COVER STORY, MAY 2010

A RETAIL PERSPECTIVE
Brokers throughout Texas talk shop about the current market.
By Jon Ross

It seems like it’s been forever since there was solidly good commercial real estate news anywhere in the country. The recession has taken a toll on retailers everywhere, and tenants have been put off by the uncertainty of the economic environment. In Texas, however, a few rays of sunshine are coming through, and brokers in key markets around the state have been encouraged by the level of activity they’re seeing.

“The retail real estate market in Texas is the strongest in the nation. The shopping centers in Texas and the malls in Texas in particular were the least affected during the economic downturn,” says John Bemis of Jones Lang LaSalle. “Our 11 malls throughout Texas have continued to perform strongly from a sales standpoint and from a leasing standpoint.”

Dallas, Fort Worth, Austin and Houston are all weathering the storm with gusto, and retailers in these markets will be prepared to capitalize on opportunities once the recession clears.

Fort Worth

In Fort Worth, steady is the name of the game. The city’s retail industry hasn’t gone through big gains or losses, so surviving the recession means riding out a low level of activity until the market turns around. Fort Worth’s approach to development is echoed in its population, which is composed primarily of middle-class residents who come to town and stick around for a while.

“Our demographics … tend to result in less cyclical variances in our retail market,” says Steve Harriman of NAI Fort Worth. “Our market is considered very disciplined and conservative in comparison to some of the more dynamic markets of Dallas and Houston.”

Even in a conservative, cautious market, there are some tenants who seek opportunity in the downturn. Convenience stores and gas stations have been doing well in the current market, as QuikTrip, RaceTrac, 7-11 and Valero are all looking for new locations. Drug stores like Walgreens and CVS/pharmacy have also been in an expansionary mode, but are very selective about their locations, so they aren’t undergoing a huge amount of activity. Other tenants that have historically done well in a down market deal in fast food.

“The fast-food business continues to flourish in North Texas,” Harriman says. “A lot of deals for new sites are being made, both corporately and on the franchise level. 2008 was a tough year for fast food, but 2009 was a good year, and 2010 has proven to be very positive year so far. The fast casual dining segment, including Chipolte, Cowboy Chicken and Qdoba, are also doing well and looking to expand in our local market.”

Grocery stores are experiencing some movement in the market and are testing out new sites. In Burleson, HEB Grocery is working on a site they’ve been sitting on for years. Kroger also has plans for two 128,000-square-foot concepts in Mansfield and Fort Worth, and the company will also break ground soon on a Signature Store in Fort Worth.

Grocers seem to be the only large box tenants moving forward. Instead of looking for new sites, Walmart is working on projects that have been land-banked for a number of years, and home improvement stores have been “stuck in neutral,” Harriman says.

“Large soft-goods retailers, such as Kohl’s, JC Penney and Belk, are closely monitoring same-store sales and awaiting substantive signs that job growth and real economic recovery has truly arrived,” he says.

Finding financing is one of the main sticking points in North Texas. The financial situation is much the same throughout the country and has been since the early months of the recession. Obtaining a loan totaling more than $12 million is unheard of in Forth Worth, but there potentially is money for loan if the borrower is stable.

“Lenders have not arrived back on the scene, and we have not seen any evidence that the lenders will be back soon,” Harriman says. “If you have the right deal, the rates are still very affordable, as those lenders who are looking at deals are setting ‘floors’ and sometimes ‘ceilings’ in their loan rates.”

Austin

Construction has wrapped on phase two of the Domain mixed-use project in Austin.

Simon Property Group’s 304-acre Domain project is the obvious focal point of retail in Austin. Co-developed with Endeavor Real Estate Group, the mixed-use project is located on a former IBM property on Domain Boulevard near Loop 1. The first phase was completed in 2007, and the second phase, which is anchored by Dillard’s and Dick’s Sporting Goods, was completed this spring. 

While Domain is the hot ticket in Austin, it’s not the only retail getting off the ground. According to Eric Dejernett of CB Richard Ellis’ Austin office, projects that were already moving along before the recession hit are starting to deliver.

“There’s a fair amount of urban/north central Austin mixed-use property that is part of multifamily or condo development that started at the end of the cycle,” he says. “There’s definitely some stuff that has come on the market really within the past 12 months, but you’re not going to see much coming on the market new over the next 24 months.”

