Richmond Retail Insights: Strategies for Modern Investors

Richmond’s retail market has demonstrated resilience and growth over the past year despite not being completely shielded from the broader structural shifts in the retail sector. The closure of the Virginia Center Commons mall in the fourth quarter, resulting in over 750,000 square feet of vacant mall space, significantly impacted the area’s mall vacancy rate. However, the demolition of these properties in early 2023 effectively removed a substantial portion of outdated retail space. This led to a notable compression of Richmond’s vacancy rate to record lows by spring 2023. This dichotomy in the retail landscape is evident when comparing malls with non-mall retail spaces. While the mall vacancy rate in Richmond is approximately 15.3%, other segments of the local retail market maintain a collective vacancy rate below 4%. This suggests that the generally negative perception of the market’s vacancy trends is predominantly due to the challenges faced by malls.

Overview

Despite this, the overall health of Richmond’s retail market remains strong, fueled by consistent leasing activity over the past three years, with annual totals exceeding 2.2 million square feet from 2020 to 2022. However, there has been a recent decline in activity, in line with national trends, amid concerns of economic instability in late 2022 and early 2023. Nevertheless, the limited supply-side pressures will likely maintain vacancy rates below historical norms in the near future. At the same time, asking rents continue to rise, albeit at a slower pace compared to pre-pandemic levels. The capital markets in the area were very active in early 2022, but the surge in interest rates over the past year has led to a reduction in transaction volumes. The first quarter of 2023 witnessed investment activity fall below 60 total deals, a significant decrease from over 100 deals in the same quarter of 2022. Despite this slowdown, investor interest remains high in Richmond’s retail strongholds, as evidenced by major deals in areas like Short Pump.

Bifurcated Performance in Richmond’s Retail Market

Richmond’s retail market is experiencing a split trajectory. Malls face challenges due to the growing preference for experiential, walkable, open-air retail spaces, leading to high vacancy rates in these large enclosed centers. In contrast, other retail formats in Richmond exhibit much tighter vacancy rates. For instance, the mall vacancy rate currently stands at 15.3%, whereas all other retail categories combined have a vacancy rate below 4%. This dichotomy highlights the evolving retail landscape and the differing fortunes of various retail formats.

Revitalization Through Demolition of Obsolete Structures

The demolition of outdated retail spaces has also influenced recent trends in vacancy rates in Richmond. A notable example is the Spring Rock Green retail center, formerly The Beaufont Mall, which underwent demolition in May 2023. This 253,330-square-foot center, dating back to the 1970s and largely vacant for several years, is set to be transformed into a mixed-use development featuring both commercial and residential spaces. Similarly, Rebkee demolished the 880,000-square-foot Virginia Center Commons in Glen Allen to make room for a new $50 million sports facility. Removing long-standing vacant spaces from the market has contributed to the compression of vacancy rates in the area.

Leasing Trends and Economic Uncertainty

Richmond’s retail market is now facing a critical juncture in terms of leasing activity in the spring and summer of 2023. Despite robust leasing activity in the past, there has been a noticeable slowdown in the latter part of 2022 and the early months of 2023. This trend is continuing into the second quarter, with the two-quarter trailing leasing activity figure at its lowest in five years. This slowdown largely stems from economic uncertainty, which prompts retailers to adopt a cautious approach before committing to new spaces. This dramatic shift in leasing activity follows a period of solid commitment, with over 2.3 million square feet of retail space leased in Richmond last year, marking a significant trend over the past three years.

Lease Agreements with Experiential Retail Tenants

Experiential retail tenants have significantly influenced recent lease agreements. For instance, in January 2023, Bangers and Dinks leased a 25,000-square-foot space at 1516 W Koger Center Blvd in Chesterfield for a pickleball facility scheduled to open in the summer. This facility replaces the former Home Makers Furniture store. Besides experiential retail, pet-related companies have had substantial leases, like Pet Paradise (33,000 square feet) and PetSmart (26,040 square feet), with the former being a new lease and the latter a renewal. These leases indicate a continued interest in diverse retail experiences in Richmond.

