The Carolinas are seeing retail activity climb back quickly after the slowdown.
By Savannah Duncan
The retail market in the Carolinas is on the upswing. Leasing activity has improved, and although it’s not yet back to pre-recession levels, there are deals getting done. For the most part, development was still stalled in 2011; however, some projects will start to move dirt this year. The bright spot has definitely been shopping center sales, with several transactions reaching $20 million, and some even surpassing $90 million.
While the Carolinas still face the struggle of having one of the highest unemployment rates in the country at 9.5 perccent for South Carolina and 9.9 percent for North Carolina as of late January, Robert Spratt, president and CEO of Charlotte, North Carolina-based Hill Partners, says the Carolinas have a bright future. “The lifestyle, climate and cost of living in the Carolinas are all very attractive,” he says.
Activity such as BMW’s plan to invest $900 million in its manufacturing facility in Spartanburg, South Carolina, and Chiquita’s decision to relocate its national headquarters from Cincinnati to Charlotte are signs of good things to come.
“Real estate values are beginning to recover in several markets in the Carolinas, regardless of the challenges of unemployment, consumer confidence and online shopping,” says Karen Christy, research and marketing director of Collier’s International’s Raleigh office. “To the commercial real estate industry, these challenges provide the opportunity to continue to solve problems for clients.”
Leasing on the Rise
Compared to this time last year, activity has improved quite a bit, says Pete Brett, CCIM, specializing in retail and development at Greenville, South Carolina-based Coldwell Banker Commercial Caine. “Vacancies are down, rates are stabilizing and even up in some of the stronger centers, and absorption overall has been pretty positive.”
According to Colliers International, total retail statistics show 2011 year-to-date positive net absorption for Charlotte, Asheville, Fayetteville, Greensboro, Raleigh/Durham and Wilmington, North Carolina, and Charleston and Columbia, South Carolina, all with vacancy rates below 10 percent.
“The South Carolina retail market has experienced substantial activity following the last economic downturn, as many of the big boxes left vacant during the recession have since been filled,” Christy says. “Leasing activity in North Carolina is picking up slowly and is steady heading into 2012, with most major markets obtaining positive net absorption.”
Marc Yavinsky, executive vice president of Palm Beach, Florida-based Menin Development, says that at the company’s Magnolia Park Town Center project in Greenville, South Carolina, there has been a significant amount of activity from tenants who would be new to the market. Additionally, some retailers who want to expand or relocate in the market have shown interest.
“Retailers that are still around are looking to add stores because they have to grow and they have had limited opportunities to do so,” says Chris Fraser, president of investment sales and office leasing at Grubb & Ellis/WRS Realty.
There is renewed interest from a lot of the retailers that have been on the sidelines and are starting to get back in the game, says Paul Harnett, senior vice president in Madison Marquette’s Charlotte office. “There was some of that last year, particularly compared to 2010, but this year there is robust activity in leasing interest from prospective tenants.”
The flight-to-quality effect is still in play as Class A centers are experiencing the most activity, says Rich Roy, retail specialist in CASTO’s Cary, North Carolina, office. “Hopefully activity will trickle down to the B and C centers.”
Joe Baranowski, president and COO of East Berlin, Connecticut-based Developers Realty Corp. says that the company has centers located in Fayetteville and Jacksonville, North Carolina, both military markets, which have remained close to fully leased with retailers in the centers experiencing an increase in sales.
With little development slated to come on line this year, owners of Class A shopping centers are taking the opportunity to strengthen their assets, says Susan McGuire, principal of CNL Crosland Commercial Real Estate’s Charlotte office. “Strong centers are getting stronger, and borderline centers are getting weaker.”
Spratt adds, “In 2012, we expect better quality centers to pick up market share because there’s not a lot of larger new developments out there.”
For new retailers looking to enter the Carolinas, the backfilling of many of the big boxes paired with retailers’ preference for Class A locations has started to become a problem. “The region continues to have strong interest from new-to-market retailers, some of whom are having difficulty finding the space they need in Class A centers in their target areas,” says Elizabeth Gates, principal and senior vice president of marketing and research in Grubb & Ellis/Thomas Linderman Graham’s Raleigh office.
Jimmy Wright, broker for Greenville-based NAI Earle Furman, says fast-casual restaurants like Chipotle and Zoës Kitchen remain the most active type of retail. Brett says regional restaurants are also expanding in the market, including Cook-Out, Mac’s Speedshop, Breakwater, Carolina Ale House and St. Louis Original Hamburgers.
McGuire adds that service uses and value-oriented retailers have been expanding as well. “Consumers are more value conscious, so off-price retailers have benefitted during the recession,” says Alan Kahn, president of Columbia-based Kahn Development Co.
Some big box retailers are signing leases to fill out markets they are already in, says Michael Lebovitz, executive vice president of development at Chattanooga, Tennessee-based CBL & Associates Properties, which owns several centers in the Carolinas. For example, Kohl’s, which already had stores in Raleigh and Greensboro, opened a 92,658-square-foot store at CBL’s 690,020-square-foot Alamance Crossing center in Burlington, North Carolina, in September 2011.
