Texas Retail Roundtable
Texas Real Estate Business - November 2010 - by Daniel Beaird
Retail real estate professionals from across the state discuss the industry's performance in 2010 compared to last year, and what they foresee for 2011.
Retail in Texas is improving ahead of the rest of the nation. Texas Real Estate Business recently spoke with several retail real estate executives in the state to get their impressions of the market.
From the Dallas/Fort Worth Metroplex, the following professionals participated in the roundtable discussion: Bryan Cornelius, partner, Venture Commercial Real Estate; Daniel Harris, senior vice president, Henry S. Miller Brokerage, Retail Division; Gar Herring, president, The MGHerring Group; Gavin Kam, president, Net Realty Advisors; Tim McNutt, director of leasing and sales, Bright Realty.
TREB: What is the current state of retail activity in Dallas-Fort Worth?
Cornelius: We are seeing good retail activity in the Dallas-Fort Worth market and although retailers are still being cautious, they will continue to open new stores in this market. The most active retailers right now are in the discount category. There has been an increase in market planning activity from retailers, which would indicate a push for store openings in 2011 and 2012. The most active sector is grocery stores. Kroger, Tom Thumb, Save-A-Lot, Aldi and neighborhood Walmart grocery stores are all actively opening stores. Walmart has been active with Walmart Super Centers as well.
The quick serve and fast food restaurants are also still active in this market. The includes In N Out Burger, Carl's Jr., Mooyah Burgers, SmashBurger, Panda Express and Chipotle. Full service restaurants have been active as well, such as Logan's Road House, BJ's Brewery, Olive Garden and Red Lobster.
Harris: Retail leasing remains relatively flat in the Dallas-Fort Worth Metroplex, with mostly positive absorption in Class A anchored centers offset by continuing vacancy loss in Class B and C centers, but this is expected to stabilize by year's end or into the first quarter 2011. Empty Class B and C big box centers will continue to struggle with vacancy until replacement anchors can be found to increase draws in traffic.
Herring: We are fortunate to be located in North Texas where the market has fared much better than other areas of the country. We are finding that while retailers are opening fewer stores, they continue to recognize Dallas-Fort Worth as one of the strongest retail markets and are still expanding in our area.
Dillard's opened this March at our project, The Village at Fairview, and it is one of only two new stores that Dillard's opened this year. Whole Foods Market will open in November. In addition, several retailers in the Best Southwest area (cities of Cedar Hill, Duncanville, Lancaster and Desoto) have relocated to our Uptown Village at Cedar Hill project within the past year. These retailers include Justice, The Children's Place and Old Navy, which built its newest prototype store at Uptown Village.
Kam: From an investment sales perspective, the market has picked up significantly over the past few months. There is a shortage of high quality single tenant properties, especially those absolute net leased to credit tenants. With interest rates low, the returns are attractive when compared to similar credit bonds and other fixed income investments.
McNutt: There is little doubt that retail has suffered over these last 2 years of economic recession. Texas has been stronger than the national market but we have seen a significant slowdown in our market. Sales tax revenues are up over 2009 so we can claim modest growth over historic lows this year. Consumer confidence continues to struggle and until job growth continues, I believe it will be a much softer market for the next year. However, there are signs of optimism and an increase in activity in local and regional tenants making opportunist efforts to gain market share.
TREB: What retail leasing/development trends have surfaced during the economic downturn?
Cornelius: Landlords tried to hold rents where they were the last few years, but just recently we have seen developers get more aggressive to fill vacant space. Also, landlords have gotten more creative in marketing their properties and are becoming more broker-friendly with respect to fees and leasing bonuses. Another trend is the landlord's willingness to give free rent in lieu of tenant improvement allowances, sometimes as much as 6 to 12 months of free rent.
Harris: The heavy amount of active term rent reduction negotiations between tenants and landlords has dissipated to a great degree, reflecting renewed confidence that by both sides of the economy and sales have stabilized, and will slowly improve. Strong leasing activity with discount and value-added retailers continues. Leasing to non-traditional tenants such as office users or even warehouse users has seen an uptick during this downturn.
Some other trends of note are the increased use of retail centers for dental and medical users, and a fairly strong increase in percentage of restaurants occupying former retail space. Payday loan and pawn shops continue to thrive and grow in the downturn. Temporary concept store leases in malls are also popping up with landlords finding creative ways to fill spaces and structure novel leases. New retail development has, for the most part, come to a halt during this downturn with the majority of development seen in the remaining completion of high profile power centers. Alliance Town Center, The Village at Allen and The Village at Fairview are examples of this.
