Following a lengthy period of downturn and contraction, Atlanta’s retail real estate markets are showing signs of life. While by no means low, vacancy rates have been declining amid positive absorption as retailers expand in the community-neighborhood shopping center market and big-box spaces emptied previously find new tenants—or new uses. And growth has returned to average rents. While construction remains prudent overall, meanwhile, some of Atlanta’s big-name core-area mixed-use developments are seeing new progress even as major projects in select suburban locales also move forward. While the market shows signs of recovery, challenges posed to retail real estate by the slow pace of economic growth and the slow recovery of the housing market are augmented by the rising tide of competition from e-commerce retailing.
Soaring vacancy rates in the local community-neighborhood shopping center market during the recession and in its wake were relieved by the emergence of stabilization, albeit at high levels, in 2010 and 2011, during which time the rate remained stuck steadfastly at or above 14.1%. Although progress has been and should remain slow, 2012 has brought the beginnings of a downward trend: the year is expected to close with the first sub-14.0% vacancy rate since fourth quarter 2009. At 14.1%, the rate for second quarter 2012 was unchanged from the quarter before but was down 30 basis points since year-end 2011. The second quarter national rate for this property category, for the sake of comparison, was notably lower at 10.8%.
While elevated according to national norms, vacancy in the metro Atlanta power center market has shown a more persuasive decline than has the local community-neighborhood sector rate. While up 20 basis points for the period, the 8.0% second quarter power center vacancy rate was down 50 basis points year-over-year. The second quarter national rate for this property type was 6.3%, down 10 points for the quarter, down 50 year-over-year. There is considerable ground to be made up in both market segments before vacancy rates typical of the pre-recession period will be restored.
SUPPLY AND DEMAND
While vacancy remains high, notable gains in demand for community-neighborhood shopping center space have been seen in recent quarters. Following 193,000 square feet of net absorption in fourth quarter last year, first quarter 2012, alongside no new supply deliveries, produced a net of 234,000, the best single-quarter performance recorded by the firm for this market sector since prior to the recession (when much higher totals were common). While second quarter took a breather with a total of only 16,000, activity should again heat up over the remainder of the year; the firm anticipates a total close to 200,000 square feet for the year’s second half. While the 2012 total will fall far short of heyday activity levels, it represents a marked departure from the negative totals that plagued this segment of the market over the preceding four years.
Construction in this sector, while increasing slightly, remains modest. Reis’ August 6 report on individual construction projects calls for the delivery of 284,000 square feet in three projects, the largest of which is the 153,200-square-foot Crossings at Four Corners neighborhood center in northwest Atlanta. Two others, with a combined total of 131,000 square feet, will deliver this year in areas of metro Atlanta not included within current submarket boundaries. The most significant project in this property sector currently underway is the 346,000-square-foot community center component belonging to the first phase of the revived Buckhead Atlanta mixed-use development. Its completion date was not specified.
Indeed, mixed-use projects, especially (but not exclusively) in the core area, have been a major component in retail as well as other forms of development. While activity is modest at present, Reis reports 1.9 million square feet of retail product in planning stages in such projects. While Atlanta’s 12th and Midtown and Atlantic Station developments have been leaders in mixed-use construction, the revival of a major defunct project in north suburban Alpharetta—with a new name and a new developer—has been a source of considerable attention. Speaking of revived large-format projects, 550,000 square feet of regional center space completed in a major project in Buckhead earlier this year. In addition, a large outlet center is underway in suburban Woodstock. See the Submarkets section for more information on these and other significant projects.
Losses in average rents, fluctuating in severity, were the rule in the community-neighborhood shopping center market from 2008 through 2011, a response to negative absorption and high vacancy. While vacancy in this sector remains elevated, as indicated, the return of positive absorption has had a favorable impact on lease rates. At $17.20 psf and $14.98 psf, asking and effective averages for the latest quarter were up 0.4% and 0.3% for the period and were up 0.6% each since year-end. A similar growth pace is expected for the remainder of the year. Rents in the power center market also have shown recent modest gains. At $22.22 psf, the mean asking lease rate for non-anchor power center space for second quarter was up 0.3% for the period and was up 0.4% year-over-year. “The rise in tenant demand has bumped rents higher for the first time since the fourth quarter of 2010,” remarks Marcus & Millichap in its second quarter 2012 report on local retail.