Across the country, retail sales volume appears to be up, but YTD numbers are down just a bit.
“Last year was the best year for Retail sales ever recorded, with $88.3 billion in volume nationwide. Right now at 3rd quarter we’re at $66.8 billion, so without a few massive sales before years end we won’t top that.”
Demand continues to spread across the sector and the country, coming from multiple sources: capital from East Asia and Europe, pension funds, and big firms like Blackstone.
Caps have compressed across all retail types, but compression is slowing. Primary markets are still compressing, pushing investors into secondary and tertiary markets. Cap rates in the lesser markets are down 0.25%.
Inner city and large mall assets are trading in the high 5.0%
Strip centers are getting high 6.0% at best, including the grocery-anchored centers
There is plenty of opportunity and therefore plenty of action. Retail is often the last sector to improve, but consumer confidence has improved and people are shopping. The rise in online sales has transformed the merchandising landscape, but retailers are mastering omni-channel marketing and turning it to their advantage.
Crystal Ball for Retail
There are still deals to be had. For certain retailers in certain markets there is even undersupply. Value might be found in renovating underperforming centers in promising areas. Grocery-anchored strips are always popular, but we’re seeing more diversification now, innovation and crossover uses. The positioning of a center is critical – find new concepts to attract people on a daily basis.
For the latest in retail development, Mark Toro of North American Properties (NAP) gave us the scoop current trends. NAP is an experienced developer of successful mixed-use projects, including the phenomenal Avalon project north of Atlanta. They also recently acquired and revitalized Atlantic Station, a unique urban reuse project.
More than Mixed-Use: Experiential Retail
The hottest thing in retail is experiential: when the retailer offers shoppers special engagement opportunities that bring them into the store, like the Genius Bar at Apple, or yoga at Lululemon.
People shop, dine and recreate – they want experiences. They seek an enjoyable environment beyond what an old mall or bland big box can provide. Building and managing these centers costs more, thus lease at higher rates. That means the developer and management must team with retailers to drive everyone’s success. The retailer mix has to synergize as well. Retailers work together with the center on marketing, customer service, and support, to create a quality shopper experience.
Twitter, Facebook, YouTube, Instagram
The strategy relies on social media, the fastest and most reliable way to engage shoppers today.
“We have led the industry in the use of social media to drive sales for our retailers. If you tweet us with a customer service issue, you will hear back within minutes,” said Toro.
NAP has a deep commitment to the success of its projects, and they believe communication is a critical component. When they acquired Atlantic Station it was troubled asset. Using social media they polled the community about what they’d like to see.
“We de-leased non-performers and took occupancy down from 80% to 70%, then leased back up to 95% today, bringing in a better mix, that including more restaurants and newer specialty stores. The refresh increased sales by $144 per square foot in sales, a remarkable improvement. Now we have no trouble justifying our lease rates. The customers are there,” he said.
The Urban Burb
The region’s first urban environment in a suburban setting, Avalon, is a new mixed use development more than 20 miles north of downtown Atlanta, and it’s creating quite a buzz. Avalon is collecting some of the highest rents in the region. At 8.8 acres and 2.5 million square feet Avalon includes a 4 star full-service hotel with a conference center, half a million square feet of diverse retail, 526 apartment units, 101 single-family homes, 500k sf of office space, plus another 100k of loft offices. Each of these uses draws energy from the other.
In the first year office space is 90% leased at downtown rents, and the residential units are selling for twice the price of local real estate. Why? There is no other opportunity to get this street-level experience.
“It’s said that if you get the street right, everything else takes care of itself,” noted Toro. “We’re getting those rents because the tenants can’t get what we have anywhere else.”
Residents and shoppers can enjoy interesting experiences from entertainment to amenities, retailers and restaurants, three of which are #1 in their chain. The average resident is in their mid-40s, with income around $250k. These people are trading big high-maintenance homes for a new apartment and an urban lifestyle.
Avalon engages the local community by keeping an active events calendar to attract shoppers and keep the energy lively. Regular and seasonal events are celebrated, like Derby Day, music and performance that bring the community onto the property. Open container policy means you can carry your cocktail from venue to venue and enjoy the outdoor entertainment.
“During the holidays we build an ice rink to rival Rockefeller Center, and last year we had over 40,000 skaters.”
It’s truly a new city center. With Phase 1 open and running successfully for a year, Phase 2 construction is beginning now.
Acquisition / Disposition Strategies
For a hands-on look at the investment market, we talked to Frank Meyrath, National Retail Broker for Bull Realty. Frank is involved with buyers and sellers every day.
Meyrath said that it’s a very active market; large assets and portfolios are trading hands. Right now, low cap rates on Single Tenant Net Lease may drive more investors to investigate owning more multi-tenant spaces.
Investors looking for good cash flow may want to consider pursing a smart value-add proposition. The definition of value-add has been evolving. A few years ago value-add might have meant a total restructuring a C property. Today smaller upgrades including innovative uses can yield more improvements to NOI.
Secondary & Tertiary Markets
Capital is moving into the southeast from the north and west because of the active growth in markets like Raleigh/Durham, Charlotte, NC, Atlanta and Greenville, SC. South Florida and Miami are the gateway for overseas capital.
Examples of core institutional cap rates around the country are generally low 5-6.0% range. In private capital with more diverse buyer base, investors are seeing cap rates in the 6.0-7% range. That’s a premium between 50-100 bps over the gateway markets.
‘Retail follows Rooftops’ – look where the population (with income) is growing.
Redevelopment and Restructuring: big boxes are getting smaller, and new concepts are refreshing old retail centers. It’s all about getting the shoppers to come in.