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A Retail Revival in the Carolinas

Retail development has blanketed the Carolinas for several years, evidence of the region's economic vitality. But some saturated areas are looking for ways to control new development by adopting a smart growth philosophy.

Prime economic conditions continue to lure developers and retailers to the Carolinas. As a result, communities have begun to take a hard look at what their infrastructures can support. "From the state level down to the community level there's been a strong focus on smart growth," says Bob Otten, president of Charlotte, N.C.-based Lat Purser & Associates. "I see that being an influence in a lot of communities."

Proof of the area's economic prosperity is in the statistics. A scan of North Carolina's economic indicators reveals that unemployment is down, retail sales are up, population growth has been rapid and new construction is off the charts. It's clear that North Carolina's economy is on an upswing. Unemployment dropped to 3% in October 1999, compared to the national rate of 3.8%. And retail sales grossed more than $8.9 billion in North Carolina for August 1999, an increase of 5.1% from the previous year, according to the North Carolina Department of Commerce.

The state experienced a veritable population explosion in the '90s. More than 1.7 million people moved to North Carolina from 1990 to 1998, according to The Raleigh News and Observer. What's enticing newcomers to the area? Well-known draws include major universities, the banking industry, the Appalachian Mountains and the Carolina beaches.

Healthy numbers in Research Triangle The 13 counties that make up the Research Triangle area, which includes the capital city of Raleigh, are thriving. Population growth in the Raleigh-Durham Metropolitan Statistical Area has outpaced every other North Carolina MSA, according to the North Carolina Department of Commerce. The Karnes Research Co. pinpoints employment growth for 1999 at 4.8% in the Triangle.

Tommy Norman, president of Norcom Development in Charlotte, agrees that the Raleigh-Durham market is hot. "It's home to the very successful Research Triangle Park, which has been an enormous boon to that market, centrally located between Durham, Raleigh and Chapel Hill," he notes. "It's a strong economic engine for the state and has brought some high-paying jobs into the market."

The 7,000-acre development, which is the largest research park in the United States, is home to 137 organizations and 42,000 full-time employees. It is owned and developed by the private, nonprofit Research Triangle Foundation.

Meanwhile, favorable demographics and market conditions have propelled north Raleigh into one of the fastest-growing areas in the city. As a result, the local planning department has put smart growth on its agenda, according to The Raleigh News & Observer. By setting limits on new construction, considering the impact on traffic and the environment, and promoting mixed-use development, the department hopes to control future retail and residential development. The overall retail vacancy rate in the Triangle stood at 3% in January, according to the Karnes Research Co.'s Triangle Retail Report.

"We have an office in Raleigh and we're very busy," notes Brian Simon, COO of Atlanta-based The Shopping Center Group. "Demand from tenants is strong. But infrastructure is what's holding back retail development. Charlotte and Raleigh are growing as fast as the infrastructure will allow them to grow."

Creaking under the growth A total of 873,861 sq. ft. was under construction in the Triangle as of January, according to the Karnes Retail Report. And most of the Triangle's growth has arisen in the surrounding bedroom communities, which include Cary and northeast Wake County. Cary is both the hottest Raleigh sub-market and the largest, with nearly 5.9 million sq. ft. of existing retail and another 320,459 sq. ft. under construction. Northeast Wake touts nearly 2.8 million sq. ft. of existing retail and 308,035 sq. ft. under construction, according to the Karnes Triangle Retail Report. In addition, Karnes reports that Cary, northeast Wake and south Durham have more than 900,000 sq. ft. of shopping center space proposed.

The frenetic development in the Triangle area has attracted the interest of Columbia, S.C.-based Edens & Avant, developers of neighborhood shopping centers. The company recently acquired seven centers in South Carolina and three in North Carolina. "We're very bullish on the Carolinas," says CEO Joe Edens. "They seem to be poised for good contingent growth in population as well as industrial and business investment."

Overall, Edens says he has not seen overbuilding in the Carolinas. Occupancy levels in his supermarket-anchored centers stand at roughly 95%, with low tenant turnover. "There is very little in the way of speculative space being developed," he says. Meanwhile, the major supermarket chains are continuing to build new stores, especially in the active Charlotte and Triangle area, Edens notes. "The food retailers are in general doing pretty well."

