1Q24 Retail Market Update with Tyler Brock

In today's episode we discussed the strong performance of the Nashville retail market, trends in investment sales and leasing activity, opportunities for retail investors to acquire class C properties, strategies like developing micro units, challenges facing shopping malls, and more.

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Key Takeaways:

• Retail occupancy in Nashville is above 97%, showing retail's resiliency despite challenges like the pandemic

• Rents have been increasing, currently averaging around $27 per square foot but higher in areas like East Nashville

• Investment sales of retail properties have been occurring, though development of new retail space remains low at around 1.1% of total inventory

• Mixed-use and smaller footprint retail spaces around 5,000-10,000 square feet have been more attractive to tenants and landlords

About Your Host:

Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate broker and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving commercial real estate investors.

Episode Transcript:

0:00

This episode of the commercial real estate investor podcast is brought to you by cre launch Pro. This online commercial real estate program is designed to take you from beginner to pro commercial real estate investor with access to all of my courses, our online community and monthly group coaching calls. Learn how to confidently buy your first commercial property today at www dot c r e launch pro.com.

0:24

Welcome back to the commercial real estate investor podcast live from the condo group studios in Nashville, Tennessee, and today we're diving into a new segment that we'll be bringing to you every quarter, which is a in an asset class market update. Today we're diving into the retail market with Tyler Brock, he is one of the brokers on my team that is specializing in mostly investment sales, but also some leasing on this front as well. And we'll be diving into that today. So Tyler, what's going on, man? Hey, good to see you. Hey, man, what are you might wanna move it a little bit closer your mouth? I typically keep it right about here.

0:56

Gotcha. Appreciate you having me. Yeah, man.

0:59

Thanks for Thanks for coming on the show. And, you know, funny enough, even though Brock works with me, this is the first time that he's actually come into the studio. So happy to be here, man. Yeah, fun thing to check out. Right? What's what's going on in the world retail man? I mean, you know, it's, it's interesting, right? So So 10 years ago, retail went through the apocalypse. And a lot of investors and I guess people in general are saying, retail is dead. It's never coming back. You know, Amazon has killed everything. And office is going through something similar now. Right. But retail seems to have made a turnaround. So tell us a little bit about your report.

1:34

You know, I'll hit on some of what you just said there first. You know, I think a lot of people thought that and the retailers now have kind of used that to their advantage. You know, there was the there was the ecommerce scare. You've now a lot of people who are implementing whether it's influencers, social media, you've got aI out there now where you can track cell phone data, things like that. And so I think that they have used a lot of that to their advantage. I certainly don't see retail going anywhere in this report will kind of hint to that as well. But I think there's a lot of positive based off that change. I think that retails proven its resiliency as well. You know, we had the shutdowns and 2020. We had the the supply chain lows right after that, then there's labor constraints. And then again, the E commerce scares. And so you know, retail, especially here in Nashville, but really across the nation has has really bounced back in in great form. Nashville especially has been extremely hot. We started really feeling good about midway through q4 of last year, but then into this year as well. It has been, it has been lights out. I think a lot of that here, at least here in Nashville has been fueled by tourism. I think it's been in the increase in population, you know, we've had a 20% increase in population within the city over the last 10 years. We're expecting another 500 500,000 people to move in within the next 20 years. You know, we've had a lot of lot of lot of interest from big name companies coming here as well, you know, most notably, we've got Amazon, we've got Oracle, you've got all celebrity bars coming downtown. And so I think that that's just going to continue to expand there.

3:12

It's a it's a great market, right? I mean, Nashville was named by Uli to be the number one market in the United States for the third year in a row. And for those of you that are listening are joining us on YouTube. We have a link in the description below for you to go download the retail market report that towers put together. It's excellent covers mostly Nashville, but also talks about some nationwide trends as well, for sure. And so yeah, you were talking about some of the bigger names what are some of the bigger, I guess groups that are moving in the Nashville area right now.

