The development of retail space is expected to continue following the rapid growth of residential construction in Charlotte, but the demand for luxury retailers and value retailers could make things difficult for retailers targeting middle-class consumers. And counter to national trends, community shopping centers are seeing some of the greatest growth.
Real estate firm Crossman & Co. recently released its Southeastern retail market report for spring 2015, which said to look for the continued success of luxury retailers and value retailers, and that the middle will be “deadly” for those retailers.
“The current tenant activity follows the market demand for luxury and value-priced products and services,” said Trent Gustafson, president of Gustafson Partners Commercial Real Estate.
Charlotte saw 946,000 square feet of retail construction started between third quarter 2013 and third quarter 2014, the most of the five markets that Crossman & Co. looked at in depth. Atlanta was second, with 900,000 square feet of retail space started.
The report’s projection for the deadly middle is based on the widening wealth gap in the U.S. and the stagnant salary increases for middle- and lower-income consumers in the past several years.
Salaries for the top 1 percent of earners in North Carolina increased by 22.7 percent from 2009 to 2012, and the bottom 99 percent decreased by 1.8 percent during that same time, according to the Economic Policy Institute, a nonprofit research organization based in Washington, D.C.
“Sometimes those things in the middle feel the crunch,” said John Crossman, Crossman & Co. president. “The retail in the middle can sometimes feel that, whereas the two ends on the high and the low tend to do well.”
Brian Craver, senior vice president of brokerage at Cushman & Wakefield│Thalhimer, said Charlotte is reaching a level of density that is more attractive for high-end retailers, particularly in south Charlotte.
“Certainly I would say that the high-end retailers are focused on the southern wedge because the demographics are so strong there,” he said.
The average rental rates in Charlotte’s inner southeast and outer southeast submarkets, which contain SouthPark Mall and the Promenade on Providence “lifestyle center,” were both more than $23 per square foot as of second quarter 2014, whereas rental rates in the northwest, northeast and eastern submarkets were all below $18 per square foot, according to Karnes Research Co.
Armani Collezioni, a sub-label of Giorgio Armani, opened a store in SouthPark Mall’s Neiman Marcus wing last summer, and luxury jeweler Kendra Scott is set to open a store at SouthPark on March 30.
Bucking national trend
A recent National Real Estate Investor report said that while vacancy rates nationally for class-A malls are at historically low levels, the vacancy rate for community and neighborhood centers has “barely budged” over the past few years. The report projected that the demand for community and neighborhood centers is shifting towards other types of shopping centers.
“The rise of lifestyle centers, town centers, power centers and, more recently, outlet centers, is undoubtedly siphoning demand away from neighborhood and community centers and even some weaker malls,” the report said.
Neighborhood centers are typically anchored by a supermarket, and include stores that offer convenience goods for shoppers’ day-to-day needs. Community centers typically have two or three anchor tenants and offer a wider range of retailers, such as clothing, electronics and home improvement, according to National Real Estate Investor.
But Gustafson said he had not noticed that happening in Charlotte, with the exception of one or two projects.
“What I’ve seen in Charlotte is the opposite. I’ve seen the neighborhood centers more active,” he said.
Community centers and neighborhood centers both had more space under construction than power centers as of second quarter 2014 and more than twice the amount of combined proposed space, according to Karnes Research.
Crossman also disagreed with the National Real Estate Investor prediction that the demand for neighborhood and community centers would decline.
“The challenge of power centers today is that the anchor tenants are shrinking,” he said. “When you come back to neighborhood centers, they’re never going to stop.”
Power centers contain several big box stores and additional smaller retailers and are either freestanding or in strips.
Grocery store wars
The National Real Estate Investor report did make an exception for neighborhood and community shopping centers that are anchored by grocery stores, and said they aren’t going away anytime soon.
Crossman & Co.’s report said a lot of Charlotte’s shopping center development was due to grocers, particularly Publix, which opened nine stores in the Charlotte region last year and is scheduled to add another six in 2015.
The report quoted Josh Page, commercial asset manager at South Carolina-based Pacolet Milliken Enterprises Inc., on the competition that’s set to occur among Charlotte grocers.
“We have not seen battles in (the) Southeast markets that are as hotly contested as the Charlotte grocery market is now, and will be in the near future,” he said.
Most recently, Publix opened a store in Cornelius last week, and is expected to deliver a store later this year at South Boulevard and Iverson Way in South End. The 55,000 square foot store will anchor the Shops at Southline shopping center, which will also have more than 8,000 square feet of retail space.
But several industry professionals said the popularity and convenience of online shopping is hurting all retail development, with the exception of grocery-anchored shopping centers.
Andy Misiaveg, partner at The Shopping Center Group, said consumers have more shopping options now than ever, which has not only affected in-store sales, but also retailers’ demand for space.
“They’re all just trying to get more efficient within the box that they have now,” he said, noting a lot of retail development has turned to repurposing existing buildings as opposed to building projects from the ground up.
The occupancy rate for Charlotte shopping centers fell slightly in third quarter 2014 from third quarter 2013, but shopping center rents during that same time experienced the highest percentage increase in more than five years, according to Crossman & Co.’s report, which also said rental rates are expected to climb between 2 percent and 5 percent in 2015.
Misiaveg said brand loyalty, although difficult to acquire, was the best way for retailers to draw customers into stores.
“The experience in the store really has to resonate with a customer for people to keep going back to it,” he said. “I think it’s just the nature of retailing today.”