The Complexity of Retail Tenant Mix


The Atlanta retail market is at a critical juncture, facing unprecedented challenges, including a sharp slowdown in construction deliveries and development pipelines that are at their lowest levels in over a decade. This has had a ripple effect on deal flow, particularly in retail, where a balanced and well-curated tenant mix is key to a property’s long-term success. Despite near historically low vacancy rate of 3.9% and record-high rents, net absorption has turned negative for the first time in four years. These trends have created a complex and competitive landscape for both landlords and tenants, each navigating new and emerging realities.

Retail real estate stands out as one of the most intricate property types to manage, mainly due to its reliance on tenant synergy and its ability to foster a unique shopping destination. With limited new supply, the intricacies of tenant mix become even more important as landlords seek to balance existing tenants with newcomers to maintain a property’s vibrancy.

  • Importance of Tenant Synergy: Success in retail hinges on how well tenants interact with one another. Anchor stores draw in foot traffic, but it’s the surrounding smaller boutiques, cafes, and experiences that create a dynamic shopping environment. The right balance creates a compelling consumer destination, vital for long-term success.
  • Landlord Constraints: With little to no new construction, landlords now face tough decisions about tenant selection. They must strategically align current tenants with any new arrivals to maintain appeal and avoid tenant churn, all while working with fewer available spaces.

Supply and Demand Imbalance: The Impact of a Shrinking Pipeline

A fundamental issue disrupting the Atlanta retail market is the steep decline in new retail space coming online. As construction deliveries hit their lowest levels in more than a decade, competition for existing space has intensified, putting both landlords and tenants in a difficult position.

  • Lowest Levels of Construction in Over 10 Years: This construction slowdown has left many national retailers, as well as local entrepreneurs, scrambling for space or putting their expansion plans on hold.
  • Effect on Deal Flow: The reduced pipeline has slowed deal activity, as fewer suitable spaces are available for new tenants. This has created a backlog of demand, with some retailers holding out for the right opportunity while others are forced to make compromises on location and space.

Vacancy and Absorption Dynamics

While the overall vacancy rate in Atlanta remains impressively low at 3.9%, net absorption has shifted into negative territory for the first time since the height of the pandemic. This shift points to several underlying challenges in the retail market.

  • Negative Absorption: The current trend suggests that more tenants are vacating than are moving in, potentially due to rising rents and space constraints. The shift may also reflect broader economic pressures and the growing impact of e-commerce.
  • Post-Pandemic Market Adjustments: Retailers are still adjusting to long-term impacts from the pandemic, including the permanent closure of some stores and shifts in consumer behavior. As e-commerce continues to thrive, physical retail spaces face ongoing pressure to adapt.

 Big Blocks of Retail Space by Age of Property

Currently, the majority of large retail spaces available for lease (defined as 20,000 sq. ft. or more) are found in older properties. Retail properties aged 25 years or older represent 84% of these large blocks, indicating that the available inventory is primarily composed of buildings constructed before the 2000s. This trend highlights a limited supply of newer retail spaces, with only 5% of the available large spaces built in the past decade.

Rising Rents: The Double-Edged Sword

Record-high asking rents in Atlanta’s retail sector reflect both strong demand and the competitive nature of the market. However, while beneficial for landlords, these rising costs pose significant challenges for tenants, particularly smaller businesses.

  • All-Time Highs: Driven by low vacancy rates, asking rents have reached unprecedented levels. Many small or independent retailers are now struggling to secure space in prime locations, leaving the market increasingly dominated by national chains.
  • Consequences for Tenant Mix: Higher rents may erode the diversity of the tenant mix, with smaller or niche retailers being priced out of desirable areas. This can weaken the unique character of retail hubs that typically rely on diverse offerings to attract foot traffic.

E-Commerce Impact

The rise of e-commerce continues to reshape Atlanta’s retail landscape, forcing both landlords and retailers to rethink their strategies for success.

  • Shift to Omnichannel Retail: Many retailers are adopting omnichannel strategies, offering options like buy-online, pick-up in-store (BOPIS), curbside pick-up, and ship-to-store. This model ensures that physical locations still play a vital role in the customer journey.
  • Impact on Foot Traffic: Traditional retail centers have seen a decline in foot traffic as consumers increasingly turn to online shopping. However, unique stores that offer distinct experiences or hard-to-find products continue to draw customers, often serving as destinations.
  • Rise of Dark Stores: In response to the rise of e-commerce, some retailers are establishing dark stores—fulfillment centers that streamline online order processing. This has become an effective model for reducing delivery times and increasing customer satisfaction.

Investor Perspective

While challenges abound, the Atlanta retail market still presents compelling opportunities for investors. Evolving consumer behaviors, supply constraints, and the market’s continued growth in select submarkets create a range of investment strategies.

  • Retailtainment Opportunities: Investors can capitalize on the growing trend of experiential retail by repurposing older spaces for entertainment-focused or interactive retail. This can increase tenant retention and drive foot traffic, especially in prime submarkets like Buckhead.
  • Prime Submarkets vs. Secondary Markets: Established submarkets such as Cumberland/Galleria remain highly attractive due to stable rents and low vacancies. However, secondary markets like Dawson/Pickens Counties offer lower entry costs with potential for higher returns as retailers expand into these less saturated areas.
  • Shifts in Consumer Behavior: Investors should prioritize properties with flexible layouts that can accommodate showrooming, fulfillment, or quick-service retail to stay relevant in an evolving market.
  • New Development vs. Redevelopment: With little new development in prime areas, adaptive reuse projects offer strong potential for returns. Identifying underutilized properties in desirable locations could yield substantial long-term gains.

