FEATURE ARTICLE, MAY 2007

DALLAS/FORT WORTH: A MAGNET FOR RETAIL INVESTMENT
D/FW’s population and job growth is garnering the attention of retail investors from across the country.
Alex J. Katz

Katz

The Dallas/Fort Worth region has seen continuing population and job growth during the last couple of years. This influx of residents has contributed substantially to the stability in local home prices and growth within the retail sector as well. While the coasts are generally experiencing a sluggish housing market at best, the D/FW market seems to not only be surviving, but thriving. The combination of low taxes and affordable housing make D/FW a great place to live and raise a family. Furthermore, as Baby Boomers continue to retire around the country, many will look for a nice place to relocate that is affordable, peaceful and beautiful — making Texas, and particularly D/FW, an ideal candidate.

Focusing On The Fundamentals

The D/FW retail market is experiencing a flight to quality this year. Investors and 1031 exchange buyers are underwriting deals more strictly and paying more attention to location and the creditworthiness of tenants. Many retail investors are looking for neighborhood strip shopping centers that are anchored by groceries or drug stores, which provide everyday goods and services to their consumers. These investors typically focus within Texas, on fast-growing primary and secondary markets.

The market has experienced a spike in New York and California 1031 money in early 2007. After a slowdown in 2006, activity has once again picked up. For instance, Gavin Kam of the Kam Group at Marcus & Millichap in Dallas recently pointed out that his investors seem to have increased their appetite for centers in Brownsville, McAllen and the rest of the South Valley. The nationwide market has become enamored with the region and with the sales volume per foot national retailers are experiencing. Investors have likewise begun to realize that Texas is outperforming the nation at almost every level.

Lending On Retail Assets

Lenders continue to have a strong appetite for retail properties in this market, both in the construction and permanent debt arenas. On the construction side, however, many lenders continue to require a substantial amount of pre-leasing, often in the arena of 60 percent up to even 100 percent prior to putting a shovel in the ground. Occupancy rates in newer centers have been steadily increasing during the last year, which has facilitated and supported the aggressive rates and terms currently available for permanent fixed-rate financing.

New development and construction of shopping and strip retail centers aim to balance supply and demand, thereby serving the needs of the local consumer community. A variety of retail projects continue to be announced in Denton County, Plano, Frisco and Arlington, to name a few hot spots. One such development is Allegiance Development’s Rayzor Ranch, an $850 million mixed-use development spanning 400 acres in the heart of Denton. That site is slated to become the largest super-regional development between Dallas and Oklahoma City. Other major large-scale retail projects in the works include Hillwood’s Victory Park in Dallas and Margaux Development’s planned 1.3 million-square-foot retail project on the west side of Interstate 35 West near the Village, north of the U.S. 287 split.

In retail, there is a lot of competition these days, which inevitably results in some centers doing better than others. That being said, money is still chasing retail deals of all shapes and sizes and lenders are working hard to demonstrate flexibility and receptiveness to structure in order to win deals. Some of the favorites among borrowers include the master leasing of vacant spaces, earnout capabilities upon stabilization and temporary recourse that burns off upon the achievement of certain milestones.

Alex J. Katz is managing director in mortgage intermediary Meridian Capital Group’s Dallas office.


©2007 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.