While there are more retailers open to making commitments, it’s still difficult for new, start-up retailers, Kahn adds. “When the capital markets loosen up, then we will have some new concepts [enter the market],” says Robin Hilliard, area vice president of leasing for Weingarten Realty’s Raleigh office. “With new concepts, if they are not proven [successful] and don’t have money, they can’t get money.”
Daniel Taub, executive vice president and COO of Tarrytown, New York-based DLC Management Corp., says securing small shop tenants is more of a challenge than large tenants.
“The biggest challenge is sourcing viable existing and potentially new small shop, mom-and-pop tenants who either have an existing business or have the capital and ability to start a new business,” he says. “While our analysis tells us that it’s a worthwhile investment to help them relocate, expand or open a new store, it’s still a challenge.”
It’s harder to find local, qualified tenants due to a lack of capital in the market, Hilliard echoes.
When it comes to lease negotiations, Taub says national tenants are still in a position of leverage, but in certain markets, it has become an even playing field.
“With construction limited and a dwindling supply of space in the region’s prime locations, the market is slowly shifting back in favor of the landlords in select areas,” says Jack Graham, executive vice president and principal at Grubb & Ellis/Thomas Linderman Graham’s Chapel Hill, North Carolina, office.
“For owners of older centers that have not been redeveloped or properties further off the beaten path, the market largely continues to favor tenants and will continue to do so through the remainder of the year,” he says.
Baranowski says tenants are still looking for free rent and tenant improvement allowances. “Several of our tenants in Jacksonville have asked for more TI to renovate stores in exchange for a longer lease term. We are willing to work with strong tenants.”
During the past 3 years, asking rents in the Raleigh/Durham area have fallen an average of $2 to $4 per square foot, indicating rates in the $14 to $15 range instead of the $18 to $19 range, says Gates. “This 20 percent decline is in line with similar declines in values for neighborhood retail and strip centers,” she says. “However, most landlords we speak with have remained firm on TICAM reimbursements and actually have seen occupancy and pricing firm up in the last 90 days.”
McGuire says she has seen a shift in sticking points for retail leases starting to occur. “It used to be that you’d spend a lot of time talking about options and co-tenancy, but one of the dramatic shifts is that stores have become more focused on internal operations as well,” she says.
While lease transactions are still taking a longer time to execute, Roy says landlords and tenants have been getting more creative in order to get deals done, which has strengthened relationships.
Strength in Numbers
Investment demand for retail properties increased in 2011, with $377 million in volume, Gates says, which is more than double the volume witnessed in 2010. “Well-leased, grocery-anchored centers remain the most sought after retail class.”
Andrew Margulies, associate in Marcus & Millichap’s Raleigh office and a member of the firm’s National Retail Group, says last year the company closed 60 investment sales in the Carolinas. Approximately 76 percent were net-lease transactions and about 24 percent were multi-tenant shopping center sales.
Investors are bullish on the Carolinas because of the strong population growth, moderate cost of living and strong economic drivers. “There is a lot of interest from the private investment market nationally and internationally for retail properties in the Carolinas,” Margulies says.
Hilliard adds that core and distressed assets gather the most interest. “Core assets are selling at a fairly low cap rate and distressed assets are trading at a pretty good value because of value-add properties, but for properties in the middle, there’s just no demand for them,” she says.
Three of the largest sales of the year occurred in Charlotte. Blackstone Real Estate Partners purchased a portfolio of 36 shopping centers from Equity One for $473.1 million, including the 731,678-square-foot Carolina Pavilion and the 79,700-square-foot Salisbury Marketplace, both in the Charlotte region.
In September of last year, DDR Corp. purchased the 258,000-square-foot Cotswold Village Shops and the 28,600-square-foot Terraces at SouthPark in Charlotte from Bell Partners for $85 million. Additionally, EDENS purchased the 400,000-square-foot Park Road Shopping Center, also in Charlotte, in July 2011 from Wake Forest University, Queens University of Charlotte and Wingate University for $82 million.
The largest sale last year was Inland American Real Estate Trust’s $95 million acquisition of the 549,000-square-foot White Oak Crossing Shopping Center, located in the Raleigh suburb of Garner, North Carolina, from local developer Collett & Associates.
“New developments and some redevelopment is starting to be discussed, which all have merit and the ability to come to fruition, but it’s just taking longer,” says NAI Earle Furman’s Wright.
Baranowski says the Carolinas market had been active until 3 to 4 years ago. “The development market right now is extremely difficult. That’s not to say if the right opportunity came along that we wouldn’t take a look at it, but at the moment we are just trying to manage, lease and maintain the space we have.”
In spite of the challenging requirements to obtain financing for projects, there are some developments and redevelopments happening.
In October 2011, a 138,047-square-foot Target opened at Phase I of the 700,000-square-foot retail portion of CASTO’s 100-acre Park West Village, located in Cary. Since then, other tenants have opened, including Omega Sports, Rack Room Shoes, Dress Barn, T.J. Maxx, Hallmark, Fantastic Sam’s, PetSmart, buybuyBABY, Aveda Salon, Penn Station Subs, Omaha Steak, Game Stop, Sprint, Mattress Firm and GNC.
