The Regency Difference

Small Town Retail Thrives during Pandemic

The coronavirus pandemic’s effects on retail have been devastating, causing a spike in bankruptcies, thousands of store and restaurant closures, and a wave of landlords simply handing back properties to their lenders.

But far from the eyes of most commercial real estate investors, a different retail story is playing out. In the country’s small, rural communities, brick-and-mortar retail is comparatively thriving.

For much of the past decade, national chains pulled the plug on stores in rural and small towns across the U.S., “rightsizing” their portfolios with stores in their densest markets.

But in recent months, retailers in small towns and rural communities across the U.S. are experiencing a new renaissance as residents in small communities stick closer to home.

When the pandemic started last year, “it looked like the biggest nightmare” for tenants in Newburger-Andes’ 1M SF retail portfolio, 70% of which is located in small towns and rural communities, said the firm’s chief investment officer, David Andes. Today, the news is much different.

“Every single retailer we had struggled with came back. Every single one,” Andes said.

Newberger-Andes mainly invests in single-occupant, triple-net-leased retail buildings with retailers like Advance Auto Parts, Krystal and Family Dollar.

“We were seeing all the Dollar Generals, all the Family Dollars, their sales increased, if not doubled,” he said. “People started going out again. But they stayed away from the city.”

Retailers with a rural presence also have noted a shift in the financial impact that they are seeing in smaller town stores. North Carolina-based grocery chain Ingles Markets Inc., with nearly 200 stores focused solely on suburban areas, small towns and rural communities, reported net income that shot up from $17.7M to $53.8M year-over-year in the fourth quarter of 2020.

Dollar Tree CEO Mike Witynski told analysts on a Nov. 24 earnings call that sales at its rural stores slightly outpaced those in its urban ones. Tractor Supply Co. CEO Harry Lawton told analysts on the retailer’s Jan. 28 earnings call that he expected trends that started over the past nine months, including what he called a “rural revitalization,” would continue through 2021.

“In terms of the rural versus urban, the nice thing about our model is consistency really across the store base, but specifically to rural, we did see our rural stores perform well and outperform our urban stores,” Dollar General Chief Operating Officer Jeff Owen said during a Dec. 3 earnings call.

Rural retail rents are expected to hold up better than in urban and suburban communities, according to CoStar, which studied retail rent growth in the 54 largest markets in the country.

CoStar defines urban, suburban and rural communities based upon the density of rentable building area of commercial real estate, and its data thresholds are different around the country. Between 2019 and 2020, retail store rent growth in rural communities rose by 2.5%, outpacing both suburban and urban central business district rent growth by 50 basis points, according to CoStar.

CoStar projects that rural rents will grow nearly 3% in the next two years, far outpacing rent growth in the suburbs. CoStar projects urban retail rents to drop over the next two years.

Carolyn McKinley is the president of the Chamber of Commerce and Tourism and a lifelong resident of Meriwether County, in western central Georgia, 60 miles north of Columbus. Meriwether is one of 108 rural counties in Georgia. Of its population of fewer than 35,000 residents, most shopped differently in 2020 than they had in years.

“They don’t want to go to the malls,” McKinley said. “They don’t want to go to the big stores. So, actually, our retail taxes indicate our tax base has increased dramatically over the past year.”

Georgia State University, compiling data from the Georgia Department of Revenue, shows an uptick in retail sales taxes collected in Meriwether County during 2020 compared to 2019 by more than 25%.

Typically, Meriwether residents would travel south to Columbus or north to Metro Atlanta to shop. But McKinley said residents’ concerns about the coronavirus are prompting them to shop within the county.

“I have gone zero outside the county. I’ve either done online shopping or local shopping,” she said, adding that she feels her neighbors are very conscious about wearing masks in the local store.

Aside from the safety factor, there are other influences that are helping bolster rural retail during the pandemic. Rural communities tend to have a larger percentage of necessity-based retail, which is a category that has outperformed retail as a whole during the pandemic, CoStar Advisory Services Consultant Alexander Levy said.

Regency Properties Chief Operating Officer Jim Wittman said what has happened to retail today harkens back to a similar trend he saw during the Great Recession. The firm’s retail properties in small communities held up better than those they had in major metros. The more isolated the properties were, the better they performed, he said.

That prompted Regency to shift its investment focus. Today, Regency owns 6.5M SF of retail in 19 states, all in markets that the firm characterizes as “county seats,” or communities that are at a minimum of 30 miles away from cities with at least 100,000 people. Some of the cities where it owns retail centers include Eufala, Alabama, Decatur, Indiana, and Campbellsville, Kentucky, all of which have populations under 20,000.

“What we’re really doing is what everybody else is trying to do in the industry: You want to have the dominant center,” Wittman said. “Well, guess what? We have the dominant centers in these markets.”

Regency’s portfolio is anchored by national brands like Walmart, Kohl’s, Tractor Supply Co., Starbucks and Hobby Lobby.

Ackerman & Co. Vice President KB Yabuku said other investors are starting to follow suit, focusing more on tertiary and smaller market retail centers. Yabuku said retailers are also rediscovering small-town America, with Tractor Supply, T-Mobile and O’Reilly Auto Parts expanding into smaller markets in the Southeast.

“I mean, how many Starbucks do you put on Peachtree Street?” Yabuku said.

McKinley said the local shopping revival in her small county, which has seen its population decline over the last two decades, may outlast the pandemic.

“[Residents] have learned there is more convenient and friendly and personal-type of shopping they can do in the local area,” she said. “For some people, they discovered places they can shop that they didn’t even know existed.”

While there are many national brands in his centers, Wittman said the closeness of rural communities is also helping retailers be more resistant to the pandemic’s economic fallout.

“I think we lose this watching the news all the time, but there is a large pride factor in who they are,” he said. “When they see somebody struggling down the street, it’s not [just] someone down the street, it’s their neighbor.”

Written by:
Gregory A. Mills
Senior Managing Director Investments
Director, National Retail, Office and Industrial Group
February 24, 2021

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