October 27, 2023

Retail Commercial Real Estate, Southeast ICSC Edition: The Season of Re-Evaluation

Authors: John Orr CCIM, Elyse Welch CCIM, Lindsey Halter CCIM

There are a few constants in the lives of retail commercial real estate folks in the Southeast. The Major League Baseball playoffs, Atlanta ICSC, and Johnny’s Hideaway. True to form 2023 did not disappoint, with one overwhelming theme bubbling out of every mouth, pitch book and deal sheet.

Tis the Season of Re-Evaluation.

Things have been good – very good for a long time. Low interest rates, abundant (and cheap) equity, job growth, and consumer demand = good times! That’s been the new normal since coming out of that little global pandemic. Leasing velocity and development activity on a compelling growth curve painting a rosy picture of the market.

However, not everything was as serene as it seemed. A series of escalating interest rate hikes took the market by storm. Rates soared from nearly zero to over 5.0% within a year, posing significant challenges for investors and developers reliant on loans and debt, fundamental components of commercial real estate investments.

The once sought-after Single Tenant Net Lease (STNL) investments began to lose their charm. With the introduction of Treasuries as an “Alternative investment”, many investors started redirecting their funds. The rapid increase of Net Lease investment supply, driven by retailers aiming to capitalize on post-pandemic consumer demand, further suppressed the market’s appeal.

The rapid spike in interest rates left many new projects, which often take months or even years to deliver, in a precarious position, with some unable to turn profits quickly enough to offset rising interest and materials costs. One developer even remarked on the potential for losses, even if everything went according to plan. To navigate these challenges, industry players are resorting to value engineering, imaginative capital arrangements, and hard conversations about this new reality.

But it’s not all doom and gloom. Retail occupancy and rental rates are reaching unprecedented highs in most regions. Even as the cost of launching new projects continues to rise, consumer demand shows no signs of slowing down.

So, for those curious about the current state of Retail CRE: it’s all about Re-Evaluation. Whether you’re a landlord, tenant, developer, broker, banker, or investor, it’s time to assess the landscape and adjust strategies accordingly. Remember: adaptability is key. Here’s to navigating these tumultuous waters and thriving in the years to come.

Stay Alive Until ‘25!