Remember the “retail apocalypse”? Fast forward to today and it seems to be quite a different story.
Retail is currently viewed by many as the most attractive sector within the commercial real estate industry, due in part to an all-time low vacancy rate and increasing rental rates. Atlanta’s retail vacancy rate has dropped to 3.6 percent, which is the lowest rate on record according to CoStar Group. The low vacancy rate coupled with an extremely limited amount of new retail space under development due to high construction costs has created a market unlike anything we have seen in a long time.
Increased construction costs along with higher interest rates have made it cost-prohibitive to build traditional retail power centers; however, grocery-anchored retail is the anomaly with Publix taking the lead. Several mixed-use developments that include a large retail component are underway as well, including High Street in Dunwoody, Medley in Johns Creek and Centennial Yards in downtown Atlanta, just to name a few.
Additionally, some retail space has been taken off line as malls reinvent themselves. Examples include the partial demolition of North DeKalb Mall in Decatur to make way for a new mixed-use development known as Lulah Hills; Northlake Mall in Tucker, which has backfilled its anchor spaces with Emory Healthcare; and North Point Mall in Alpharetta, which will demolish a substantial amount of existing space as part of its redevelopment pending city approval.
Retailers have had to get more creative than ever to continue their growth. Burlington, for example, has worked with landlords to tear down sections of underutilized small shops to build its new, smaller prototype as they did in Griffin and Hiram. There is very little big-box anchor space available, which makes for a highly competitive market. Tenants are monitoring not only upcoming lease expirations, but also spaces occupied by retailers that may be at risk of closing locations.
Several weaker and highly leveraged retailers have faltered; however, landlords in these cases typically have several backup offers pending and are waiting for the existing tenant to misstep. The Bed Bath & Beyond bankruptcy is a perfect example of strong big-box demand. Burlington took the lead and acquired four of the Atlanta-area Bed Bath & Beyond leases at auction.
When a retailer assumes a lease at auction, rent payments begin almost immediately, and the retailer must live with a lease that was negotiated years ago between the now defunct tenant and landlord. Other retailers that took previous Bed Bath & Beyond locations in the metro area but worked directly with the landlord include Nordstrom Rack, Planet Fitness, HomeGoods, BrandsMart USA, Boot Barn and Bloomingdales Outlet, among others. While a handful of Bed Bath & Beyond locations remain available throughout the metro area, most have deals pending.
Single-tenant and outparcel demand is at an all-time high. A large majority of the single-tenant activity has taken place in the suburbs where land is more plentiful, although local municipalities have become increasingly more difficult as it relates to zoning, permitting and design approvals. New-to-market concepts such as Whataburger and Raising Cane’s continue to aggressively expand throughout the metro area. Other concepts just beginning to emerge throughout the market and are planning multiple locations include Salad and Go and Dutch Bros Coffee. Banks (Fifth Third, Chase); restaurants (City BBQ, Miller’s Ale House, Jim ‘N Nick’s, Chipotle, Chick-fil-A); fuel (RaceTrac, QuikTrip); and coffee (Dunkin’, 7 Brew, Starbucks) have all recently added new locations around Atlanta and are continuing to expand.
That said, not all outparcel users are having the same success. Car wash concepts have been rapidly expanding over the past several years, however markets have become saturated and the investment market for this use has slowed. Multi-tenant outparcel building development has also significantly slowed due to high construction costs.
While retail is currently a bright spot within the commercial real estate industry, it still faces headwinds and uncertainty. Retailers that have committed to open a set number of new stores will be challenged in finding appropriate space over the next several years unless there is a substantial shift in supply. Whether it’s the decrease in construction costs, stabilization of interest rates or another round of bankrupt retailers, something will need to change in order to keep the momentum moving in a positive direction.
— By Kyle LeCain and Cheryl Routson Champion, senior vice presidents and partners at TSCG. This article was originally published in the July 2024 issue of Southeast Real Estate Business.