Herring: Retail projects that have sustained throughout the economic downturn are opening in phases. In addition, some developers are finding alternative and creative uses for additional space, which benefits both the shopping center and the community. For example, The MGHerring Group has incorporated many community features in our development of The Village at Allen, The Village at Fairview and Uptown Village at Cedar Hill. We recently opened a community garden and beach area with sand volleyball courts and kids' play area at The Village at Fairview. A 10-acre park is opening in November.
The benefits of these community features are two-fold. We want our shopping centers to serve as gathering places for the community, which is why we offer much more than just shopping and dining. Residents view the shopping center as their own when they can bring their kids to play in the park or the interactive fountain, take their dog to the onsite dog park, plant their own vegetables in the community garden, and attend free events with friends and family.
Retailers have become more conservative in their expansion plans, but they are still opening new stores, particularly in markets such as Dallas-Fort Worth where retail activity is outperforming other regions of the country. Retailers are selecting shopping centers with solid anchors and prominent locations in markets with strong demographics for population and income growth.
McNutt: New development has for all practical purposes stopped. Reasonable credit and financing is almost non-existent. The Federal Reserve continues to attempt to rectify the uncertainty in the market but very little clarity has manifested as a result of those efforts. Those projects that were ramping up in 2007 have been difficult to lease up. Navigating the waters where tenants and landlords expectations are very far apart has resulted in all deals taking much longer than in previous cycles. However, we have managed to lease up a couple of challenging properties even during this difficult time. Identifying the uses desired and hitting the streets enabled us to lease over 30,000 square feet of space in the Southwest Center Mall in the last 90 days.
TREB: Have any major developments come online this year? Are any planned?
Cornelius: The new developments we have seen come online this year in the Dallas-Fort Worth market have been grocery store and Walmart driven. All things considered, this has been a very active market for new grocery-anchored developments.
In September, HEB Grocery Store opened in Burleson, a suburb of Fort Worth. The first phase of retail adjacent to the HEB has approximately 14,000 square feet of small shop space with plans to add additional space as leasing permits. HEB announced another store planned for Granbury, 20 minutes southwest of Fort Worth.
A Kroger Marketplace opened in early January of this year in Frisco, which is Kroger's latest concept. The marketplace is 123,429 square feet and includes hard goods. The small shop space leasing appears to be getting some traction. Kroger will be opening Kroger Marketplaces later this year in North Fort Worth at Heritage Market Place located at Heritage Trace and IH-35W. They've also broken ground in Little Elm with a projected opening of summer 2011. Pads and small shop space are also planned. There is a planned Kroger Marketplace for US-75 (Central Expressway) and Haskell Avenue in Dallas as well.
Tom Thumb opened in May of this year in Rockwall, a suburb of Dallas. A Kroger Marketplace is under construction in Rockwall as well. A Tom Thumb-anchored shopping center broke ground at the corner of FM 423 and Lebanon in Frisco. This will be a 70,000-sqaure-foot Tom Thumb with 94,000 square feet of shop space.
Walmart will be opening a Walmart Super Center in Benbrook in mid November. Walmart also has stores under construction at Skillman and NW Highway in Dallas, IH-35 and US 380 in Denton, and Preston Road and Hickory Creek in north Frisco. There are plans for future Walmart Super Centers at U.S. 287 and Avondale Haslet Road in North Fort Worth, and FM 1187 and Main Street in Crowley.
Target has also been approved at the intersection of U.S. 287 and Harmon Road in North Fort Worth.
Harris: There is over 20 million square feet of development in the planning stages, but this mostly remains unfunded. Population increases will continue, even if unemployment holds steady, and as the credit market slowly thaws, we can expect development to pick up again when the time is right.
Herring: We launched the second phase of The Village at Fairview in March and have welcomed more than 40 new tenants this year. More than 100,000 square feet of new retail will open between late October and December.
MGHerring is one of the only developers pursuing ground-up regional development projects in Dallas-Fort Worth and other markets. Tenants will be looking for new locations in 2011.
McNutt: Once again, projects that were underway as the recession began have come online and continued to struggle with leasing and financing. Bright Realty has a large mixed-use project slated for a 2011/2012 start but so much is contingent on the retail growth plans and credit markets for the next 5 years. I believe this holiday season will play a large part in the growth plans for retail in the near future.
TREB: What submarkets are performing best?
Cornelius: The submarkets that are performing best are the middle to high-income suburban markets like Southlake, Keller, Rockwall, North Fort Worth and Mansfield. The urban inner city markets such as the Uptown area of Dallas are still seeing strong occupancies and rents mainly driven by restaurants.
Harris: The uptown area of Dallas is always strong. North Dallas, Plano, Allen, North and Southwest Fort Worth, Alliance, Las Colinas, Flower Mound and Southlake continue to do well, as do some smaller pockets in the southern sector. Some of the outlying communities are struggling as housing starts failed to keep pace with retail development, and as such, vacancy rates remain up and downward pressures on rent rates continue.
