Brokers and developers describe the two-state region as one that poises retailers for success.
Retail following rooftops has long been an adage of the commercial real estate industry, and North Carolina and South Carolina are proving to be a case study in that very pattern. Retail brokers and developers working in the two states say that despite the trials of the past few years, the region, which offers a climate friendly to residents and retailers alike, is performing well and proving the calls of retail’s demise alarmist at the least, if not misguided.
Though the two-state region has faced many of the same difficulties seen nationwide with the COVID-19 pandemic and its aftermath — such as supply chain delays, higher costs of construction, a recessionary environment, labor shortages and elevated interest rates — the insatiable demand for both residency and retail in the Carolinas has more than offset the potentially depressing effects of these economic factors.
Strong fundamentals
Daniel Holloway and Dustin Tenney, co-founders of Reedy River Retail at SVN|Blackstream based in Greenville, South Carolina, describe the outlook for the retail market as being strong and positive. Holloway and Tenney are engaged in business throughout North Carolina and South Carolina.
Dotan Zuckerman, head of activation and retail for Portman, an Atlanta-based developer that currently has mixed-use projects underway in Charleston and Charlotte, goes so far as to call the region’s retail scene as a “shining star.”
Such confidence is not unfounded, as developments are moving forward to capture demand in the Carolinas’ top markets. Tiffany Barrier, senior vice president of retail services at CBRE|Raleigh, wrote that in 2022 alone, downtown Raleigh featured the delivery of 301 Hillsborough at Raleigh Crossing (Barings), Tower Two of Bloc 83 (City Office REIT) and construction of Seaboard Station (Hoffman & Associates). She also wrote that downtown Durham likewise “boasted major groundbreaking, retailer and restaurant announcements.”
Brokers and developers interviewed for this article vocalized a consensus not just on the fact of retail’s promise and strong showing in the Carolinas, but also on one of the major contributing factors: the robust population growth in both states.
William Mees, director of development with Midland Atlantic, attributes the influx of new residents to “a favorable tax structure” as well as an agreeable climate, noting that the weather is especially fantastic when “compared to a gray February day in Cincinnati,” which is where Midland Atlantic is based.
Holloway additionally observes that the cost of living is substantially less in the Southeast than what one might find in the Northeast or the West Coast, adding that “South Carolina has always been a very business-friendly state, and that’s why [it] keeps attracting the likes of BMW, Michelin and Boeing.”
According to the U.S. Census Bureau, the total population in South Carolina rose to 5.2 million in July 2021, marking a 13 percent increase from 2010’s figure. In North Carolina, the population grew by 133,000 people from July 2021 to July 2022 alone, with a 10 percent increase between 2010 and 2021.
Holloway and Tenney also note that “vacancy rates are near historic lows in the Greenville market — below 4 percent.” Colliers’ report for retail in the Greenville-Spartanburg market confirms as much, placing vacancy in the third quarter of 2022 at 3.45 percent, a decrease from 5.1 percent in the third quarter the year prior. Vacancy rates have behaved similarly in Charleston, where Colliers’ third-quarter 2022 report remarks the “vacancy rate is considerably lower than it was pre-pandemic.”
This is in part the result of a disparity between a robust demand for space and the amount of new construction being delivered. As Tenney puts it: “There is more demand for this market — from companies that are already in the market and those that are outside of the market — than there is supply to keep up with it.” The Reedy River Retail duo says they have 15 development deals in the pipeline themselves.
Unsurprisingly, rental rates have seen a shift in the opposite direction. According to a market report by Marcus & Millichap’s Institutional Property Advisors division, asking rent in Charlotte as of the third quarter of 2022 marked a 7.3 percent increase year-over-year. Even more dramatic, asking rates in Southwest Charlotte displayed an increase of 16 percent in the first half of 2022.
Tenney says that he has been surprised by the price tenants are willing to pay for retail space. Citing Simpsonville, a southeastern suburb of Greenville, the broker notes that while a couple of years ago, prices per square foot sat “in the teens,” those rates were soon pushed to $25 per square foot.
Now, a new development the team is working on is leasing at $43 per square foot. According to Tenney, national tenants have not even batted an eye at these rates.
Midland Atlantic is currently underway on Morganton Park South, a mixed-use development in Southern Pines, a city in central North Carolina that is roughly equidistant to Charlotte, Greensboro and Raleigh. Mees says that much of the space at the project is leasing at rates in the high 30s and low 40s.
