The Atlanta retail market continues to be robust, with vacancy tightening in key submarkets and rents trending upward. Overall vacancy fell slightly from 7.1 percent during the fourth quarter of 2015 to 7 percent in the first quarter of 2016, according to CoStar. However, the decline is greater in hot submarkets such as Buckhead and Central Perimeter that boasted vacancy rates as low as 2.8 percent and 3.2 percent, respectively, in the first quarter.
Demand Up, Supply Tightens
There is still a disconnect between supply and demand, especially in strong trade areas, and many retailers that wish to enter or expand in the market are finding it difficult to do so. Rents are escalating by 10 percent to 15 percent because of the increased competition for space and the high cost to build new developments is attributable to escalating land costs.
During the first quarter, 21 buildings totaling 300,174 square feet were delivered, according to CoStar, and at the end of the first quarter, 1.73 million square feet of retail space was under development. As Atlanta can deliver more of the space that’s under construction and open up availability, rent is expected to continue to climb.
Health and Fitness
Food is a very strong driver pushing for opportunities. Quick-serve and sit-down restaurants are actively seeking space with fervor, as are health and fitness concepts. Grocery stores are leading nearly every new development announced. Desirable in-town locations require some type of multifamily component in order to make the cost of the land practical.
We are seeing some smaller intown centers that are focused around having a health or fitness concept as one of the lead tenants. In particular, boutique fitness concepts often have the flexibility to lease space in very targeted markets like Grant Park and Decatur, where other retailers are finding it difficult. We’ve also seen many niche retailers like Guitar Center and Hollywood Feed, a new-to- market natural and holistic health food concept for pets, that’s seeking to expand in these food and fitness centers.
Experiential Retail Attracts
With less space available to rent, landlords can take a more thoughtful approach to their merchandising mix. NOIs are still important, but paying more attention and analysis to the benefit of having a particular retailer or restaurant in a given center.
Dinner and movie concepts keep popping up on site plans, which isn’t surprising given the influx of entertainment concepts seeking entrance into the market. Today’s development is more proactive about events planning and marketing to bring people to the property and keep them there longer.
With development active back in earnest across all retail products, increased supply levels will give buyers more options in 2017, and cap rates will continue to level of as supply catches up to demand. Currently, demand for single-tenant/triple-net product is at an all-time high. The lack of supply for single-tenant assets in the Atlanta metro area, as well as the rest of the Southeast, has allowed sellers to secure multiple offers for their properties, increasing exit pricing and further compressing cap rates.
The retail investment sales community, along with the rest of the country, is also seeing a surge in multi-tenant building activity. We have seen a dramatic increase of developers two or three national tenants together in one building, typically securing 10- year leases. The buyers that typically purchase triple-net lease properties are showing more willingness to purchase these two- and three-tenant deals if they have minimum 10-year term and strong national retailers.