[Editor’s note: Welcome to What Now Atlanta’s Commercial Real Estate Insider Column, powered through an exclusive partnership with Franklin Street. Here, we’ll provide an inside look at the city’s commercial real estate landscape through the eyes of the broker.]
At Franklin Street, our team works across many industries, so we surveyed our professional brokers and asset managers in Atlanta to see what will move commercial real estate markets in 2022.
Overall, we’re predicting that almost every sector in commercial real estate will remain hot. By that, we mean active investors and developers in the multifamily space, a continued surge in interest in retail, with retail space of all shapes and sizes seeing reuse and reimagination, and the office environment finding new footing. Here are seven predictions the Franklin Street team has for 2022.
- Smaller footprint restaurants with more drive-throughs
Restaurants are looking for smaller footprints, with spaces larger than 4,000 square feet harder to lease. Restaurants are looking for drive-through options to take advantage of new revenue streams like takeout and delivery. Our retail and restaurant tenant rep Greg Eisenman says examples of chains growing local are gusto!, First Watch and Freddy’s. Still, we continue to hear that staffing issues are causing new restaurants to push back grand opening dates.
- Retail box stores getting smaller, opening up space for other retailers
Box stores also are shrinking in size. One example is Burlington: Its prototype decreased by half, from 50,000 to 25,000 square feet. Our retail landlord reps Sam Kreuger and Kaitlyn Theriot say this trend will continue to create more space for other anchors and junior anchors, especially in the service-based retail, medical office, boutique gym and salon categories. Examples include One Medical, tend, Planet Fitness, [solidcore], Pepper Boxing and LionChaser Fitness, which all are expanding throughout Atlanta.
- Property investors want more retail centers
Single tenant, strip, grocery-anchored and power centers still are extremely popular with investors. Our retail investment sales team John Tennant and Bryan Belk predict institutional and private sector money will be looking to buy all classes of retail centers this year.
Grocery-anchored centers continue to be the crown jewel, as retail sales of necessities continue to climb across the country. Strip centers and stand-alone buildings leased to drug stores, automotive tenants and strong credit, quick serve restaurants, like Chipotle, Chick-fil-A and Panera Bread, also are attractive to investors. The abundance of capital available to pursue retail deals is as high as it’s ever been, which will allow the retail sector to continue the aggressive pace of activity into 2022.
- Challenges to growth are construction costs, supply chain, inflation and interest rates
Investors are keeping an eye on climbing inflation and interest rates while developers are finding construction material costs and availability a constraint to growth. Supply chain issues are expected to continue well into 2022, as well as increasing labor and land costs, which will slow the pace of growth.
- Office space trying to find ‘new normal’
The office sector is looking for a new normal, defined by ultra-flexibility, as Covid-19 variants continue to delay the return to the workplace, say our office team of Chris Butler, Patrick Kelly and Chad Rupp. Many companies are rethinking how much office space they need and who they encourage to be in the office. However, these decisions are not uniform across the board – with each company having unique and custom needs. The new hybrid model of working remote and in the office includes enhanced technology, more meeting and breakout rooms, more shared spaces and enhanced amenities and multifunctional areas.
Unfortunately, this continues to be problematic for retail tenants that rely heavily on office workers for sales and traffic, and that creates complications for landlords.
We’re also seeing a “flight to quality.” Office tenants are seeking not only Class A buildings but also Class A developments that include live, work and play options.
We expect “ultra-flexibility” will be designed into the business models of office owners and tenants to adapt to these fluid market dynamics.
- We can’t build enough apartments fast enough
Job creation continues to be a driver for apartment demand across metro-Atlanta. The global pandemic showed many companies where their weak points were in the global supply chain so they are making changes now to mitigate potential disruptions in the future. Domestic warehouse capacity and manufacturing closer to home are two resulting trends. Companies seeking shorter supply chains and less reliability on foreign labor and currency are “reshoring” – meaning moving jobs and manufacturing facilities back to the United States. And many are choosing Georgia. We predict we’ll see more of this in 2022.
Job creation puts more renters in the renter pool and, with increasing wages, we expect apartment development will remain very strong in 2022, yet still won’t meet demand, say our multifamily investment sales team of Jake Reid and Chad Defoor. Developers can’t build apartment communities fast enough. Therefore, we expect 2022 will end with all-time highs for both occupancy and average rental rates for metro Atlanta.
That brings workforce housing into focus – apartment buildings that are B and C Class will have a waiting list and likely will see rental rates rise.
Investors will continue to flock to the multifamily sector – not just U.S. buyers, but also international investors. International conflicts, aging consumers throughout the developed world, and a predicted pending collapse in the Chinese real estate market will push additional foreign investment into American real estate, seeking both higher yields and a safe harbor.
- No slowdown in industrial and supply chain real estate
Atlanta remains one of the least expensive major industrial markets in the country in terms of rental rates and development costs, says our industrial expert Victor Segrest. With our low-cost advantage, population growth and investment at the Port of Savannah, we predict Atlanta’s industrial real estate sector will continue to grow. Suburban markets, especially Gainesville and Augusta, continue to experience high rent growth, particularly in the logistics arena, and more construction is underway. Atlanta holds the most amount of inventory across flex, logistics and specialized industrial real estate and will continue to experience net square foot absorption for flex and logistics industrial properties.
Atlanta is at the crux of several trends that will see our real estate markets across many sectors continue to thrive. A reshoring of jobs and of companies seeking more stable and shorter supply chains will spike our industrial sector. The strong workforce here continues to spur retail sales (especially of necessities) and apartment demand as companies relocate here. Still, the pandemic, inflation, interest rates, the war for talent and supply chain issues constrain what would otherwise be one of the fastest growth times in our industry. Franklin Street partners with our clients to help them navigate through these interesting times. The outlook for 2022 is very promising for our clients, and our full range of broker services assure them that no matter what challenges and opportunities lie ahead, they can rely on our team to guide them.