| TEXAS SNAPSHOT, JUNE 2005
Dallas/Fort Worth Retail Market
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Tim A. Speck
Vice President and Regional Manager
Marcus & Millichap
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Improving economic conditions along with a slowdown in retail construction activity will continue to fuel investor interest in Dallas/Fort Worth retail assets throughout the year. Rents are increasing and are currently at a 4-year high. Concessions are beginning to level off as vacancy gradually eases. In addition, out-of-state buyers remain active in the Metroplex, and many are willing to accept lower rates of return than are local investors. Increased competition for retail properties over the last 2 years has resulted in a 45 percent increase in sales prices.
The local economy will continue to gain momentum over the remainder of the year. Retail sales will climb 4.7 percent this year, bolstered by strong economic and demographic trends. Also, overall employment growth in the Dallas/Fort Worth area will accelerate to 2.8 percent this year, adding more than 76,000 employees to local payrolls, led by growth of more than 3.5 percent in both the financial and information sectors.
Further boosting the marketplace, retail construction will decrease by 24 percent this year to a still robust 4.1 million square feet after rising during each of the past 2 years. The higher cost of raw building materials has forced some speculative developers to scale back, but big box retailers are expanding at a brisk pace. Approximately 25 big box projects will comprise two-thirds of the expected completions this year.
There’s good news for owners — vacancy is on the decline and rents are on the rise. The overall vacancy rate is forecast to ease 30 basis points to 11.1 percent by the end of 2005. Asking rents will climb 2.6 percent to $14.52 per square foot by year end, while effective rents will gain 2.5 percent to $13.04. Every submarket except Irving will register rent growth this year. Rents in the revitalized Uptown submarket can range from $30 per square foot to $35 per square foot.
Dallas’ single-tenant net-lease sector continues to attract significant investor attention. Strong buyer demand pushed single-tenant total dollar volume over the $200 million mark for the second consecutive year in 2004. The median price per square foot increased 4.2 percent since the end of 2004, to $213. Sales activity is strong for general freestanding properties, restaurants and fast-food locations, which, combined, accounted for 78 percent of the single-tenant transactions over the last year.
Finally, Metroplex retail properties remain attractive to out-of-state investors as cap rates in Dallas are often higher than in their home states. Multi-tenant dollar volume reached a new high last year, climbing 36 percent to more than $750 million. Sales prices have been rising steadily as increased activity among California investors, who are willing to accept lower returns than local buyers, is driving up prices. The median multi-tenant price per square foot jumped 50 percent over the past 18 months to $141. Buyers seeking more stable properties with less risk are likely to focus on Plano, Frisco and McKinney — areas with strong population growth and above-average household incomes.
— Tim A. Speck is the vice president and regional manager of Marcus & Millichap’s Dallas office.
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