Instead of new development in the current market, users are focusing on backfilling space. Landlords are offering deals for tenants looking at junior anchor and anchor slots, and this aggressiveness has helped gobble up space. But for more development to begin, concessions will have to decrease.   

“Lease rates are going to have to come back up before it’s going to justify new construction on a whole,” he says. “You are going to see grocery and some of the anchor users coming in and taking advantage of the market to reposition themselves — people that build their own box. It’s really been more of people trying to pick up opportunities from all the contraction that’s happened.”

Even without development, there’s been an uptick in leasing activity in the city, leading Dejernett to believe Austin will be one of the first cities to emerge from the downturn. The city’s standing as a secondary market insulated it a little bit from the initial recessionary dive, and when commercial real estate throughout the country started taking a hit in the middle of 2008, brokers didn’t really start to see a drop in activity until late that year. Moving forward, Dejernett expects occupancy to be on the rise by this Christmas and has an eye toward being “back in business” in 2011. 

“It feels like in Austin that we’re on an early watch list. As the retailers nationwide are starting to feel a little bit more confident about expanding, they’re looking at Texas,” he says. “We’re definitely getting more looks than some other parts of the country.”

Dallas

Gavin Kam of Colliers International’s Dallas office says retail investment sales in the Dallas market are heating up even amid a continued decline of sales prices. He points to the Westwood Financial’s recent sale-leaseback of a 7-11 portfolio and Greenway Investment Co.’s acquisition of the 26,418-square-foot Parkside Center as proof the market is heading in the right direction. 

“Our team has experienced a significant increase in activity, both from buyers in the market inquiring about deals, but also brokers once again trolling the market for their clients,” Kam says. “In general, investors are becoming more confident that the economy is improving and that the worst is behind us. They are taking a look at the amount of cash they have on hand and have seen a huge bounce in their stock portfolios and are putting feelers out into the market.” 

During the past 6 months, there has been limited retail activity in Dallas compared to the rest of the state. Grocery stores are doing well — a 21,667-square-foot Save-A-Lot opened its doors in March — and there have been a few smaller openings here and there. One of the biggest recent sales was the Weitzman Group’s acquisition of the 160,000-square-foot anchor building at Southwest Center Mall formerly occupied by Dillard’s.

But Dallas is still mired in the recession, albeit a recession it entered later than most cities throughout the country. According to the National Bureau of Economic Research, the United States economy hit its peak and started spiraling into a decline in 2007, but the Texas economy continued to grow until late 2008. Though Dallas, and the rest of Texas, is very much in a downturn, the Texas Comptroller’s office predicts a growth of the states’ GSP of about 2.6 percent; this, it is estimated, will out pace the rest of the country by 0.6 percent.

Houston

According to CoStar’s roundup of the first quarter of 2010, Houston’s retail market stands at 8.5 percent, a decrease over the previous quarter. This absorption was coupled with a decrease in vacant sublease space. The market managed to absorb space even with the delivery of 12 buildings totaling 206,757 square feet. More than 300,000 square feet of retail space is still under construction.

Jake Baker of Riverway Retail says that a lot of this activity is coming not from the bigger users but from smaller tenants. “Mom and pops are willing to take a risk and go out there and open up their own shops,” he says. “They’re following the grocery stores, who are doing very well and opening new locations.”

Riverway Retail’s Scott Shilling’s echoes Baker’s sentiment, adding that, as with most places in the country, discount users are doing extremely well.

“The tenants who are value oriented seem to be doing best [in Houston],” he says. “People are trading down; they can get a very similar product but pay less. They used to get it at a department store, and now they get it at Target; they just feel better about that purchase.”

Texas retail doesn’t face many of the problems experienced in other parts of the country, and this leads Bemis to think the end of the retail downturn might come soooner for the Lone Star state than it will for the rest of the country.

“The picture’s getting better,” says JLL’s Bemis. “2010 will be much as it was in 2009. In 2011, we’ll start to see some slow growth.”

Despite this relatively positive outlook on the future of the Texas retail market, Bemis warns to be cautious and prepare for what might be a long, slow retail revival.

“This is not going to be a situation as it was in 2001, where we had a very deep and quick in, and we had a very deep and quick climb out,” he says. “The in on the front end of this was steep. The out is not going to be steep; it’s going to be a slow, gradual climb."

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