3:41

You know, there are there are many dimension here. But while while we've seen these are some of the tertiary markets as well, but while while you've got buches Kroger has just announced that in Clarksville, they're putting in their new concept there and which is going to be the marketplace. And so they're going to expand out of just their normal footprint and and they're actually going larger, whereas we'll talk about I'm sure here shortly that the trend between landlords and consumers and and and investors as well has been trending toward a smaller footprint but the Kroger marketplace that they're putting in Clarksville is going to be much more resemblance of a Walmart Supercenter. So they'll have clothing, they'll have electronics, things of that nature as well. But you've got Dunkin that's made a huge push, you've got Starbucks, it's made a huge push, you've got scooters, that's made a big a big push as well. And then the the local guys here to you know, the beyond the one in two location but the eight, nine and 10 locations. And Melrose for example, continues to expand and grow as fast as possible and as fast as they can find space. And that seems to be the issue is Where do they find space?

4:43

Yeah, it's tough. I mean, there's not a whole lot of turnover because there's not a lot of new deliveries coming into the market. So tenants don't really have options to move anywhere else. And seemingly they don't really want to move. Can you talk about where the occupancy rate is today and where the turnover is?

4:58

For sure. So in As far as retention rates will start their retention rates as far as the tenants that were there and staying in place is sitting at 97% within Nashville. And that's pretty much consistent across the board within the nation. occupancy in Nashville now we'll exclude shopping centers, they enclose shopping centers, but occupancy is just above 2%. The vacancy is just above 2%. In Nashville, which is massive. You compare that to a to a multifamily type model, where they've got the highest vacancies they've had in over a decade at just above 12%. They're also showing falling rates, whereas the retail rate, we've had one of the fastest growing in the nation, we're actually were double the national average at 6%, six and a half percent rather. And so you know, occupancy, the rate increases. And then like you mentioned, the lack of delivery, which we can touch on more, I think points all to some very, very positive things within this next year, and then even beyond. Yeah,

5:54

let's get into the fundamentals here in a second, we've got a question from Evan jumping into the live chat, he's saying, Have you ever built new construction? Retail? If so, is there a good amount of equity after a build? And yes, I have, we've been involved in a lot of retail projects over the last 10 years that have been in commercial real estate. And the amount of equity that you can have in the project after you've completed, it really depends on where your construction costs are, and where you're able to lease it for, right. I mean, if you're able to build it incredibly cheap, and somehow get $30 a square foot and rent, you know, those those buildings are based, their valuations are based on cap rates. So if you're in a great area, you can get a 6% cap rate, you'll have quite a bit of equity built up into that. And you can either, you know, do the burr model, where you buy rehab, rent refinance, repeat, where you basically just refi out of your construction debt, pull some equity out and move on to the next project, or you could sell it 1031, exchange that chunk of cash into the next project and move on. The problem is today, construction costs are so high that it's very tough to make a lot of these deals work, especially just on the financing side, where you're trying to get a winter to give you the money. And in order to do that most of them are requiring you to have fully executed leases with some of your tenants. So it's a very lucrative business to get into just like any development, it can be somewhat risky. So just make sure you know what you're getting into, before you do it. Yeah, well, let's, let's talk about the fundamentals. Sure. So where are we at on rents? And how is that working, because you know, especially coming out of COVID, people were thinking, oh, you know, people are going to be shopping as much, they're not going to be going out to the stores as much or the store is going to survive.

7:33

Sure. And so, like, like we had talked a little bit previously, I think guys are really using that to their advantage. There is a study showing that about 75% of people really under 40 is where most of this came from, within a two week span is shopping both in store and online. Now online, that's only accounted for through 2023, at least for about 16% of total sales, which surprised me. And so I think that you see more and more drive to the consumers going into stores. A lot of things that we've seen in shopping centers are some non traditional type type tenants as well. So we've got a lot more medical going in, whether it's optometrist, or chiropractic, something of that nature. But some things that that really you have to go in. And so really what they're seeing is what they call the halo effect, where again, they're utilizing this social media, or they're utilizing the online marketing. And people are finding the products that they like there, but then actually going into the stores and purchasing them. I mean, I know I do that with things like Home Depot, and things of that nature as well. And even even, you know, clothing. And so I think that we see more and more of that. And I think that the consumer, I think that rather the tenants who lean into that are gonna see increased foot traffic in their, in their centers there.

