased by 190,000 square feet, largely due to the demolition of Cary Towne Center, a substantial mall. A contributing factor to this high net absorption is the lower-than-average move-outs, averaging about 235,000 square feet per quarter, compared to the five-year average of 350,000 square feet. The vacancy rate in Raleigh’s retail sector consistently stays below the national average, with current rates at a near-record low of 2.3%. This tight market condition challenges leasing agents in finding suitable retail spaces, indicating potential for even higher absorption with more availability. The scarcity has led to a 6.1% annual rent growth, surpassing the national average of 3.5%. Raleigh’s retail sector benefits from its significant population growth, over 2% annually, making it the third-fastest-growing major metropolitan area in the U.S. This demographic trend boosts demand for retail spaces and supports a substantial construction pipeline, with 1.2 million square feet of retail space currently under construction. However, transaction volumes have declined for four consecutive quarters, influenced by rising interest rates and economic uncertainties, yet the area continues to draw both private and institutional investors.

Retail Market Dynamics in Raleigh

As of 2023’s third quarter, Raleigh’s retail market shows robust demand for space, driven by strong population growth and continued consumer spending. The market recorded a net absorption of around 530,000 square feet, outpacing average move-outs. Retail inventory shrank by 190,000 square feet, largely due to the demolition of Cary Towne Center, a major mall, in 2022. This led to vacancies and availabilities dropping to near-historic lows of 2.3% and 3.1%, respectively. Leasing agents note that absorption rates could have been higher with more available retail spaces, particularly second-generation spaces. They point out the challenges with first-generation spaces, such as high costs and extended construction times. The most significant absorption occurred in the Route 1 and Northeast Wake County submarkets, reflecting the market’s dynamic response to these conditions.

Trend of Smaller Lease Sizes and Impact on Retail Segments

Notably, there have been significant move-ins in the Raleigh market, such as Urban Air Adventure occupying 40,000 square feet in Morrisville (RTP/RDU submarket) in June, Trophy Brewing taking over an 18,300-square-foot building in the Six Forks/Falls of Neuse submarket in the same month, and BJ’s Wholesale Club moving into 115,400 square feet in Garner, Southeast Wake County, in January. Despite these more significant transactions, there is a trend towards smaller lease sizes. Since the beginning of 2022, the average lease size in Raleigh is about 3,600 square feet, a decrease from the 4,200-square-foot average observed from 2016 through 2021. This shift has increased demand for space in neighborhood and community centers, where vacancies have dropped to 2.7% from highs near 10% a decade ago. Power centers and general retail continue to maintain the tightest vacancy rates in Raleigh, at 1.7% and 1.6%, respectively, reflecting the ongoing robustness of these segments in the retail market.

Raleigh’s Exceptional Annual Rent Growth

As of the third quarter of 2023, Raleigh’s annual rent growth has reached 6.1%, surpassing both the historical average for the market and the national rent growth rate of 3.5%. The rapid population growth in the area and a surge in retail sales actively drive the notable increase in rent. The robust demographic expansion and consumer spending patterns have been pivotal in driving up the rental rates in Raleigh’s retail market.

Comparison of Rental Rates: Raleigh vs National Average

In recent quarters, Raleigh has demonstrated stronger-than-average rent growth. As a result, the market’s average rental rate has risen to $25.00 per square foot, which now exceeds the national average. This marks a significant shift from previous years, where Raleigh was generally more affordable than the national average. Specifically, rents in Power Centers in Raleigh are notably higher, averaging $29.00 per square foot, compared to the national average of $26.00 per square foot. Furthermore, rental growth in all submarkets of Raleigh surpasses the national average, with Downtown Raleigh and Franklin County experiencing some of the highest annual rent increases in the market. However, areas such as Route 1 and Northeast Wake County have recorded rent growth below the market average. The rents in key employment areas like RTP/RDU stand at the higher end, exceeding $32 per square foot, while regions like Johnston County and Northeast Wake County maintain some of the market’s lowest rental rates, falling below $20 per square foot.

Net Deliveries and Demolitions in Raleigh’s Retail Market

As we moved into the third quarter of 2023, Raleigh’s retail market saw a net decrease in deliveries, totaling a reduction of 190,000 square feet over the past year. This trend was primarily due to two significant demolitions in the latter half of the previous year. The demolished properties include a 169,000-square-foot freestanding retail building at 4300 Fayetteville Road in Southeast Wake County and the Cary Towne Center, a 500,000-square-foot super regional mall. Even though the market saw the completion of new buildings over the past year, the total stock removed from inventory surpassed the amount added.

