Retail Road Less Traveled: Secondary Markets Become No. 1

Date: 02/24/2014

One market’s over-pricing is another’s enticing — investors, that is. The beaten path in the retail real estate world, i.e., primary markets, is well worn this many years into the recovery. Investors interested in maintaining yield can be excused for having a wandering eye.

“With better pricing expectations, expect more sellers to go to market in 2014,” said Frank Meyrath, vice president in Bull Realty’s Retail Capital Markets team. ”We are seeing significant interest in properties across the Southeast. While ‘location, location, location’ is a staple of all real estate underwriting, interest in secondary markets is substantial as cap rate buyers, particularly from major Northeast cities, look to the Southeast for opportunities not available in the primary markets.”

Buyers searching for new retail assets will, no doubt, keep an eye on potential interest rate increases. Location, lease term and leverage isn’t quite the classic real estate phrase invoked by Meyrath, but successful retail investors employ a balanced, yet fluid, strategy with regard to these and other key factors in the recovering sector.

A reawakened retail property sector contributed to an overall “very good” CRE investment performance in 2013. Sales of retail assets rose 10 percent in the last 12 months, CoStar reported. Investor zeal and volume led to the spread of activity to “non-gateway markets” such as Austin, Dallas, Houston, Denver, Phoenix, Miami and Atlanta. Up and coming markets have investors coming for the upside.

“The sun is shining again in many of these secondary retail markets,” said Bob Kane, vice president of Bull Realty’s National Retail Group. “Not just there for the fresh scenery, investors are acting fast to get a foothold in these places so they can ride the rent growth we’re likely to see in the next two to three years.”

Investors like to hear of expanding retailers, especially the credit tenants opening in secondary markets experiencing a hot housing market and resurgent job growth. A fourth quarter outlook by Goldman Sachs Global Investment Research and Haver indicated that housing starts will increase 26.5 percent this year to more than 1.17 million units. The volume is forecast to rise to approx. 1.63 million in 2016. MetroStudy reported in November that new home starts in Atlanta increased by 76 percent annually.

Georgia’s capital city saw its retail vacancy rate drop from 9.5 to 9.2 percent to close 2013 (the national rate went from 6.7 to 6.6 percent). Shopping centers, power centers, general retail (which includes freestanding assets), specialty centers and malls posted 14.0, 5.8, 5.7, 15.0 and 6.1 percent vacancy, respectively.

Approx. 1.18 million sq. ft. of retail space was built in Atlanta last year, including the completion of nine buildings totaling 209,000 sq. ft. in fourth quarter, reported CoStar. Coming into the new year, 594,344 sq. ft. of retail space were under construction in the metro.

On this year’s much anticipated list of grand openings are Oliver McMillan’s Buckhead Atlanta, which will have around 300,000 sq. ft. of high-end retail, restaurants and cafes, and Ponce City Market, which will offer more than 350,000 sq. ft. of retail in Midtown, reports Atlanta Business Chronicle.

North American Properties’ Avalon is scheduled to open its first phase in Atlanta’s northern suburbs in fourth quarter. The $600 million mixed-use development in Alpharetta will include around 380,000 square feet of retail, restaurants and entertainment offerings.

Elsewhere, Office Depot and OfficeMax completed their merger in fourth quarter 2013. Combined their revenues would’ve totaled $17 billion last year. Kroger has completed the $2.5 billion acquisition of Charlotte, N.C.-based Harris Teeter, adding 219 stores in the southeastern U.S. and $4.5 billion in new revenue to the company.

2014 started off with huge news in the auto parts retail segment: Advance Auto Parts purchased Raleigh, N.C.-based General Parts International Inc. for $2 billion. Roanoke, VA-based AAP is now the largest parts provide in North America with 5,264 company-owned stores (AutoZone is second with 5,210 units), reportsTriangle Business Journal. The combined company will continue to provide services to the 1,418 independent Carquest-branded store locations in the U.S. and Canada.

Interestingly, Hess Corp. has announced plans to spin off or sell its retail business, which at 1,258 locations is the biggest operator of convenience stores along the East Coast and fifth largest in the U.S., according to CoStar.

“We’re seeing the market wake up with many retail investors doing 1031 exchanges,” said Bull Realty Vice President Nancy Miller. “There is increased 1031 activity, not only in the Southeast, but all across the country. It’s a good time to sell.”

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Bull Realty, Inc., Research