Raises to rental rates are necessary to compensate for costs of land acquisition and construction that have steadily risen. Luckily, the strong demand for space in the area renders higher rents acceptable, if not palatable.
“The overall appetite for the market — and really the Southeast as a whole — is so strong that we’ve been able to compensate for sellers’ expectations on land not coming down and construction costs that have continued to creep up,” says Tenney.
Food Fights
“Appetite” seems a fitting word in the discussion around retail in the Carolinas, as restaurants are currently playing a central role in the market.
Portman’s projects currently include Magnolia, a 189-acre mixed-use development in Charleston; Savona Mill, a 27-acre mixed-use redevelopment in Charlotte centered around a former textile mill dating back 105 years; and 2161 Hawkins, a 370-unit residential development in Charlotte that will feature 18,700 square feet of ground-floor retail and restaurant space.
Zuckerman says that at each of these developments, there is a focus on chef-driven concepts. Recently signed tenants for 2161 Hawkins include Bar One Lounge and 800 Degrees Woodfired Kitchen.
Holloway of Reedy River notes that the restaurant industry is the retail segment seeing the greatest expansion and references what he refers to as the “coffee wars” and “chicken wars.” Chicken concepts coming to the market include
Raising Cane’s, Slim Chickens, Popeyes and Huey Magoo’s, says Holloway.
“On the coffee side, Dunkin’ is making a strong push. You’ve got some smaller-format coffee users like 7 Brew, Scooters, Clutch Coffee and Summer Moon,” he adds. Though, coffee and chicken aside, “there are a bunch of restaurants and those types of users branching into the Southeast and into the Greenville market specifically.”
Restaurant users have been prolific in the Charleston and Greenville-Spartanburg markets as well. More specifically, experiential food-and-beverage tenants are meeting with a good deal of success. This echoes another of the dynamics at play in the top markets of North and South Carolina (and beyond) — retail is evolving by necessity.
Evolution Over Extinction
Though retail may be alive and well, it has had to shapeshift to remain so. As Holloway briskly summarizes it: “COVID forced all retailers to innovate or die, essentially.”
Traditional retail formats such as big-box retailers and shopping malls of yore have given way to a focus on mixed-use developments and the social potential of retail experiences.
“People are social creatures,” says Zuckerman. “They want to get out of their homes and gather with their friends, and mixed-use projects like ours with an activated retail component are where they are choosing to do this.”
Tenney adds that there is a focus on creating spaces where people can “hang out for several hours.” This is epitomized in one project currently underway in Greenville that the Reedy River pair is working on, Pelham Exchange, which will include features such as green space, a large outdoor stage, a brewery and different restaurant options.
Midland Atlantic’s Southern Pines development, which is mixed-use by virtue of a multifamily aspect, will still incorporate a fair share of retail of the hard- and soft-goods variety. Anchored by a Target store, the project will also feature a 60,000-square-foot combined Dick’s Sporting Goods and Golf Galaxy, as well as a 24,000-square-foot HomeGoods. Five Below will also occupy 9,500 square feet.
Holloway and Tenney note that convenience has become paramount in post-pandemic retail consumption.
“Retailers are much more dependent on convenience — you’re seeing a lot of pick-up windows, drive-thrus and third-party delivery options,” says Holloway. “Retailers really are just trying to find a way to make the experience as painless as possible for the customer, because if there’s a long line or a slow drive-thru at one restaurant, they can go next door and get something of similar quality for half of the time and half the cost.”
Other legacies from the pandemic and its ensuing tribulations can be seen in lease terms, according to Mees, who says that some tenants continue to ask for “pandemic-style” protection in their leases.
Flexibility has been essential not only on a conceptual level as retail reinvents the ways in which it manifests itself, but likewise in the practicalities of doing deals in the current landscape, economically and logistically fraught as it is.
One trend, which Holloway and Tenney expect to see an increased emphasis on in the year to come, is a focus on second-generation space and adaptive reuse projects, as opposed to new construction.
In addition to the echoing the pair’s observation on the impact of heightened interest rates —Midland Atlantic was fortunate in securing financing for its Southern Pines project before rates began to spike— Mees cites supply chain issues and contractor availability as impediments to ground-up construction projects.
In spite of the obstacles though, the tone throughout the Carolinas is one of optimism. The commercial real estate industry needs only to look to the example of retail itself and embrace adaptation.
As Holloway puts it: “When the market conditions get challenging, you can’t stop making forward progress. You just have to get creative.”
—Hayden Spiess
This article was originally published in the March 2023 issue of Shopping Center Business magazine.