8:43

Yeah, this is one of many reasons that I love owning a brokerage being involved in brokerage and talking to brokers all the time, is that brokers are the boots on the ground. So if anything happens in commercial real estate, they'll know about it before just about even anyone else, including investors and lenders, because, you know, they are on the front line, working with the tenants working with the buyers, and they can see, you know, when banks start to pull back or when some type of, you know, use starts to take off. So for example, you know, a couple of years ago when interest rates started spiking. Phil on our team, he was working with a lot of triple net lease investors. And triple net leases are basically cap rate arbitrage, right? If interest rates go up, and cap rates stay the same, you can't make those deals work. And almost within 30 days, we saw a complete halt in that industry and so we said okay, the net lease sale side of things is going to hurt for a little bit and it didn't really come out until 3456 months later and we saw it you know really starting to struggle and people started to raise their cap rates to get property sold. So let's let's talk about investment sales your what have you seen any notable transactions in Nashville and where are we kind of looking at on a price per square foot basis?

9:58

So price per square foot But on a market average, through 2023, at least we're sitting at about $27 A square. I think that you know, there's obviously some fluctuation as to where you're at and the kind of shopping center that you're going in majority of the developments. And back to Evans question here as well, majority of the developments that we're seeing outside of, you know, some of the larger sales like the Bell made shopping center, who would Ajay capital, I believe, purchase that. But most of the developments that we're seeing are all either multifamily or mixed use. And very little that square footage has been devoted over to retail. The development, the retail development from 23 was just at 1.1% of what the total total inventory is on the market right now. Majority of that was coming from the tanker outlets that was delivered over in Antioch. And of these deliveries that are coming in 75% of them are leased, by the time they hit the market, which I was pretty surprised by moving into 24, we've only got a half percent of the total stock. That's that's new development coming to the market. And again, it's being leased very, very quickly. And so notable developments and sales is really surrounded around the mixed use type type developments there. That's That's again devoting very, very little to retail, despite the increased rates and the high occupancy,

11:15

you know, there's a lot of opportunity for investors to buy retail condos. You know, we've seen that over over the years, because a lot of multifamily developers don't really want to deal with the retail, but a lot of cities are requiring them to have retail as part of the development because it makes the development better, it makes the neighborhood better, which is pretty nice to see. And we've we've seen some of those multifamily developers actually sell off the retail portions as condos to investors, which is which is pretty interesting. $27 a foot on average is pretty high,

11:44

it is high. And you know, we throughout NAT throughout East Nashville, at least we're achieving quite a bit higher than that. And as we've mentioned earlier, where consumers and landlords are gearing more toward a smaller footprint. That's that's one of the things that I tell investors to look for, if we can find a 5000 or 6000 square foot space that we can split that in two or three, when it becomes more attractive to tenants. And also we can increase rates beyond that, you know, it's much easier to for the tenant to stomach, whether it's 6000 8000, or even 10,000 a month, versus a 5000 6000 square foot space that may be 18 to 25,000 a month, then you get a lot larger pool of people who will go in there.

12:24

Yeah, I'm a big fan of micro units. We've you know, of course, we did the wash. Before that I had some other projects that focused on micro units, I just think that, you know, as investors, it's a smarter approach, because you can get you know, more tenants, you diversify your risk and your income. Sure, maybe you've got to deal with more tenants. So you know, that can be a headache or not, it hasn't been personally in my experience at all. But also it allows you to charge a higher price per square foot. And for the tenants, the all in monthly rate, which is pretty much all they care about. We as real estate investors look at these prices per square foot all the time. That's what we base everything off of. That's not really how business owners work. They want to know what their all in monthly rate is. So that they can kind of put that into their performance, see if their business is going to work there. We've got a comment coming in from next life. Speaking of triple net lease, what's the interest rates looking like for loans on those right now agencies are at 220 BEPS, spread over the Treasury? What are local banks doing for Triple Net Properties? You know, it really depends on where you are, which banks, you're talking to what their appetite is for these types of deals. I was I just got off the phone with a with a winner out of Georgia, right before we went live here on YouTube. And, you know, he was saying that there are 8.41%, which is really tough to make work. But I've also got buddies that are closing deals in the high sixes, low sevens. So it's kind of all over the board. It depends on what kind of debt group you're talking to what kind of bank how healthy they are, and what their appetite is for for that type of investments. So still a little bit all over the place. Speaking of micro units, obviously that's been trending over the past few years. What are you seeing trending in the world of retail right now?

