In our latest analysis, we delve into the burgeoning retail market of Atlanta, GA, a region that has shown remarkable resilience and growth in recent times. As we navigate through the intricacies of this market, it’s crucial for strategic partners and stakeholders in the realm of real estate private equity and capital groups to understand the nuances and opportunities presented by this vibrant landscape.
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Sustained Positive Absorption in Atlanta’s Retail Sector
Atlanta’s retail absorption has been consistently positive for ten quarters straight as we approach the third quarter of 2023. This trend places the metro among the top markets in the country for trailing 12-month net absorption, alongside other major Sun Belt markets such as Dallas-Fort Worth, Phoenix, and Houston. The sustained positive absorption is a testament to the region’s robust and diverse economy, favorable demographic trends, and a strategic approach to managing speculative supply.
Declining Vacancy Rates: A Sign of Market Health
The declining vacancy rates in Atlanta’s retail sector are a significant indicator of market health. As of the current analysis, the vacancy rate stands at a mere 3.7%, the lowest it has been this century, according to CoStar. This downward trend in vacancy rates is a clear signal of the market’s robustness, driven by a combination of economic diversity and demographic favorability. For investors and strategic partners in real estate private equity, this presents a compelling case for considering Atlanta as a key investment destination.
Challenges in Retail Space Availability
Despite the positive trends, Atlanta faces a challenge in terms of retail space availability. The four-quarter rolling leasing activity has seen a decline, dropping by 27% from more than 8.6 million square feet in the first quarter of 2022 to around 6.3 million square feet in the first quarter of 2023. This contraction in leasing activity, particularly in large leases of 25,000 square feet or more, indicates a tightening market where suitable retail spaces are becoming increasingly scarce.
Opportunities Amidst Retail Closures
The recent bankruptcy of Bed Bath & Beyond, leading to 16 closures in the Atlanta area, is perceived not as a sign of market distress but rather as an opportunity. This development opens up avenues for stable tenants in need of well-located, larger blocks of space. For capital groups and investors, such shifts in the retail landscape can present unique opportunities to reposition or invest in these newly available spaces.
Impact of Economic Trends on Smaller Retailers
The cooling of consumer spending and looming recession projections are likely to impact smaller retailers, particularly those with lower margins and fewer reserves. This could affect overall absorption rates in the retail sector. Strategic partners and investors need to be mindful of these macroeconomic factors when making investment decisions in the retail space, especially in markets like Atlanta, where smaller retailers form a significant part of the retail ecosystem.
Demographic Trends Supporting Retail Demand
Atlanta’s retail market is buoyed by strong demographic underpinnings. The city has experienced a population growth rate roughly double the U.S. average over the past decade, coupled with median household income growth surpassing the national average. These factors have been instrumental in driving demand for retail space in Atlanta, supporting the region’s ongoing recovery and making it an attractive market for real estate private equity investments.
Emerging Areas of Retail Demand
The northern suburbs of Atlanta, which are witnessing rapid growth in affluence, are expected to attract a significant portion of new retail demand. However, areas within the perimeter, benefiting from increased density and job growth due to major corporate relocations and expansions, should not be overlooked. The influx of high-paying office jobs and the accompanying multifamily development in areas like Midtown, West Midtown, and the Eastside will enhance buying power in these premier in-town areas.
Rising Residential Developments Boosting Retail Rents
The surge in new residential developments across Atlanta is having a significant impact on the retail sector, particularly in terms of rental rates. Retailers are increasingly willing to pay premium prices for space, driven by the expanding number of residential rooftops. Over the past three years, this trend has led to a steady acceleration in triple-net asking rents. As we head into the second half of 2023, the metro area is witnessing overall rents increasing at a record pace, aligning with the growth patterns observed in other fast-growing Sun Belt markets like Austin and Dallas-Fort Worth. The trailing 12-month rent growth in Atlanta stands at an impressive 6.6%, notably higher than the national average of 3.5%.
Local Demographics Shielding Atlanta’s Retail Market
Local demographic tailwinds have insulated Atlanta’s retail market from broader structural challenges. Despite potential impacts from declining consumer spending and the closure of some retail stores, the overall retail fundamentals in the metro area have shown significant improvement since the onset of the coronavirus pandemic. This resilience is a key factor for investors and strategic partners in real estate private equity, highlighting the strength and potential of the Atlanta retail market.