Construction has started for an additional 275,00 square feet of retail space. The first tenants are slated to open this winter.
Chris Thomas, partner of Childress Klein Properties’ Charlotte office, says the company is in the process of expanding its 545,000-square-foot RiverGate shopping center in Charlotte. “We are petitioning to add as much as an additional 155,000 square feet of retail space and 100,000 square feet of office space.” The company intends to break ground later this year, with an opening scheduled for the second half of 2013.
Additionally, the company is working with The Howard Hughes Corp. to get construction re-started on the 1.3 million-square-foot Bridges at Mint Hill, located in Charlotte. Construction initially began in 2008 but stalled when the market slowed, says Thomas. “We are aiming for a late 2014 or early 2015 opening,” he adds.
In Fayetteville, CBL is redeveloping the 1.04 million-square-foot Cross Creek Mall, which will include contemporary design improvements including updated entrances, paint, new interior décor and graphics, upgraded restrooms and amenities, and new landscaping. Additionally, Lebovitz says the company is in the early stages of expansion.
CBL is also developing the 127,000-square-foot Waynesville Commons, located in Waynesville, North Carolina. Construction began in September 2011, and completion is slated for October of this year. An 85,000-square-foot Belk will anchor the property, which will also include Michaels, PetSmart and an additional 11,000 square feet of retail space.
In January, Mount Pleasant, South Carolina-based WRS Realty broke ground on a 450,000-square-foot power center, located on the former site of the Henredon manufacturing facility in Morganton, North Carolina. A 177,000-square-foot Walmart, T.J. Maxx, Ross Dress For Less and PetSmart will anchor the center, which is 75 percent pre-leased. “It’s a regional center that will serve more than just the Morganton area,” Fraser says.
Phase I is slated for completion in the summer of 2013. WRS will manage development and leasing/sale activities on behalf of the owner, Morganton Retail Investment. Southern Real Estate Management will manage the center.
Hartnett says Madison Marquette is expanding two retailers at Monroe Crossing in Monroe, North Carolina, and University Mall in Chapel Hill. In October, Belk remodeled and expanded its store at the 350,531-square-foot Monroe Crossing by 30,000 square feet, bringing its total footprint to 95,000 square feet. At the 366,000-square-foot University Mall, Harris Teeter will also remodel and expand its store by 10,000 square feet for a footprint of 53,000 square feet. Construction is slated to begin by year’s end.
One way retail space is being added is through mixed-use projects. Spratt says Hill Partners is currently working with Crescent Resources on Gallery at Cameron Village in, a 282-unit apartment development in Raleigh with 17,000 square feet of street level retail (pictured on page 45).
“Depending on the space [within the project], we are four or five prospects deep,” says Spratt. The retail space is 99 percent pre-leased. Ground breaking occurred in August 2011, with completion slated for spring 2013.
Without a doubt, one of the largest development projects at the moment is Magnolia Park in Greenville, South Carolina. Currently, there is 700,000 square feet of retail space on the site, and Yavinsky says Menin Development is actively working to add 400,000 square feet of retail space to the site. Additionally, the site can hold up to 375,000 square feet of office space, 350 hotel rooms and several hundred apartment units.
Yavinsky says the additional retail space will include big box tenants to provide a power center component, as well as a road-front section with more service-oriented retailers. In addition, there will be a town center area with green space surrounded by retail.
“At the end of the day, it will be a regional project that will be something that doesn’t exist in Greenville today,” he says. “We’re developing it to be one of the largest commercial centers in the state.”
Another large project that’s expected to break ground late 2012 or in early 2013 is the 800,000-square-foot The Edge, a multiple-use project in Chapel Hill, North Carolina, that will include 450,000 square feet of retail space, 400 to 500 multifamily residential units, 80,000 square feet of office space, two hotel sites and small scale office uses.
A partnership between Sonny Molloy, Jeff Pape, president of D&A Development & Consulting and The Rosen Group is developing the property, and The Shopping Center Group has been retained as the leasing agent for the project.
“The traffic and transit studies have been completed in draft form and we’re working with the town of Chapel Hill on the scope of the infrastructure improvements,” says Pape. “We are working to finalize the site plans and expect to have our entitlements in place by the end of the year. The town of Chapel Hill is excited about the project and we are pleased with the progress.”
The Year Ahead
The remainder of 2012 will bring continued retail growth in the Carolinas, says Colliers’ Christy. “Even with new supply coming on line later this year, this space will be quickly leased due to pent up demand for Class A product,” she says.
New retailers will continue to enter the Carolinas, especially when banks increase lending again. “Banks are more agreeable to sitting down and making proposals than they were a year or two ago,” says Baranowski. “[The retail market is] more positive than it was 12 to 24 months ago.”
“The Carolinas are relatively stable compared to other similar sized markets,” Taub says. “Overall, the Carolinas are well-positioned to continue to have more positives than a lot of other parts of the country.”