In with the new New retailers are popping up everywhere in the Carolinas, including upscale retailers such as Nordstrom. The chain plans to open a store at The Streets at Southpoint, a 1.3 million sq. ft. center near Research Triangle Park currently under construction by Chicago-based Urban Shopping Centers. New to the South Carolina market is Saks Fifth Ave., which plans to open a store in The Mall at Shelter Cove, a 363,000 sq. ft. enclosed regional mall developed on Hilton Head Island by Montgomery, Ala.-based Jim Wilson & Associates.

In fact, the high-end retailers such as Tiffany & Co., Saks and Nordstrom are catering to affluent new arrivals from the North, Northeast and Midwest, explains Norcom president Tommy Norman. In addition, specialty retailers such as The Gap, Old Navy, The Limited, Bath & Body Works, Lane Bryant, Zany Brainy, Athlete's Foot and Party City have been trickling into the Carolinas. "Kohl's, a junior department store, is starting to get a stronger foothold," observes Edens. "And Target is really picking up its pace."

Edens also notes that:

* Bass Pro Outdoor World, a sporting goods retailer, and Jillian's, an entertainment restaurant, recently entered the market.

* Established retailers such as Circuit City and Wal-Mart are now repositioning their stores in new centers and markets, with Wal-Mart opening supercenters that include a grocery component.

* Competition among other big-box retailers such as Linens 'N Things and Bed Bath & Beyond continues as they expand into new areas in the region.

* The Home Depot and Lowe's Home Improvement have expanded in the Carolinas.

Simon of The Shopping Center Group provides some perspective on such trends. "The Carolinas are the beneficiary of retailers that march into the Southeast, start in Atlanta and finish off in the Carolinas," he observes. "For example, we've been working with Costco for four years, but are just now pulling the trigger on our deals. They came into Atlanta and opened three locations. Now that they've been operating and seen success, they're ready to take on markets like the Carolinas, where we only had Sam's Club as a competitor.

"Our market is wide open for many of those categories because we haven't had so much competition here," adds Simon. "Now we have BJs coming in on top of Sam's. It makes it difficult to operate in smaller markets with three wholesale clubs. Retailers want to make sure they have the best site going in."

Banking center attracts retailers In Charlotte, home to the second largest banking center in the country, retail activity has been extremely strong, especially in the downtown market, observes Randal Johnson, principal of Divaris Real Estate Group. "At this point in the game we're still not seeing any signs of stress," he says.

On the other hand, Otten of Lat Purser says, "We are seeing a little bit of a slowing in the market." As development opportunities are being created around the I-485 beltway now under construction, newly created interchanges are continually attracting retail and housing.

"Some of those may be green in that the actual completion of the interchange may be five to 10 years off," adds Otten. "Consequently, retailers today are more careful in their evaluation of the Charlotte market."

One of the largest projects to open near Charlotte last year was Concord Mills in Concord, a 1.5 million sq. ft. value-oriented mall developed by Arlington, Va.-based The Mills Corp. It combines stores, outlets, restaurants and movie theaters.

Charlotte's heavy growth is making development more thoughtful. "But I don't think it's slowing it down because the demand is too strong," says Brett Womack, vice president of Divaris Real Estate Group. The affluent Lake Norman area, for example, is looking at ways to better manage its retail development.

"The northern part of Charlotte around Lake Norman has experienced phenomenal triple-digit growth in the past two to three years, and there is no sign of it stopping," Womack adds. "The localities feel that development is getting ahead of their growth."

Downtown - or as locals say, "uptown" - Charlotte may be getting a major retail boost if plans to transform the old convention center come to fruition. Developers are competing to get control of the center, which has been vacant since 1995.

"It's going to be a major addition to the entertainment component downtown," says Johnson of Divaris. "It will tie all the new restaurants and housing together and help solidify 'uptown' as a place to go on weekends. It's just a matter of who is going to do it."

The Charlotte Observer reported that Charlotte's Spectrum Properties has offered $12 million for the three-acre site, which it plans to convert into a three-story retail and office complex with a stop for the Charlotte trolley. Berwyn, Pa.-based LCOR is also competing for the project.