Outlook for Richmond’s Retail Landlords

The forecast for Richmond’s retail sector looks positive for landlords. The construction pipeline remains near a ten-year low, and with a significant portion of upcoming developments already preleased, we expect supply-side pressures to stay low in the near future. This situation will likely benefit current property owners, potentially leading to continued rent growth. However, if the current trend of slowing leasing activity continues, it might also moderate rent increases, reflecting the interplay between supply, demand, and economic conditions in the retail market.

Historic Low in Vacancy Rates

Over the last three years, Richmond’s retail sector has experienced a significant reduction in vacancy rates, decreasing by more than one percentage point. This decline has resulted in a current vacancy rate of about 4.0%, which is the lowest the metro area has seen in two decades and is consistent with the national average. This marked improvement in vacancy rates underscores the ongoing transformation and stabilization of Richmond’s retail market.

Demolition Leading to Vacancy Compression

The early part of 2023 saw a notable decrease in retail vacancies, largely due to the removal of outdated retail spaces. In January, the local company Rebkee demolished over 880,000 square feet of space at the former Virginia Center Commons mall, with the most prominent building exceeding 785,000 square feet. In the last quarter of 2022, the owners vacated this building to prepare for its demolition and redevelopment into a mixed-use complex. Consequently, by the end of 2022, Richmond’s retail vacancy rate stood at approximately 5.2%, with nearly a million square feet of space awaiting redevelopment.

Retail Market Resilience Amid Volatility

Despite the fluctuations and volatility of the past three years, the overall health of Richmond’s retail market does not rely solely on the vacancy rate. The mall sector, in particular, has been following a distinct path compared to other retail segments. Meanwhile, asking rents in Richmond have seen a growth of about 2.3% by the end of 2022, indicating a year-over-year increase and a continued tightening of vacancies fueled by vigorous leasing activity.

Stability in Rental Rates Despite Economic Challenges

Remarkably, Richmond has successfully avoided any decline in rent rates over the past three years, a stark contrast to the four years of rent decreases from 2008 to 2011. The key factor distinguishing these two periods is the structural evolution within the retail sector, particularly in development levels, which have remained much lower than those seen during the last economic downturn. This restraint in development, combined with gains in jobs and population in the Richmond area, has kept the expansion of vacancies to a minimum.

Future Growth Prospects Amidst Economic Uncertainties

Considering the current low vacancy rate and favorable demographic trends such as job and population growth, Richmond’s retail market appears well-positioned for further rent growth in the upcoming quarters. However, ongoing economic turbulence, which has already started to slightly impact leasing activities, may temper this growth. If such economic challenges persist, retail owners might focus more on maintaining and increasing occupancy rates rather than aggressively pushing for higher rents.

Controlled Construction Pipeline Benefiting Vacancies

Richmond’s construction pipeline has remained modest, with no quarter in the past ten years exceeding 1% of the existing stock under construction. As of mid-2023, only 300,000 square feet are under construction, contributing positively to the vacancy rates. This restrained approach has been beneficial, especially during periods of sporadic store closures that have affected net absorption figures. The need for a significant new supply has prevented these periods of softening from worsening.

Spec Development Limited Amid E-Commerce Rise

The uncertainty in the brick-and-mortar retail sector, especially with the struggles of big-box stores since 2018 due to the rise of e-commerce, has led to a cautious approach towards speculative development. Properties opened since the beginning of 2022 are over 90% occupied, a testament to the demand for new retail space. This high occupancy rate, along with the preleasing of over half of the currently under-construction space, indicates a need for more supply-side pressure for landlords and property managers.

Inventory Reduction and Vacancy Compression

By the end of 2023, Richmond’s retail inventory will likely have decreased. This reduction is mainly due to the demolition of significant retail spaces like the Virginia Center Commons and the Spring Rock Green Center, which removed a combined total of over 1.1 million square feet from the market. These demolitions, especially of largely vacant centers, have led to a compression in vacancies, bringing the rate to a 15-year low of about 4.0%.