Herring: Retail activity in the Dallas-Fort Worth market continues to perform above other areas of the country. The submarket of Collin County (specifically the cities of Allen and McKinney) continues to be one of the fastest growing markets in the U.S. in terms of income and population.
Money Magazine ranked McKinney fifth and Allen 16th on its 2010 list of "Best Places to Live". The City of Allen is also one of the few cities to see an increase in sales tax revenue this year.
Kam: Recently an investor told me "where the big planes fly, I will by." This seems to be the general consensus in the market right now. Buyers want major markets and high traffic locations with good access and visibility. Just as important, they are looking to buy with reasonable rents in place, preferably leased to second or third generation tenants. They are not willing to buy with high rents, many reflecting amortizing TI allowances.
McNutt: Where the basic fundamentals of retail are in place such as high density, high income and high traffic, activity continues to be strong and retailers continue to seek space in these locations. The second opportunity is on the very low end of the retail spectrum - owners who have an extremely low basis in the property and can offer an exceptional value to the tenants with aggressive terms.
TREB: Have any major retailers entered/exited your market?
Cornelius: Aldi Grocery stores is one of the only major retailers to enter this market, opening multiple stores earlier this year. There also has been a big push for restaurants entering the market, such as In N Out Burger and Carl's Jr.
There have been no major retailers exiting our market since Circuit City and Linens ‘n Things exited last year.
Harris: Asian big box grocers such as 99-Ranch and H-Mart have entered the Dallas-Fort Worth market and this will be a continued growth story. Existing retailers have also brought new specialty brand stores to market.
McNutt: Most national retailers we have had discussions with continue to be bullish on the Texas market. Food service seems to be leading the pack of new inquiries. In N Out Burger coming to towns is a positive sign for Texas. QSRs continue to inquire about pad sites and inline opportunities.
TREB: How is the second half of 2010 performing compared to the first half?
Cornelius: In the first half of the year, we saw a lot of deals that had been in the works get completed. Overall, the first half of the year was pretty good and this activity has continued through the third quarter. However, he fourth quarter is typically a slow time of the year as retailers focus on holiday sales. There is optimism regarding 2011 coming from brokers and retailers alike.
Harris: Rent rates appear to have declined slightly for the second half of the year with occupancy holding steady for the most part. Activity appears to show a slight uptick and optimism is definitely increasing. The Dallas-Fort Worth market remains one of the strongest and most resilient retail markets in the country.
Herring: Yes. We are seeing more activity with new tenants coming to the Village at Allen, The Village at Fairview and Uptown Village at Cedar Hill that want to be open in time for the holidays. More than 100,000 square feet of new retail will open at The Village at Fairview between late October and December.
McNutt: We have seen a steady increase in activity in both leasing and land sales in the last quarter and expect that trend to continue through the fourth quarter.
TREB: Do you believe things will turn around in Dallas-Fort Worth in 2001? Why or why not?
Cornelius: Our market should see improvement in 2011, but I believe it will be slow and steady at first. The Dallas-Fort Worth markets continue to be two of the best retail real estate markets in the country.
We have seen some improvement in job growth in our market, which is a good economic indicator. This should lead to store for store sales increases for our retailers, which in turn should lead to expansion.
We have also seen the capital markets coming back, which should help spur new developments. The deals still have to be the right deals and underwriting will be more rigorous, but there will be opportunity for developments in 2011.
Harris: Yes, I do; slowly but definitely. Positives are an expected thaw in the credit markets, pressures to kick-start the SBA loans to small business, improving employment rates, population growth in the Metroplex, and the entrepreneurship of the American people. Retail shopping is changing, and changing dramatically. Online shopping will continue to increase, and the face of bricks and mortar retail will undergo a radical shift in the coming years. Those who can adapt to this will thrive.
Kam: I believe that 2011 will be better than 2010, although I do believe next year will still be challenging. It will take time for the market to absorb the decline in fundamentals and cap rates. On the bright side, the risk premium that has factored into the market has created attractive investment opportunities for investors who will be able to purchase high quality properties at attractive yields, leveraging historically low interest rates.
McNutt: In my opinion, there are two major factors that will influence activity in the coming year. Holiday sales and job growth. Strong holiday sales news will influence consumer confidence but until the market sees the high unemployment figures start to drop, the consumer will continue to be frugal with discretionary spending. I anticipate the recovery in Texas to lead the way as in-migration and favorable business climates improve. Removing any uncertainty in the tax/regulatory issues facing us in the future should enable the large amounts of cash sitting on the sidelines to be put to work. As always, we are hoping for a solid rebound in 2011 but will remain lean and mean until the trends solidify.
