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Atlanta Is A Retail Investment Darling

There was a time when many institutional investment firms had a big red X on Atlanta when it came to retail.

In 2007 and 2008, Atlanta's economy took an uppercut to the chin. More than 248,000 jobs were lost in Metro Atlanta — one in every 10 — and 250,000 homes fell into foreclosure. Retail took the haymaker hard, with stores going dark and shopping center owners struggling just to cover basic maintenance costs. It was not a place many investors looked to for easy profits.

Then something changed.

Clearwater Crossing, a 90,500 SF Kroger-anchored shopping center an hour north of Atlanta that recently traded to an Atlanta investor.

“All of the sudden, the employment stats out of Atlanta just started to turn and surge,” said David Schreiber, a managing director with Chicago-based LaSalle Investment Management. “It was a surprise, because [Atlanta] came out of the recession fairly slow.”

Investors shelled out $1.7B for retail properties last year, according to Colliers International. On top of that, the price per square foot investors are paying for properties continues to climb from 2016 lows, according to a Marcus & Millichap report. Despite the larger gloom and doom in the industry — where many retailers have gone bankrupt or sway at the edge of doing so — leasing in Atlanta has surged, leading to a vacancy rate that has dropped to 7.2%, a 10-year low. 

Couple that with historically low levels of new retail development, and retail investment experts see a rich recipe for income growth. More than 2M SF of prime retail delivered — much of it in mixed-use projects — during the past year, much of it already leased by the time doors opened.

Price per square foot averages for retail shopping centers in Atlanta, per Marcus & Millichap

“Strong net migration and household formation metro-wide are driving retail sales above the national average in Atlanta,” Marcus & Millichap officials stated in the report. “To meet the needs of the growing population and more households, several necessity retailers are under construction, including Whole Foods and Kroger."

LaSalle, which has been an active investor in Atlanta for many years, jumped into the urban retail game last year with its purchase of Restoration Hardware's upscale Buckhead multistory showroom for a reportedly more than $30M.

Since then, though, LaSalle has had difficulty finding other retail product to buy, Schreiber said. It has nothing to do with Atlanta's fundamentals, those are golden. But they are golden for all investors as they fight for, and bid up, prime retail properties that come to market.

“Any investor who is placing money on a national basis is going to be active in Atlanta,” he said.

The spectrum in which investors hunt for properties is relatively narrow with the scars of the Great Recession still fresh. The most favored retail properties are grocery-anchored centers and urban retail properties, especially those filled with restaurants or retailers who provide a unique experience, Marcus & Millichap Senior Director Zachary Taylor said.

“Investors are being particularly cognizant [as to] whether the users that they're considering are adapting to the evolving retail landscape as it relates to e-commerce,” Taylor said. “Whether it's one tenant or a shopping center full of tenants, I think investors are evaluating what tenants [they are] … and whether they'll be viable long term.”

For investors, a local area's demographics — whether the property is in Midtown Atlanta or miles outside of the city in Cobb or Gwinnett counties — is the key to whether a property will be hotly sought after, JLL Managing Director Margaret Caldwell said.

JLL Vice President Margaret Jones and Managing Director Margaret Caldwell

Most recently, Caldwell and her partner, JLL Vice President Margaret Jones, sold Clearwater Crossing, a 90,500 SF Kroger-anchored shopping center in Flowery Branch for nearly $17M to Forum Management Group.

While the center is nearly an hour north of Downtown Atlanta by interstate, Caldwell said the area, where average household incomes top $107K/year, has some of the most affluent suburban demographics in Metro Atlanta.

“Population growth in Atlanta has made grocery-anchored retail assets extremely attractive to investors,” Caldwell said. “It actually sold very quickly before we even called for offers.”

For buyers, though, finding retail properties has been tough as few centers have been put up for sale in recent months. That is a big reason why $282M traded in the first quarter, a decline from the same period last year, Caldwell said.

“Most institutional investors are being very cautious on retail investment,” LaSalle's Schreiber said. “We have a lot more capital that is looking for the security of grocery-anchored ... than the more higher-risk property. And frankly, there's not that much of a market."

But not all centers will have investors lining up to buy them. Mimms Enterprises Director of Acquisitions and Finance Brad Shoemaker said some of the firm's Class-B legacy retail centers, often in tertiary cities, have a harder time trading. Cap rates in those centers have shifted upward to the high 8% to low 9% range, Shoemaker said. Caps for more prime retail properties in Atlanta average between 7% and 8%, according to Marcus & Millichap.

“The interest is definitely still there,” he said. “Maybe it's a fear of interest rate risk. People are trying to price that in.”