The year is now half over, and some clear trends are emerging in commercial real estate.
This resilience comes at a time when the office sector faces the challenge of large amounts of sublease space entering the market, and the multifamily sector is experiencing flat absorption and a slight decline in rental growth amid a surge of new supply. The industrial sector continues to shine, although its record-setting performance appears to be entering a new phase of more modest absorption and demand levels.
Limited New Supply Creates Competition for Retail Space
In Atlanta’s retail sector, the vacancy rate at the mid-point of the year is 3.7%, a historic low for the market. In addition, year-over-year rent growth is 6.7%, positioning Atlanta as one of the few markets in the country where rent growth is outpacing inflation.
What accounts for these impressive stats?
Metro Atlanta is benefiting from continued strong job growth – which has doubled the U.S. average over the past few years – and the return of robust population increases, posting a 1.5% rise in new residents as of the first quarter of 2023.
“Because of the population growth, what we’ve seen in Atlanta is we’re one of the top markets for total absorption and for rent growth,” said McShane.
There has been minimal new retail supply added to the market, and the growth of experiential concepts is heightening demand for space, backfilling vacancies including those that are occurring due to some high-profile retail brand bankruptcies.
“We haven’t built a lot of spec development, so we’ve only built the property that we need, really. And over the last 10 years, we’ve seen leasing activity in retail outpace new deliveries, so that’s led to a compression in vacancies,” McShane said.
He added, “Free-standing retail, power center retail, neighborhood centers, places close to people’s homes that provide experiential retail, and that provide goods and necessities that can’t necessarily be bought online, are really seeing very tight compression because there’s not enough new supply coming online. Not much has been built since 2010.”
Negative news, including the declared bankruptcies of Bed, Bath & Beyond and David’s Bridal, are not likely to have a major impact on the market.
“These announcements of bankruptcies have captured a lot of headlines, but if you look at what’s happening to these spaces they’re vacating, I guarantee there’s several letters of interest going out for those spaces in every market that are high-quality, well-located retail space, which is very scarce in every market.”
He said the retail sector can expect headwinds due to the shaky state of the economy, but noted that Atlanta is in a strong position to weather potential obstacles.
“We do expect rental growth to slow down going forward because we are starting to see a little bit of a slowdown in consumer spending and retail leasing,” he said.
But the long-term prospects are encouraging for the retail sector in Atlanta, as population growth continues to drive demand while the new supply pipeline remains comparatively limited.