14:06

You know, I guess it depends on who you're looking at in the type of shopping center that we're at. So shopping malls, the enclosed shopping malls, the while we spoke about extremely low vacancy for for the inline shopping centers, or the open air shopping centers, shopping malls are sitting at 18% which is massive. They've taken a real beating since COVID. And they've had a very hard time bouncing back. I think in some areas that's because they put in low quality tenants in there that aren't conducive to to bring in bring in foot traffic. And so what we're seeing from shopping, shopping malls rather, is is a an adjustment over to whether it's multifamily or mixed use. So putting in grocery stores bringing in like we had talked hospitals, medical, medical, medical tenants, things like that, which I think is going to be key for those guys. The the A Class shopping centers are still doing extremely well. You look at the mall and green hills You know so those guys are still doing extremely well still showing very high foot traffic but the actual shopping malls are in big trouble I came from the world of grew up in just south of Nashville and Franklin and so it came from a world of the Cool Springs Galleria being the hotspot for everybody you know that that was the that was the the epicenter of Cool Springs and I hate to see now that man they've really taken a beating and they've had a hard time bouncing back much like the rest of the shopping malls,

15:26

man. It's been it's been tough going to the gallery. Yeah. Yeah, I've been there twice in the past year. And you know, I was kind of like, This is so sad. I'm not going to come back because I want to remember it was when I was a kid

15:37

Yeah, when I used to get dropped off by my parents but now you've gotten more more people walk in with headphones and and just getting their exercise and and staying out of the heat or the cold, whatever it is. Then consumers and

15:48

they leased to a vape shop. And I saw that and I was like, Oh man, they must be really hurting for tenants if they're going to start going to this level of tenancy because that that deters. Like, think about it. I mean, the Galleria used to be a very high end Mall. And the Greenhills is still a very high end Mall. But Gucci and Louie Vuitton are not going to go in next to a vape shop, right? It's just not going to happen.

16:12

I went to a to a shopping mall, this was in St. Louis, but they had done away with the food court. And they had pickleball courts all throughout the inside. Brilliant. And it was a it was a ghost town, but they found a way to bring in some tenancy there and to bring in some rent. But largely, you know, I would say roughly 60% of it was still vacant, you know, so it's, it's been rough to see those guys have a long road ahead of them, especially your see and you know, lower B class because it's going to take a lot to put a lot of money to put back into those and a lot of capital to get those back to where they need to be, or you're gonna have to completely change course. Now, on the bright side, they're again, revisiting Cool Springs Galerias, they've got prime prime location, you know, and so I think that the retailer surrounding them, especially Outparcels, they've struggled as well. And a lot of the restaurants in the Outparcels of Cool Springs Galleria, have really struggled. And you've seen some of that in the news here recently. But yeah, they've got a very long road ahead of him there.

17:09

Yeah, I mean, the Galleria sits on such a phenomenal piece of land. I've always thought you know, have you ever been to the Avalon in Atlanta? Yeah, yeah, phenomenal development. I mean, they could easily transform it into that keep the existing tenants today, keep the existing building, add some structured parking with you know, hotels, apartments, condos all around it create this entirely walkable, little mini city, right there and bring it back to life. But you know, I know that's expensive to do. But for whatever reason that hasn't happened yet. So if anybody from the gallery is listening, call us. We are more than happy to help you with your real estate portfolio. Rivergate

17:43

mall and Goodlettsville they they could use Oh, yeah, they've they've seen a lot of the same there. I

17:48

actually think that river gates gonna make a comeback. We've seen a lot of development, a lot of investment sales going up that way. And I think it's only a matter of time. Because if you think about how close it is to downtown Nashville, I mean, it's really not that far of a drive.

18:03

Well, and you had BJs that's that is about to open that'll deliver this year right there. Right on the same on the on the outparcel. There. And then what is it fresh market that's going in behind that? If I'm not mistaken? I'm not sure. There's there's a high end grocery that's directly behind that. You know, everything down river gate Parkway there, they've got tons of traffic. And there's a lot of there's a lot of honestly, vacancy over there. That has been grabbed up in pretty quick succession. So I agree with you. I think that there's I think there's a lot of changes to come there. I know at one point they had looked at because they the Davidson County line actually splits right down the the river gate mall, and they were looking at doing some multifamily in one of those with whether it's the series of the dealers or something there. I don't know if that's still on the books or not. I know that they were receiving some kind of pushback on that as well. But I absolutely agree with you. I think that makes it makes it quick come back there.

