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Investors Chasing Atlanta-Area Retail, Keeping Cap Rates Down

After years as the runt of the commercial real estate litter, retail properties, especially in Sun Belt markets like Atlanta, have drawn an outsize share of investor interest in recent months.

While the flow of shopping center sales has slowed, interest rate hikes and rising costs of debt haven’t deterred investors from buying retail in Metro Atlanta, especially centers with high-profile retailers with good credit. 

“There’s a lot more demand for the shopping centers with credit national tenants,” Bull Realty President Will Young said. “That’s where I’ve been surprised. People are willing to pay more for the tenants.”

Shopping in the era of the coronavirus.

In October, Nuveen Real Estate sold a Walmart Supercenter in Fayetteville for $24.5M — a price that wasn't much lower than it would have been a year earlier, before the Federal Reserve went on an aggressive inflation-battling campaign, said Colliers Vice President Michael Brewster, who helped broker the sale to a New Jersey investor.

“People want security. People want reliability,” he said. "And that sale represents that."

Nearly 25M SF of retail buildings traded hands in 2022 in Metro Atlanta, close to the high watermark set in 2021, according to a recent Cushman & Wakefield report. Regional, national and international investors are in the market, helping to push prices and capitalization rates down last year, despite rising interest rates, C&W noted.

Investors purchased 111 retail buildings last year worth $10M and more, up from 98 in 2021, according to data from Reonomy. Among the top sales were North American Properties’ purchase of The Forum at Peachtree Parkway in Peachtree Corners for $123.5M; Continental Realty Corp.'s purchase of The Shoppes at Webb Gin in Snellville for $97M; and CTO Realty Growth’s buy of the Collection at Forsyth, a 560K SF power center in Cumming for $96M, according to Cushman & Wakefield. 

“Retail has been the ugly stepchild up until the beginning of Covid,” Northmarq Managing Director Margaret Caldwell said. “[Cap rates] haven’t changed as much for retail, especially when you’re talking about grocery-anchored. We can get more yield out of retail.”

Cap rates, or what the expected yield on a building is given its current revenues, bottomed out last year, with the strongest transactions dipping below 5%.

Since then, cap rates nationally for retail properties have risen the least among commercial real estate asset types, said John Chang, the national research director for Marcus & Millichap. Retail cap rates were generally up less than 50 basis points to the mid-and-upper 6% range, while multifamily cap rates jumped an average of 50 to 100 basis points and office cap rates rose by as much as 200 basis points, Chang said. 

"Retail properties generally offered higher yields through the valuation surge of 2021-22, so they offered some yield spread over the cost of capital as interest rates rose," Chang wrote in an email. "That, together with generally sound performance metrics, especially for neighborhood and community centers, has supported greater valuation stability in the retail sector."

Marcus & Millichap First Vice President Zach Taylor — who said he sold 48 retail buildings last year at an average transaction price of $8M — estimates that cap rates for power centers and lifestyle centers have risen 100 basis points from last year. Unanchored strip center cap rates were up 75 basis points, while the cap rates of grocery-anchored centers have risen by 50 basis points as investors flock to those investments, he said. As a rule of thumb, the lower the cap rate, the more an investor was willing to pay for the in-place rents.

“Pricing has absolutely shifted, but the product type determines how much it shifted,” Taylor said. 

Retail fundamentals also held up last year. Retail vacancy decreased to the lowest figure in Atlanta's history at 3.5%, according to Cushman & Wakefield, after almost 2.8M SF was absorbed, twice as much as in 2021.

Leasing activity slowed in the second half of last year, but that was more as a result of the lack of available space. Demand helped push triple-net rents to a record high of $18.39 per SF in the fourth quarter, a more than 35% increase from 2020, according to Cushman & Wakefield. 

Young said rampant inflation is actually having a positive effect on retailers: They’re making more on their merchandise relative to their rents. That dynamic also has many owners holding off on selling their centers, Brewster said. 

“Rising cap rates due to interest rates are offset by many owners not feeling the pressure to transact until markets stabilize,” Brewster said. “I sold a McDonald’s for a 3.2% cap rate in April and a Raising Cane’s for 3.8% cap rate in the summer. Only a few people at the time realized that was peak pricing. There is zero asset-level stress when I’m selling a McDonald’s or a Walmart.”

Due to the population growth story for Metro Atlanta, experts say there remain plenty of willing buyers on the sidelines. 

“Anybody who has been active in the retail investment space over the last 10 to 12 years has been rewarded for being in the game,” Taylor said. “I don’t see [investors] getting out of the game. They’re just waiting.”