Rarity of Year-End Inventory Reduction

A year-end reduction in retail inventory is unusual for Richmond, having occurred only once in the past ten years, in 2021. In contrast, 2022 saw a retail space growth of about 350,000 square feet. Although this was below the metro’s annual historical norm, the minimal net absorption by year’s end led to a slight increase in vacancies. Notably, the largest property to open in 2022 was a 105,000-square-foot space for BJ’s Wholesale Club, an exception in the current trend towards smaller retail spaces.

Trend Toward Smaller Retail Properties

Recently, the average size of newly delivered retail properties in Richmond has been about 10,000 square feet. This trend manifests in the opening of several smaller locations by retailers such as Dollar General, Family Dollar, Firestone, Zaxby’s, Sherwin Williams, and Bojangles. These stores typically range from 3,500 to 11,000 square feet, reflecting a shift towards more compact, single-tenant retail spaces.

Progress on Mixed-Use Development in Chesterfield County

Among the ongoing projects, the mixed-use Duckridge Landing development in Chesterfield County is notable. This project includes five properties totaling 31,200 square feet, comprising four retail spaces and one medical office building. Set to be operational by the summer, it has already secured commitments from various tenants, including Bon Secours, Salon Alora, Maple Street Biscuit, and Chase Bank. This development underscores the continued interest in mixed-use spaces in the Richmond area.

Impact of Rising Interest Rates on Retail Investment Activity

In the past two years, retail investors have been notably active in Richmond, but the recent increase in interest rates has noticeably dampened this trend. By the end of the first quarter, the number of retail transactions had decreased to just over 60, falling below the pre-pandemic average of about 80 deals per quarter observed from 2015 to 2019. This decline is even more pronounced compared to the exceptionally high activity in the three quarters from Q3 2021 through Q1 2022, which saw over 100 transactions each. Despite this slowdown, investor interest remains strong in key retail areas like Short Pump.

Recent Significant Retail Transactions in Richmond

Investors continue to pursue attractive opportunities in Richmond’s retail market, as evidenced by several recent transactions. In January 2023, the Parc Place, an 83,000-square-foot retail center, was acquired by a private investor for $17.65 million. The center, built in 2005, was 92% occupied at the time of sale. Previously, it was bought at auction in 2020 for $11.26 million with a 77% occupancy rate. Another significant deal occurred in October 2022 when ShopCore Properties sold the West Broad Village, a 392,000-square-foot retail and office complex, for $93.85 million. This deal included a notable tenant, Whole Foods, which occupies a significant portion of the space. In May 2023, a joint venture involving H.I.G. Capital and FarmView Ventures acquired a portfolio of grocery-anchored centers for $110 million, indicating continued interest in well-positioned retail assets.

Grocery-Anchored Retail Centers Attract Major Deals

Grocery-anchored retail centers have been a focal point for major investment deals. A significant transaction occurred in May 2023, where a joint venture between H.I.G. Capital and FarmView Ventures purchased a portfolio of grocery-anchored centers totaling 598,338 square feet for $110 million. This portfolio, which was about 95% leased at the time of sale, includes prominent tenants such as Wegmans, Walmart, The Fresh Market, Marshalls, and ALDI. The deal underscores the attractiveness of grocery-anchored retail spaces in the current market.

Slowdown in Single-Tenant, Net-Leased Asset Sales

The rise in interest rates has led to a marked slowdown in the sale of single-tenant, net-leased assets in the latter half of 2022 and continuing into the first half of 2023. This represents a significant shift from the previous two years, during which more than 35 such deals were closed annually. The decrease in these transactions reflects the broader impact of economic factors on the retail investment landscape in Richmond.

Closing Thoughts

As the retail landscape in Richmond continues to evolve, characterized by dynamic investment opportunities and shifting market trends, Lumicre stands ready to assist with your commercial real estate acquisitions and dispositions. Our expertise and deep understanding of the local market dynamics position us uniquely to guide you through these complex transactions. Whether you are looking to capitalize on the current investment opportunities or navigate the challenges of the retail sector, Lumicre is your dedicated partner, committed to achieving your commercial real estate goals with precision and strategic insight. Let us help you make informed decisions and maximize your investment potential in this ever-changing market.