18:53

And what are your thoughts on class see retail opportunities today for investors, because, you know, in some cases, you can get some pretty good acquisitions on that side, right, there's gonna be some value add to it, you're probably gonna have to deal with some problem tenants that you can turn over. But you might be able to get these at eight, nine 10% cap rates. Absolutely.

19:09

And you know, Craxi put out a report not too long ago, showing that the average cap rate that most of the shopping centers in Nashville were trading, it was at 5%, which I was blown away by. I'm assuming that that was largely Class A, with some high credit tenants where we're, you know, we're kind of tipping the scales on that, what we're seeing is more so run the 7%, the six and a half up to the seven and a half percent, the C class, you know, I think there's a lot of hope for those guys. If you've got the capital to put in if you need some building improvements and things of that nature, but you've seen major expansion from the dollar generals, the dollar trees, the the, you know, kind of the discount retailers all throughout the nation and especially within the southeast. And I think that's kind of a hedge against any kind of whether it's inflationary or or, you know, political woes that we see here. And so I see a lot of hope for those Guys, and again, if you can buy at a very high cap rate, come in, change the tenancy over and bring in some bring in some, some nice tenants that are going to increase the foot traffic, but also increase the clientele. You've got a lot of value out there on your hands. Yeah, taller,

20:15

you work with a lot of a lot of retail investors. And, you know, so you're seeing a lot of transactions in the market, you guys are picking up listings, his partners, Anthony Rubino, who joined our team here recently as well, and they're working together on that side of things. You know, what, what should investors keep in mind as they're moving forward into 2024. And thinking about adding retail real estate investments to their portfolio? Sure.

20:39

So we've seen a major drive from your traditional multifamily guys over into having an interest in retail. And for a lot of the reasons that we touched on earlier with the multifamily having major deliveries, I believe, we're in top five for deliveries moving into 24 mean with the likes of New York and you know, the cities throughout the entire nation. And that's coupled with some very, very high high vacancy that we have right now, again, at 12%. And we're seeing rates fall anywhere from you know, I mean, anywhere from five to 8%. Year over year, over the last probably 18 months or so. Now, I think that those will get absorbed, but I think it's going to take a lot longer, you've got the multifamily guys who are having to underwrite instead of an eight month lease upgrade over to 16 to 24 months, which is something they're not used to. And so and we also like, like we mentioned, despite what CoreXY shows that the 5%, but you're able to buy in at retail at a much higher cap rate. And so we've seen, we've seen a major drive from those investors looking into it, some things that I would suggest looking at, if you're an investor coming into the market, is one things I like is very, very short lease terms, maybe not across the board, if it's multi tenant, but if you get some guys with 12 months to even 18 months and lower left on their term and lower markets or lower rates than what's market, that's an easy way to add a lot of value to it. We're also seeing that if you've got if you've got the space within the parking lot either selling off and re parceling or developing out parcels there that be standalone or one or two unit, typically. And those are getting leased up at very, very fast rates. So I think that there is a I think there's a lot of upside for all investors coming in into the retail spectrum, especially especially if they're not used to it and they're used to the multifamily. I mean, you've also got you've got within multifamily versus a retail, you've got a lot less managerial type type aspects that you have to deal with, you know, you can hire a single property manager, the this, the leases that we typically sign are at minimum three years, typically five to 10. And, you know, these are professionals who are coming in they're business owners, it's not tenants that you're dealing with, that you're struggling to get a 12 month on a 12 month lease on and we've got structured increases built into the into their their lease rates anywhere from three to 5%. And if they're signing a three or five year or 10 year term, a lot of times restructuring in options to extend that as well. And they've got it they've either got you either go to market rate or CPI, or you've got set rate increases throughout that as well. And so you don't have the the struggle of one trying to keep your occupant occupancy, but then having to negotiate lease rates every 12 months with these guys. Yeah,

23:23

retail tenants are among the best tenants you can have, in my opinion, because they just want to get in there and operate their business and do really well. Tyler, thanks for joining us. If you're listening on the podcast or you're here on YouTube, Tyler's email is in the description below. As well as a link to download that retail market report. Feel free to grab that learns more about what's going on in the world of retail, and we will see y'all next time. Thanks. Yes,

23:45

this episode of the commercial real estate investor podcast is brought to you by care launch Pro. This online commercial real estate program is designed to take you from beginner to pro commercial real estate investor with access to all of my courses, our online community and monthly group coaching calls. Learn how to confidently buy your first commercial property today at www dot c r e launch pro.com