Developer Connolly Has Decided To Buy Its First Retail Properties
For nearly half a century, Connolly Investment & Development has been a prolific developer of Atlanta retail and mixed-use real estate, starting with neighborhood strip centers in the 1970s and 1980s.
Now, Connolly is engaging in something it has never done before: buying existing retail properties.
Connolly purchased Towne Lake Plaza, a 28K SF fully leased strip center in Downtown Woodstock for a little more than $4M, or $144 per SF, from Dallas-based Murchison Commercial Real Estate Inc. in June.
Connolly CEO J.R. Connolly told Bisnow that Towne Lake is the first of what the firm expects to be many acquisitions throughout the Southeast. So far, Connolly has one other center it declined to identify under contract in north Metro Atlanta.
“In 49 years, we never bought a stabilized property basically unless we were going to tear it down and put something new and exciting on it,” Connolly said. “We are seeing more and more opportunities in buying older projects.”
Connolly said he is betting that roadwork along Towne Lake Parkway will integrate the 1990s-era shopping center into the overall Downtown Woodstock revitalization. The city is creating a roundabout along Towne Lake Parkway with sidewalks, which directly connects to the property to the downtown district, Connolly said.
“We think that will be a big part to make it more accessible to pedestrians coming in,” he said.
While not completely turning away from new development, Connolly said investing in value-add retail will keep the firm busier today than building from the ground up. The firm is finishing a 7K SF strip center anchored by Starbucks and Five Guys at Arbor Place Mall in Douglasville and a 13K SF strip center, anchored by Los Abuelos Mexican Grill, that is part of the larger Marketplace Terrell Mill retail project in East Cobb County.
Connolly also is working on Parkside at Dresden, a mixed-use project next to the Brookhaven MARTA Station. Connolly said he was uncertain when the firm would break ground on the project.
“Quite frankly, we can't find enough [sites] for straight ground-up development,” he said.
Many retail developers are pivoting to acquisitions for a number of reasons, Coro Realty Advisors President Robert Fransen said in an email. Land is getting more expensive, and lenders are more willing to give money to buy existing properties since there are already rent-paying tenants in place. Properties can often be bought below the cost it would take to develop them anew, Fransen said.
Local governments also are becoming more difficult to navigate when it comes to breaking ground on proposed developments.
“We are in the part of the business cycle where municipalities are more stringent. Early in cycles — coming out of recessions — municipalities are excited to see activity and new property taxes,” Fransen wrote. “As a result, they are more likely to work with developers. [But] we are now in the NIMBY part of the cycle.”
Despite the pandemic recession, investors have been hungry for retail real estate across the nation. Buyers are expecting to shell out $30B by the middle of this year, according to a Marcus & Millichap midyear report, with the average price increasing 4%. In Metro Atlanta, values have gone up faster, increasing 8% during the first half of the year to $240 per SF. The metro area is attracting capital from investors who are fleeing markets that are perceived to have a longer recovery period, according to Marcus & Millichap.
While current landlords are not facing a wave of distress as was once feared — they are collecting 91% of retail rents, according to Marcus & Millichap, the most since March 2020 — Connolly said he is finding more motivated buyers, many with partners who are seeking to liquidate their holdings.
“I wouldn't go as far as to say they are distressed,” he said. "But there is more motivation to sell at pricing where it is today than in the past when people thought they could get a fuller price."