Future Outlook

The next few quarters will likely be critical as Atlanta’s retail sector continues to adapt to a shrinking pipeline, evolving consumer preferences, and pressure from rising operational costs.

  • Demand for Experiential Retail: Retailtainment concepts will remain a focal point, especially in densely populated areas where consumers seek interactive shopping and entertainment experiences.
  • Growth in Secondary Markets: Retail expansion in secondary markets like Haralson County will accelerate as these areas offer affordable opportunities for new development.
  • Pressure from E-Commerce: As e-commerce further expands, retail properties that function as fulfillment centers, pickup hubs, or hybrid spaces will gain traction.
  • Long-Term Growth Prospects: Population growth and suburban expansion will continue to drive retail demand in Atlanta, particularly in its northern suburbs and exurbs.

Supplement

Focus on Submarkets with Lowest Vacancy Rates

Cumberland/Galleria

  • Vacancy Rate: 2.9%
  • Limited Pipeline: No significant construction deliveries or projects under construction.
  • Net Absorption: Negative absorption of -50,717 SF in Q3 2024, reflecting a drop in tenant demand or ongoing move-outs despite the low vacancy.
  • Current Leasing Activity: 59,517 SF, showing moderate activity as tenants compete for the few available spaces.
  • Challenges: The tight market conditions, combined with no new supply in the pipeline, suggest increasing competition among tenants for prime space. This may lead to rising rents, potentially limiting opportunities for smaller or independent retailers.
  • Total Avg Asking Rent: $16.37/SF (NNN), relatively affordable compared to other submarkets, but this could rise as supply tightens.

Northwest

  • Vacancy Rate: 2.0%
  • Limited Pipeline: With only 6,500 SF delivered YTD and 20,000 SF under construction, the supply in this submarket is highly constrained.
  • Net Absorption: Negative absorption of -20,831 SF indicates some turnover, but the extremely low vacancy rate points to a submarket where space is highly sought after.
  • Leasing Activity: 92,596 SF, which is a healthy amount of activity given the tight supply.
  • Outlook: As a market with some of the lowest vacancy, Northwest remains a prime location for tenants who can secure space. With few deliveries expected in the near future, rents are likely to rise.
  • Total Avg Asking Rent: $18.37/SF (NNN), likely to climb as space becomes more scarce.

Buckhead

  • Vacancy Rate: 2.0%
  • Limited Pipeline: This submarket has no deliveries planned for Q3 2024, but 55,000 SF is currently under construction, which may help alleviate some pressure.
  • Net Absorption: Slightly negative at -76,228 SF for the year, possibly due to tenants leaving for more affordable markets, despite Buckhead’s status as a high-end retail destination.
  • Leasing Activity: Modest at 10,568 SF, as tenants seem to be treading cautiously due to high rents.
  • Rents: Buckhead commands some of the highest asking rents in the Atlanta market at $41.79/SF (NNN), reflecting its premium status.
  • Outlook: With minimal new space coming online, Buckhead’s retail environment will likely remain tight, continuing to push rents upward. However, high prices may limit the entry of smaller retailers.

Dawson/Pickens Counties

  • Vacancy Rate: 1.5% (One of the lowest in the region)
  • Supply: Only 20,000 SF delivered YTD, and 16,000 SF under construction, which barely scratches the surface of demand.
  • Leasing Activity: Modest at 24,784 SF, which shows some tenant movement, but the extremely low vacancy limits available options.
  • Net Absorption: Positive at 18,066 SF for Q3 2024, suggesting that, despite the tightness, tenants are finding ways to enter this market.
  • Rents: One of the lowest at $12.76/SF (NNN), making this an attractive submarket for retailers seeking affordability.
  • Outlook: Dawson/Pickens Counties may see more interest from retailers, especially those seeking a lower-cost alternative to Atlanta’s core markets. However, the limited pipeline will continue to keep the market tight.

Haralson County

  • Vacancy Rate: 1.1% (The lowest in the entire Atlanta metro area)
  • Net Absorption: A modest 5,000 SF absorbed, reflecting the limited amount of space and activity in this smaller market.
  • Supply: 5,000 SF delivered this year, with no space under construction.
  • Rents: Data not available, but likely to be among the lowest in the region given the small market size.
  • Outlook: Haralson County is a small market, but its extremely low vacancy makes it a tight space for new entrants. Without any new developments planned, rents could increase here if demand rises.

Submarkets with Moderate Vacancy but High Demand

Northeast

  • Vacancy Rate: 4.0%
  • Construction Pipeline: 157,121 SF delivered YTD, with 96,330 SF under construction. While there is some new space coming online, it may not be enough to keep up with tenant demand.
  • Leasing Activity: 239,470 SF, one of the highest in the region, indicates strong tenant interest.
  • Outlook: Northeast is balancing a healthy level of supply with steady demand, but the ongoing demand pressures may drive vacancy rates even lower, making it a submarket to watch.
  • Rents: $20.60/SF (NNN), relatively high but sustainable given demand.

Across Atlanta’s submarkets, the lowest vacancy rates are coupled with extremely limited supply pipelines, which is putting upward pressure on rents. In areas like Cumberland/Galleria and Buckhead, where vacancy is around 2%, landlords are in a strong position, but rising rents could drive out smaller tenants. On the other hand, markets like Dawson/Pickens Counties and Haralson County, while affordable, face severe supply constraints that could challenge growth.

With very few new developments on the horizon, competition for space will only intensify, especially in high-demand areas. Retailers may have to adapt their strategies, either by securing space at a premium or looking to secondary markets for expansion opportunities.

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Steve Triolet
Senior Vice President of Research and Market Forecasting
[email protected]
tel 214 223 4008