Shift in Rent Growth Dynamics
In recent years, there has been a noticeable shift in rent growth dynamics within the Atlanta metro area. Exurban and south metro submarkets have generally outperformed the market average in terms of rent growth, marking a reversal from pre-pandemic trends. Previously, urban/suburban submarkets in the northeastern section, such as Buckhead/Lenox and Sandy Springs/North Central, experienced the fastest growth. The exurban areas, which have seen limited new supply in recent years and typically have tight vacancy rates, are now leading in rent growth. These areas also tend to have rental rates that are lower than the market-wide average.
High Demand in Premium Submarkets
Despite the growth in exurban areas, Buckhead and Midtown remain the most expensive retail submarkets in Atlanta. In these areas, market rents average over $30 per square foot, with top-tier buildings commanding rates exceeding $40 per square foot. However, this high demand for premium retail space is more comprehensive than these submarkets. Well-located freestanding properties leased to credit tenants are achieving higher rents even in the suburbs. For instance, a Starbucks leased property along Interstate 20 in East Atlanta commands $36.86 per square foot NNN, and a T-Mobile lease in Conyers closed at $34 per square foot NNN. These examples underscore the robustness of the retail market across various Atlanta submarkets and the opportunities that exist for strategic partners and investors in real estate private equity.
Impact of Economic Factors on Retail Transactions
As we progress into the second half of 2023, the retail real estate market is experiencing a notable slowdown in transactional activity, primarily due to rising interest rates and general economic uncertainty. This trend is evident in the substantial decrease in total sales volume, which has fallen by over 40% in the first half of the year compared to 2022. This downturn in sales volume is a critical factor for investors and strategic partners in real estate private equity to consider, as it reflects the broader economic challenges impacting the retail sector.
Nature of Recent Retail Deals
Despite the overall reduction in sales volume, the retail deals that have successfully closed in this period have been quite distinctive. These transactions have primarily included redevelopment purchases, sale-leasebacks, or extensive portfolio deals involving institutional or international buyers. This trend indicates a strategic shift in the types of retail investments being pursued, with a focus on deals that offer potential for value addition or that are backed by strong financial entities.
Rising Cap Rates in Atlanta’s Retail Market
Capitalization rates (cap rates) in Atlanta have been on an upward trajectory, now averaging higher than those in comparable Sun Belt markets. From the third quarter of 2022 to the first quarter of 2023, cap rates rose significantly, from 5.9% to 6.6%. Notable transactions reflecting this trend include CIM Group’s sale of 76 triple-net properties to Realty Income Corporation, which included several Atlanta area properties and traded at a 7.1% cap rate in March. Additionally, Richmar Properties’ sale of Covington Square in Lithonia at a 7.99% cap rate further exemplifies this upward movement in cap rates.
Contrasting Trends in Newly Delivered Properties
In contrast to the general market, newly delivered properties, particularly freestanding and small strip center properties in suburban areas with long-term tenants, have continued to close at much lower cap rates. For instance, the Ohio-based REIT Site Centers Corporation acquired the 2022-built Barrett Corners in Kennesaw for $15.6 million, equating to $835 per square foot at a 5.7% cap rate in April 2023. This divergence in cap rates between older and newly delivered properties highlights the nuanced investment landscape within the Atlanta retail market.
Rise in Redevelopment Projects
Redevelopment projects are capturing a larger share of sales activity as investors seek opportunities to add value in a challenging economic environment. A prime example is the purchase of Plaza Fiesta, a Hispanic-themed mall in DeKalb County, by Charlotte-based developer Asana Partners for $85 million. Asana plans to renovate this property, which is already more than 90% leased. This acquisition, along with others like Krog Street Market and Ponce de Leon Plaza, underscores the growing interest in urban redevelopment projects as strategic investment opportunities.
Seizing Opportunities in Atlanta’s Retail Sector
Atlanta’s retail market in 2023 is a blend of challenges and opportunities. Economic shifts are reshaping investment strategies, emphasizing redevelopment and value-add projects. This market demands a deep understanding and a flexible approach from investors. Rising cap rates and selective transactions signal a market with long-term potential despite short-term uncertainties. For strategic guidance in this complex environment, contact Lumicre for your retail needs. We are committed to providing insights and support, ensuring successful investments in Atlanta’s dynamic retail landscape.