Retail Investors View Atlanta as a Looming Gateway Market, but More Affordable
As we enter the last quarter of 2019, well into the longest economic expansion in history, the Atlanta retail real estate market is healthy and active, with multi-year retail rent and occupancy growth. The city’s retail investment sales volume totaled $2.2 billion in 2018, making it the eighth most active retail investment market in the country.
Not a gateway market, yet
In my career, Atlanta has always been a “non-institutional” market, and has stayed largely off the radar of deep pools of institutional capital aimed at New York, Boston, San Francisco and other gateway cities with deeper economies, higher rents, lower cap rates and higher values.
Nevertheless Atlanta’s population, GDP and growth make it the undisputed capital of the Southeast by a country mile. The metro’s shopping centers have benefitted from this paradox: it has the biggest economy in the South and is among the top metros in the nation for employment and population growth. However, its average rents are lower and its average retail cap rates are higher than almost every one of its peers in the Southeast and the United States at large.
Despite the overblown narrative of the retail apocalypse and despite how or when the current expansion cycle changes, Atlanta will continue to be one of the top metros in the nation for growth, and its retail real estate has the capacity to get more expensive relative to other competing metros.
Capital of the Southeast
The 29-county Atlanta Metropolitan Statistical Area (MSA) dwarfs every other Southeastern metro except the Miami-Fort Lauderdale MSA, although it’s a much deeper market than even the giant South Florida area when considering population, GDP and the size of the retail real estate market.
Atlanta’s economy is double the size of Charlotte’s, and more than triple the size of other healthy Southeastern markets like Tampa-St. Petersburg, Orlando, Nashville and Raleigh-Durham. Atlanta’s GDP and population rankings are closely matched, while many other Southeastern growth markets rank far higher by population than by economic indicators like GDP — a theme that is consistent with regular feedback from investors, developers and lenders. Atlanta’s growth is the “good” kind of growth, driven not just by the sunshine, but by jobs.
Deep, diverse market
Atlanta’s 354 million square feet of retail real estate is spread across 44 individual retail submarkets, more than any other market in the South.
But here’s the catch: By measurables such as average rental rates and investment sale cap rates, Atlanta retail real estate is not only less expensive than other major U.S. markets, it’s also less expensive than many other retail markets in the Southeast.
Atlanta’s rents are lower and its cap rates are higher than Nashville, Charlotte, Raleigh, Charleston, Orlando and many others. Plus, it’s a downright bargain compared to the traditional “institutional” gateway markets.
New buyers, foreign capital
Coro Realty is a respected Atlanta-based developer and investor, with a portfolio that includes three dozen retail assets estimated at just under $1 billion in value. President and managing partner Robert Fransen is long on retail in Atlanta, but in the near-term, he also sees opportunities as a seller.
“At this point in the cycle, it’s harder to find development and value-add opportunities,” says Fransen. “There are a lot of attractive stabilized retail assets, but there are also new entrants coming into this market, including Dutch and German capital aimed at larger, nicer centers, that are beating out local buyers.”
European money comes here not only because of Atlanta’s fundamentals, but also because of global drivers that make it a bargain by comparison. The same forces are at work in Asia, making quality growth markets in the United States particularly attractive for foreign capital.
“It’s why we’re long on Atlanta retail, not only intown and along the BeltLine, but the urbanization of retail is also taking place in Atlanta’s many high-quality suburban markets, which will also densify,” says Fransen.
Active, sophisticated owners
SITE Centers is the largest retail landlord in Georgia, and the publicly traded REIT owns some of the biggest and most attractive shopping centers in the Atlanta market. Despite a retail portfolio dominated by big box power centers, the company has maintained strong occupancy levels.
SITE Centers’ Southeast vice president of leasing Lauren Ball says that Atlanta’s retail market is unique in the Southeast in terms of the diversity of assets and submarkets.
“We’re using technology to better understand our trade areas and tenants’ customers, and it has helped us not only lease space, but to also better merchandise a center in a way that meets the needs of the trade area,” says Ball.
SITE Centers’ portfolio is a good proxy for the Atlanta market as the firm’s occupancies have maintained high levels, and retailers vacating box spaces are quickly backfilled — many times with a better tenant that is a better fit for the shopping center’s market.
Going forward, a variety of factors will upend Atlanta’s traditional “non-institutional market” distinction and put Atlanta on a path to outpace the Southeast’s other markets.
The metro’s “good” kind of growth driven by jobs, the world’s busiest airport, Georgia’s State Capitol and government complex, the headquarters of 16 of the Fortune 500 and a burgeoning film and TV industry make Atlanta a compelling investment target for both foreign and domestic capital.
The size and diversity of Atlanta’s retail market creates an abundance of opportunities for retailers, as well as retail developers and landlords to enjoy better returns and profitability than many of Atlanta’s competitor markets in the Southeast and across the United States.
— By Tony D’Ambrosio, Senior Vice President and Principal at Colliers International. This article originally appeared in the October 2019 issue of Southeast Real Estate Business.