By Karen Christy
The retail market in the Carolinas is one of recovery and creative possibilities. That theme was resonated at this year’s ICSC Carolinas Show in Charlotte this week.
Cities in the Carolinas that lead population growth are beginning to attract investors from more overbuilt markets in the U.S. and from larger cities where competition has driven down returns. Key cities in the Carolinas attracting retail investors include Charlotte, Raleigh-Durham, Chapel Hill and Charleston.
The South Carolina retail market has experienced substantial activity following the last economic downturn, as many of the big boxes left vacant during the recession have since been filled. The vacancies left dark by national closures such as Linens ’n Things, Circuit City and Goody’s provided a unique opportunity for retailers to pursue a flight-to-quality at what would be considered a value price.
Meanwhile, some big-box vacancies in less-than-stellar locations have been repurposed for alternative, non-retail uses. This activity has resulted in vacancy rates of less than 10 percent in all major markets across South Carolina.
The Carolinas are high on the radar for the restaurant segment, which is active with many national retailers looking to expand. Population growth is the key driver. Raleigh’s population is expected to grow the fastest of any metropolitan area in the U.S. through 2025.
The State Demographer’s Office projects that the greater Raleigh metro area (consisting of two MSAs and multiple counties) will virtually double its population during the period. Metro Raleigh recorded 953,000 residents in 2005, and the population is estimated to reach 2 million by 2025.
Real estate values are beginning to recover in several markets in the Carolinas, regardless of the challenges of unemployment, consumer confidence, online shopping and purchases made via mobile devices. To the commercial real estate industry, these challenges provide the opportunity to continue to solve problems for clients.
The closure of unprofitable store locations provides more opportunities for landlords and tenants to work with commercial brokers to successfully re-lease space.
Rebound in absorption
Leasing activity in North Carolina is picking up slowly and is heading in a positive direction, with most major markets obtaining positive net absorption. The gap in lease rates between Class A, B and C centers has narrowed enough for most creditworthy retail tenants to continue to consider the better, more visible centers.
Class A centers are attracting tenants with lower credit ratings from B and C centers, polarizing the market. Landlords who are less well capitalized than they would like to be are willing to pursue less creditworthy tenants to obtain higher occupancies.
The flight to quality was the first trend to emerge following the economic downturn, and remains the most important factor in a retailer’s decision to open a new store or relocate to an existing center.
In South Carolina, for example, the lack of new product coming on line has made it difficult for some retailers to find the perfect location. Consequently, some retailers have chosen not to enter the South Carolina market until new development occurs.
Trends in lease negotations
Leasing activity has been strong in the first quarter of 2012 in South Carolina, although a lack of retail product in Class A locations has resulted in an uptick of rental rates in major retail corridors. Currently there is a slight disconnect between landlords and tenants. Many tenants still have the perception that the market is primarily a tenant’s market.
Some retailers’ inability to find the perfect location combined with the rise in rental rates has led to delays in their expansion plans. Still, there are substantial retail projects throughout South Carolina that have either been announced or are underway in the first quarter of 2012, which will add additional supply to major retail corridors.
Nationally, sticking points for leases revolve around future rent increases indexed to the Consumer Price Index. Landlords want protection against a rising interest rate environment, while tenants want the stability of a fixed and known rent schedule.
High rental rates are less of an issue for national tenants and location is top priority. National tenants want a Class A facility. In most centers, there is still a wide gap between what the tenants expect in tenant improvement allowances and what landlords are willing to provide. Banks, for their part, remain cautious on the lending front.
Many landlords are appeasing tenants. Some landlords are willing to help tenants through increased tenant improvement allowances and rent abatement, especially for those tenants paying higher 2007-2008 rents than the marketed 2012 rental rates. Although it is still considered a tenant’s market, landlords are able to hold a firmer ground on points such as rent and improvements.
Development pipeline heats up
In Raleigh, Durham and Chapel Hill, there is reason for optimism among retailers regarding their future location options. Several projects are under construction or planned, including the 700,000-square-foot Park West Village in Morrisville (Phase II under construction), and the 587,000-square-foot New Hill Place in Holly Springs (under development). A planned mixed-use development, The Edge in Chapel Hill, is expected to deliver in 2014. The project contains a large retail component.
Additional mixed-use projects with significant retail components are under development in select submarkets. Those projects include: The Gallery at Cameron Village in Raleigh; 140 West Franklin in the heart of Chapel Hill; and Westpoint at 751, located across from The Streets at Southpoint mall in Durham, where an 18,000 square foot ALDI recently opened.
The Lakeview mixed-use project at Duke University and Medical Center will have 40,000 square feet of retail space.
The Lakeview mixed-use development at Duke University and Medical Center, with its 40,000 square feet of retail product successfully leased to 11 restaurants and retailers, is one of the major drivers of the 14-story Lakeview Urban Multifamily project.
In Charleston, there is approximately 1 million square feet of product planned, primarily concentrated in the Summerville and Mt. Pleasant submarkets.
In Columbia, development of the 450-acre, master-planned Killian Crossing is underway with the recent start of construction of roads and utilities. A Walmart, Lowe’s and an abundance of car dealerships have located adjacent to this site, which gives Killian Crossing the momentum and potential to completely change the retail landscape in Northeast Columbia.
In Myrtle Beach, The SayeBrook project, anchored by Target, Marshall’s and Petco, will open in July. This is one of only a few Targets nationwide that is scheduled to open in 2012. Additionally, Walmart plans to introduce new stores and new concepts, such as Walmart Neighborhood Market and Walmart Express, as vehicles for growth in both rural and urban areas in the Carolinas.
2012 outlook
High-quality retail in growth markets offers a good, stabilized yield and a strong potential for property values to appreciate. Investor activity in retail centers with credit tenants has been strong and is expected to continue.
There are value-added opportunities for investors, but pricing should reflect the risk of slow sales growth and competition from better locations. Non-anchored centers in slow-growth markets are not garnering a lot of interest from prospective buyers because of sellers’ unrealistic expectations with regard to capitalization rates.
The continuing strength of the Carolinas region is population and job growth, a highly educated workforce and housing market conditions, which are above average. The remainder of 2012 will bring continued retail growth in the Carolinas. Even with new supply coming on line later this year, this space will be quickly leased due to pent-up demand for Class A product.
Vacancy rates throughout the major markets will remain well under 10 percent, although excess space in outdated or out-of-the-way centers will remain difficult to lease. The retail potential for the Carolinas is significant. For example, repurposing empty assets in less-than-stellar retail strip centers will provide great value.
The potential for high-end urban street retail could increase tourism revenue for the Carolinas due to the development of new exciting shopping venues. The growth in boutique retail services on the upper end of the retail market — high-end urban street retail — could contribute to revitalization in downtown areas.
The Carolinas could create its own version of Madison Avenue, SOHO, Union Square and SoMa (South of the Market). These unique market areas combine arts, entertainment, tourism, one-of–a kind retailers and hot new signature restaurants, where local shoppers, tourists, business travelers and visitors spend money.
— Karen Christy is the research and marketing director for Colliers International based in the firm’s Raleigh office. Ryan Hyler, who contributed to this article, is the vice president of research and marketing for Colliers International in South Carolina.