Raleigh’s Robust Construction Pipeline

Looking ahead, Raleigh’s retail market exhibits a robust construction pipeline, with 1.2 million square feet of retail space currently underway. This represents about 1.6% of the total retail inventory in Raleigh and marks the most significant volume of retail construction recorded for the market. The most important project under construction is Eastfield Crossing, a mixed-use development at the junction of Interstate 95 and U.S. Highway 70 in Johnston County, developed by AdVenture Development. This project plans to include a total of 3 million square feet, featuring over 500,000 square feet of retail. Preleasing activity shows vibrancy, with key retailers like Hobby Lobby and Burlington signing long-term leases and planners scheduling delivery for 2025.

Additionally, construction on Grove 98, a 180,000-square-foot outlet center in Wake Forest, started in January, targeting completion in early 2024. Despite this influx of new retail spaces, the availability remains limited, with less than 15% of the under-construction space available for lease. Consequently, even with significant retail construction, vacancy rates in Raleigh are projected to stay below the national average.

Trends in Recent Deliveries and Mixed-Use Developments

The majority of recent retail deliveries in Raleigh have been smaller strip centers and freestanding retail, a shift from previous years where grocery- or home-improvement-anchored power centers dominated new market entries. Notable grocers like Wegman’s, Publix, and Lidl had previously announced aggressive expansion plans in the Raleigh area. Still, some of these initiatives, such as Wegman’s withdrawal from a planned store in Cary’s Fenton mixed-use development, have been scaled back. Fenton, a prominent mixed-use development in Cary, launched its first phase last summer, featuring a blend of high-end retail, entertainment, restaurants, and apartments. It recently added Sports & Social, an upscale sports and entertainment concept, to its tenant list. This trend towards mixed-use developments is also visible in other large-scale projects either in progress or recently completed in the area.

Retail Investment Trends in Raleigh

Over the past 12 months, retail investment activity in Raleigh has amounted to $521 million. This figure aligns with the market’s five-year average. However, as we entered the third quarter of 2023, there has been a noticeable decline in transaction volume for four consecutive quarters. Rising interest rates and growing economic uncertainty contribute to this downturn, influencing the flow of deals in the retail sector.

Notable Retail Property Sales and Investments

The Raleigh Triangle area predominantly sees retail property sales under $5 million, but several larger transactions have also occurred. For instance, in February, SVN Real Estate Associates acquired Wakefield Crossing, a 76,000-square-foot shopping center, for $14.3 million (approximately $188 per square foot). The center, anchored by a 38,000-square-foot Food Lion store and established in 2001, was 95% occupied at the time of sale. It was notable for its assumable financing option available through 2032. Moreover, freestanding, triple-net investments have been drawing interest from both national and local investors. An example is the May purchase by Neefla Equities of an 11,000-square-foot drugstore in Southwest Wake County for $2.69 million (or $243 per square foot), with a cap rate of 4.82%, fully leased to CVS Pharmacy.

Market Sales Price Trends and Cap Rates

Historically, Raleigh’s retail property has been priced lower than the national average. However, the market sales price in Raleigh has recently seen a significant increase, reaching $250 per square foot and surpassing the national average for the first time. Yet, with rising interest rates and ongoing economic uncertainty, this high growth in sales price may need to be revised, potentially leading to a reversion of values. The market cap rate in Raleigh is approximately 6.4%, which is lower than the U.S. average and also below other sunbelt markets like Charlotte and Atlanta.

Transformation of Retail Spaces

A noteworthy trend in Raleigh is the conversion of older retail spaces into office and other commercial uses. In the past year, developers have repurposed both a former Kroger supermarket and a former Sears into office and lab spaces. Additionally, software firm Epic Games has acquired the Cary Towne Center with plans to transform it into their headquarters office space. The Raleigh market anticipates the continuation of this trend in repurposing retail properties for various commercial uses.

In summary, Raleigh’s retail market presents a dynamic landscape shaped by evolving trends in investment, development, and repurposing of retail spaces. As we navigate through economic uncertainties and shifts in consumer behaviors, the market continues to adapt, offering diverse opportunities for investors and businesses alike. Understanding these intricacies and identifying the right opportunities requires expertise and insightful guidance. For those looking to navigate the complexities of commercial real estate in Raleigh, reach out to us at Lumicre for professional assistance. Our expertise in the market can provide valuable support for your commercial real estate needs, helping you to make informed decisions and capitalize on the potential that Raleigh’s vibrant retail sector has to offer.