Despite Emptying Storefronts, Retail Landlords Still Telling Ailing Tenants To 'Pound Sand'

For the first time in four years, retailers are emptying more storefronts than they are leasing in Metro Atlanta. 

Landlords tallied 228K SF of negative net absorption in the third quarter throughout Metro Atlanta, according to a third-quarter retail report from Partners Real Estate. 

An increasing number of retailers have been emptying space in Metro Atlanta over the past year, according to Partners, with available space rising from around 10M SF to 13M SF between the start of the year and the third quarter. 

Rising vacancy and negative absorption come as a number of major retailers announced store closures across the U.S. As of October, retailers have announced nearly 6,200 store closures, outpacing last year’s total of 5,500, CNN reported citing Coresight Research. Contracting retailers include Walgreens, Family Dollar, Big Lots and Babcock Furniture, which is exiting Georgia. 

But brokers interviewed by Bisnow aren't worried about the trend. Instead, they say the pullback comes as Atlanta’s retail fundamentals are as healthy as they have ever been, with record low vacancies and record high rents as stores and restaurants vie for few options.

Retailers inked more than 1M SF of leases in the third quarter and a total of 3.4M SF since the start of the year, according to Partners. The vacancy, despite the negative net absorption, has been below 4% for eight consecutive quarters, according to the report.

Among the larger leases signed this past quarter are Walmart Neighborhood Market's 76K SF lease at the Historic West Village, Publix Super Markets' 55K SF lease at 103 Mirror Lake Connector in Villa Rica and publicly chartered The Anchor School's 50K SF lease at Wesley Chapel Crossing shopping center in DeKalb County, according to Partners. 

Retailers have been more hesitant to jump on available spaces because what is available is not always the best location or the right amount of space, Hines Senior Director Nick Garzia said.

“While Atlanta still remains high on everybody’s expansion list, I just think they’re getting discerning,” Garzia said. 

And some retailers are starting to balk at the asking rents landlords are seeking with historically low storefront availability. Triple-net rents in Metro Atlanta climbed 2.5% in the third quarter year-over-year to $19.65 per SF, remaining at all-time highs for the metro area, Partners reported.  

Rents are increasingly becoming an issue for retailers as they look to grow their footprints in Metro Atlanta, experts previously told Bisnow. 

“We’re not doing anything in Atlanta unless it’s seriously below market,” Fred Castellucci, CEO of Castellucci Hospitality Group, said at Bisnow’s West Midtown event in August. “Those are the only kinds of deals we’re going to do at this point in Atlanta because I don’t see the sales there to justify the top end of the market.” 

Landlords also are being more choosy about their tenants, Franklin Street Director Jessica Branch said, adding that some real estate owners are turning away retailers to get more money from someone else.

"There is a lot of competition in the Southeast right now. I had two landlords say, 'Oh, I don't want this tenant because I have something similar in the center, and I have a ton of interest in the space,'" Branch said. 

While construction costs have leveled off this year, a run-up in the last few years has retail store construction costs averaging $147 per SF nationally, according to Cushman & Wakefield. Those costs are also slowing down leasing activity, CBRE Senior Vice President Amy Fingerhut said. 

“Our retail deals have started taking twice as long based on the upfront cost analysis with such high construction costs,” Fingerhut said in an email. 

Unlike in past cycles, developers have not unleashed new buildings as the available supply has dwindled. Through the third quarter of this year, developers built 1.4M SF of retail space, including just 178K SF in the third quarter, the lowest amount for a single quarter in a decade. Ten years earlier, developers opened 2.4M SF of new retail space in Metro Atlanta during the first three quarters, according to CoStar data obtained by Bisnow. 

Whereas at one time Metro Atlanta was considered one of the most over-retailed metropolitan markets in the U.S., the metro area faced “a multi-decade low” of retail space last year, according to CoStar. In 2014, there was 75.5M SF of retail space per Atlanta resident. Ten years and one million new residents later, that ratio contracted to 55.7M SF, according to Partners data.

In the report, Partners Senior Vice President Steve Triolet blamed the reversal in absorption on the lack of new retail projects rising out of the ground. In the past year, retailers focused their leasing activity on new developments.

“Over recent years, net absorption has been strongly tied to new construction, with little movement on older, big blocks of retail space. The tight market has driven a trend of renewals, as tenants face limited options for new space,” Triolet said in the report. 

Garzia also said the lack of new space in the market is making retailers wait a little longer before jumping on leasing any existing space. 

“I think the lack of new product is a big, big factor in all of that,” he said. 

Ryan Holzer, the president of Skyline Seven Real Estate, said the negative absorption is likely from landlords who intentionally want to empty out space to make way for stronger retailers who are willing to pay higher rents. Holzer said struggling retailers have been seeking rent concessions from landlords to no avail.

Landlords have been telling struggling retailers “Go pound sand. I can get a retailer in here for $2 more in rent,” Holzer said. “Sometimes you got to take a step backward to move two forward.”

But with interest rates dropping, developers will likely be spurred to add to Atlanta’s retail market again, Holzer said. 

“Unless you want to overpay right now, don’t build it,” he said. “I think once interest rates go down, you'll be seeing a lot more interest-only loans go out next year,” which will encourage more retail development.