Going upscale In some of the larger urban areas such as Charlotte, Raleigh and Greensboro and the surrounding suburban markets, a new style of upscale specialty retail center is being embraced by communities and developers. Referred to as neo-traditional, village or lifestyle centers, they are mixed-use projects that incorporate retail with various components and make denser use of smaller parcels of land, explains Otten.

"We're starting to see more of the neotraditional centers," adds William M. "Marty" Kotis III, president and CEO of Kotis Cos. in Greensboro. "It's a style modeled off of an old downtown storefront approach." The "downtown" sidewalks allow for pedestrian traffic while the bulk of the parking is behind the shops.

The new Streets at Southpoint mimics historic downtown Durham in design, combining retail with offices, apartments and hotels. It is connected by a new boulevard and walking trails. Similar developments are in the works: Norcom Development is planning a mixed-use project on a 19-acre site in Pinehurst, a high-income retirement area; and Lat Purser & Associates is helping the town of Matthew in southeast Charlotte study whether to build a combined town hall, library and retail area.

Meanwhile, Konover Property Trust in August opened Mount Pleasant Towne Centre in Mount Pleasant, S.C. The 425,000 sq. ft. center was designed around a village concept and built in conjunction with the town, explains Elizabeth Dion, director of corporate marketing for Konover Property Trust based in Cary, N.C.

"People are looking for a place to go without having to go to the traditional mall," she says. "It's outdoors, and parking is convenient." Konover is planning to build more lifestyle centers in the future, adds Dion. "It's something you're going to see other developers doing as well."

Lenders remain skeptical Neo-traditional centers have been "readily accepted and promoted by the planning departments across the state but the lenders are still a bit leery of that type of project because there haven't been many to prove themselves yet," adds Kotis. Kotis recently opened two new phases at the Westover Gallery of Shops in Greensboro, a high-end, open-air center featuring specialty retailers and restaurants.

Broadway at the Beach in Myrtle Beach, S.C., combines 100 specialty shops, 25 restaurants, and various entertainment components into a tourism hub. Myrtle Beach-based Burroughs & Chapin Co. opened the 350-acre complex four years ago and in 1997 won the state's Governors Cup award for the state's best travel destination. This June it plans to open another attraction, a 19,000 sq. ft. Butterfly Pavilion.

Myrtle Beach development has accelerated, Dowling notes, adding that market conditions are stronger than anywhere else in the state. Last year, retail sales were up compared with the previous year, amounting to over $5 billion along the Grand Strand, a 50-mile stretch of oceanfront.

Burroughs & Chapin has been instrumental in the growth in the city of Myrtle Beach. Nearly seven years ago, tourism and retail activity began to shift toward new shopping opportunities such as Myrtle Factory Outlets and Barefoot Landing. As a result, the city and the developer worked together to ensure Broadway at the Beach moved the focus back into the city of Myrtle Beach, says Dowling.

"The Mall of South Carolina is another step in that program," he adds. Construction is currently under way on the 1.3 million sq. ft. regional mall to be built in partnership with CBL & Associates Properties of Chattanooga, Tenn. The mall will be the largest in the state, with five anchor tenants and over 100 other stores. Adjacent to the mall on Highway 501, a major power center is planned. Home Depot and Wal-Mart have opened their stores while a Circuit City is currently under construction.

"As with other areas where rapid growth has occurred," says Dowling, "there is a move toward gradual, planned, coordinated growth." Consequently, Burroughs & Chapin proposed a 20-year development agreement with the county that outlined future projects, enabling the government to plan public infrastructure.

Cautious optimism Overall in the Carolinas, Lat Purser's Otten predicts more growth in the coming years, spurred by ongoing population increases in major markets. However, he says, "We may see some slowing with interest rates starting to creep up a little bit. But most influential in slowing down growth will be the increasing land values."

Looking ahead, Norcom's Norman predicts a slowdown. "We've got a well-balanced economy and none of the overbuilding pressure here that we see in other parts of the country like California and Florida," he says. "I think that cautiousness is going to creep into the market. And that's good."

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