In the October 2017 edition of Southeast Real Estate Business, Jeff Enck, Vice President of Shane Investment Property Group, discusses the retail market in Atlanta.
Atlanta's Disciplined Retail Market Ready to Face Headwinds from REITs, Amazon
A decade ago, the Atlanta retail market was a house of cards. It was clear to see this if you were in the industry at the time, and possibly even if you weren’t. Based on the intense overbuilding that had taken place, it wouldn’t have taken a worldwide economic meltdown to wreck it, though that didn’t help. Literally hundreds of unanchored retail centers had cropped up all over suburbia, fitting directly into everything that people consider to be negative about shopping centers.
The formula for developers was to scrape every tree from a piece of land, cover it with asphalt and an inexpensively constructed building, then fill it with whatever tenants they could find. The result was largely a glut of properties with poor intrinsic values: mid-block sites, odd shaped layouts, challenging access, uninspired, non-credit tenants with high rents. This would, of course, turn out to be unsustainable.
To be fair, not every property was developed in this fashion. Atlanta was, and still is, home to many excellent retail developers that know how to create amazing projects. But many look back to the 2000s in Atlanta as a time of cookie cutter development with inexperienced builders playing a game of musical chairs, trying to cash out before the whole thing collapsed.
So, where are we now? The economy has been in expansion since the season quarter of 2009, and many fear that a downturn may be looming. Some brokers and investors are claiming that a change is starting to occur.
Retail investment sales in the Atlanta market have modestly declined in velocity and pricing through the first half of 2017. What people have been describing as overall softness can be specifically quantified as an approximate 8.4 percent drop off in sales volume compared to 2016, as well as a 12.6 percent decline in price per square foot, with cap rates remaining flat at 7 percent for private capital-sized retail properties between $750,000 and $30 million.
There does not appear to be cause for alarm, nor is there a looming threat of a repeat of the rapid economic meltdown that occurred in 2008. In tracking retail returns nationally, equity price levels have returned to the 2015 levels, down from the recent peak in mid-2016. Investor sentiment in Atlanta is showing caution, as buyers are demanding value and higher unleveraged returns based on higher cost of capital following two 2017 interest rate hikes.
OVERCOMING THE HEADWINDS
The reasons for the recent modest decline are fairly intuitive. Factors that have had some effect on REIT activity include holdbacks due to the election, the perceived “Amazon effect,” investors anticipating lower cash returns and fewer buyers/lower competition to buy properties.
However, with the overall economy continuing to do well (1.2 million new jobs nationally and 63,000 in the Atlanta MSA since January), the weakening from these factors has been minor. Several buyer categories have been noticeably less active in REITs and international investors, however a good number of buyers still have capital and lenders are still putting money into retail real estate.
The good news is that the intrinsic data does not indicate the telltale doom of the pre-recession boom days. There is virtually no overbuilding in Atlanta retail. Through the current expansion part of the cycle, Atlanta area developments have been noted to mostly be unique projects featuring live-work-play environments and adaptive reuse projects.
If the economic cycle that peaked in 2006 featured mass overbuilding, with more mid-block suburban strip centers at $30 per square foot rents than you could count, the hallmark of the new Atlanta cycle has been intelligent and desirable mixed-use projects that provide value and interest to customers and tenants.
The cases in point are well known. With Avalon, North American Properties took over a partially started and abandoned development in Alpharetta and shaped it with Whole Foods Market and boutique dining and shopping in a downtown-style layout featuring a movie theater, offices, apartments and single-family residences.
Ponce City Market, perhaps Atlanta’s best known adaptive reuse project, took a 1920s-era brick warehouse factory and converted it into a beautifully hip, multi-level retail, office and living experience with a unique dining hall and upper-end retailers, such as Anthropologie and J. Crew.
The most recent new development of note is the new Battery Atlanta connected to SunTrust Park, the brand new Braves stadium. The Battery features 400,000 square feet of boutique retail and restaurants, a nine-story Comcast office building, an Omni hotel and 530 multi-family residences.
Atlanta still has its fair share of traditional shopping centers, but the more everyday retail centers are grounded in sustainable rent levels and occupancy. Current average retail rents throughout all retail across the MSA are $13.55 per square foot, and vacancy is at 5.8 percent. These are numbers that allow most of us to sleep well at night.
But what is perhaps most on everyone’s mind at the moment is the so-called “death by Amazon” phenomenon. This is seen by many as the largest concern for retail, though opinions differ on what effect Amazon actually equates to.
It should be noted that many sectors of retail remain in high growth. Among these are convenience stores, restaurants, discount grocers, dollar stores and other service-oriented businesses. It is also quite interesting to note that more retail stores will open in 2017 than are slated to close.