Fundamentals looking strong for Dallas/Fort Worth retail

May 1, 2013

By Mike Geisler, as reported in Texas Real Estate Business - May 2013

In the Dallas/Fort Worth retail market, the fundamentals have never been better.

Currently most surveys estimate occupancy in D/FW around 89%. If you take some minor liberties and give consideration to dysfunctional or obsolete space, as well as unique circumstances such as Valley View Mall in North Dallas, you could probably make an argument that D/FW vacancy on “leasable” space is only 7% to 8%.

Regardless, space is tight. Rents are increasing, and significant construction is still one-and-a-half to two years away. We are seeing rents increase by $1 to $3 per square foot in mature suburban markets such as Plano, North Carrollton and North Irving. We are seeing rents on better spaces inside the loop, west of Central Expressway, increase $5 to $15 per square foot – and sometimes more. Space in this market is practically non-existent.

We have seen rents at The Plaza at Preston Center, located at Preston Road and Northwest Highway in the heart of the affluent Park Cities neighborhood, breaking $70 per square foot in some cases. Across the road at Preston Center West, rents are peaking at $45 per square foot, with most rents in the low-to-mid $30s. In the Uptown Market, along McKinney Avenue around West Village, retail rents are scattered from the mid-to-high $30s to the mid-to-high $40s with restaurant spaces leasing from high $30s to $60 per square foot. Restaurant and bar rents on Henderson Avenue range from the high $20s to the mid $30s. Keep in mind; most of these rents are a product of increased sales.

Fundamentals in the financing world are also in balance. While interest rates remain attractive and low, lenders are still conservative and require reasonable amounts of equity in order to refinance. While the conduit market is returning and active, there are many other sources available, depending on the size of the transaction. Traditional banks are extremely active and are desirable because they are less restrictive and more flexible in regards to the term of the loan. In short, there is a multitude of financing options available, yet the lenders remain conservative in terms of their equity requirements.

With regard to equity, there is a tremendous amount of capital available in the D/FW market, and many funds have tempered their expectations to more reasonable returns. The mentality appears to be more focused on making a good purchase and believable story going forward that will increase the value, versus a higher risk proposition that either requires aggressive leverage or significant change in the market dynamics of the projected rents. Again, it seems that all sides of the equation are focused on a foundation of fundamental principles that work. Given a continued pattern of unpredictable behavior from the stock market, real estate, while not as liquid, appears more predictable in today’s world.

Looking ahead, eventually the fundamentals will change. The conduit markets may work their way back to more highly leveraged transactions that create a higher level of risk on the investment. Additionally, development will return, which could lead to overbuilding and thus affect the lease rates on existing products. However, this seems less likely. In fact, I find it interesting that development is still happening on a very limited basis. It is likely to take another 18 to 24 months or more before we see a steady stream of traditional retail development.

For more than two decades, lenders required significant pre-leasing of retail properties. In today’s market, given rising construction costs, cost of land, etc., many new retail developments will require significant rent increases, easily $5 to $10 per square foot over existing market rents. It will be interesting to see how things unfold. Businesses have always been faced with change, whether the change is from competitive forces or whether the industry on an investment level is competing with other investment opportunities.

Also, there is still a great deal of uncertainty as to the health of many anchors, especially junior anchors. We are already seeing an increase in activity from grocers and Walmart; however, many of the juniors are trying to figure out their “right size”. There are many issues affecting the junior anchor – on line sales, competition from others – and we continue to see the department stores struggle as well. Sears and JCPenney are two that are fighting for their lives.

Investment opportunities such as the stock market may return to some consistency and offer higher returns than real estate can provide. Though I have no idea of timing, in my opinion, the stock market will likely be our primary competitor. As for now, with the fundamentals that are in place in the market, it is an attractive time to own real estate in D/FW.

Mike Geisler is Managing Partner at Dallas-based Venture Commercial Real Estate and partner of X Team International.