COVER STORY, MAY 2011

TEXAS RETAIL ROUNDTABLE
Texas Real Estate Business spoke with retail real estate executives across the state to get their perspective on the Texas’ retail market. This month’s participants include: Keith Van Arsdale, president and chief executive officer of BMC Capital; Lisa Bridges, director of market research, Colliers International; Gary Davis, president, First Advisors; Scott Walker, director of leasing, MIMCO; and Michael Blum, partner and managing broker, NAI Rio Grande Valley.

Dallas/Fort Worth

Keith Van Arsdale is president and chief executive officer of BMC Capital in Dallas.

TREB: What is the current state of retail activity in your market?

Keith Van Arsdale: Retail is flat with vacancy still at approximately 11 percent and rental rates flat to decreasing for the Dallas/Fort Worth (D/FW) market area. From a lending perspective, lending on retail centers has progressively improved albeit “inch by inch.” For those owners that did not over leverage during the past 5 years, we can typically provide a refinance loan of

up to 70 percent loan-to-value (LTV) and execute with low interest rates. We are now actually seeing loans that make sense.

TREB: Have any major developments come on line this year? Are any planned?

Van Arsdale: There aren’t many retail projects being undertaken at this time. There is too much retail space available and not enough leasing demand. Further, construction financing is still very challenging to find, even for the best quality projects.

TREB: What submarkets are performing best?

Van Arsdale: Well-located centers in high traffic areas with a mix of national and “mom-pop” tenants are doing pretty well. It is critical that the center have the best visibility and parking to be attractive to customers.

TREB: What types of retail product? (neighborhood centers, lifestyle centers, mixed-use, etc.)

Van Arsdale: Large, big box centers have fared well due to the drawing power of national tenants. Also, many big box tenants have moved into the submarkets in which they have seen an opportunity to gain space at a much lower price per square foot. Neighborhood centers in high traffic areas have performed well too.

TREB: How is the first half of 2011 performing compared to the second half of 2010? Is there more activity/optimism?

Van Arsdale: We are optimistic that retail will improve albeit it at a very slow pace. It will likely take 2 to 5 years for the mrket to return. Consumer confidence and the economy are key drivers. From a lending perspective, we have seen an increase in lending activity in the retail sector (especially single tenant NNN). People are attracted to the stabile, solid returns for high quality tenants like Walgreens, CVS/pharmacy, FEDEX, Home Depot and Lowe’s Home Improvement Warehouse. The market is still healing inch by inch. The bottom line is we’re seeing more loans for retail centers that make more sense today than a year ago.

TREB: What are your goals for the remainder of the year?

Van Arsdale: Our goal is to increase our lending activity in the retail sector by 20 to 35 percent.

Houston

Lisa Bridges, director of market research in Colliers International’s Houston office, provided a summary of the Houston retail market in the first quarter of 2011.

Houston’s retail market continued to improve in the first quarter of 2011 with positive net absorption and lower vacancy rates. For the past seven quarters, Houston’s retail market has posted positive net absorption. Retail vacancy rates for all product types stood at 8 percent, down from 9.1 percent at this time last year. Developers have curtailed development, delivering only 49,600 square feet of new retail space in the firstquarter — compared to 228,000 square feet in the first quarter last year — and only added six projects to the construction pipeline. Overall, the local market is performing well under less than optimal economic conditions, namely sluggish job growth and low consumer spending levels.

Macrofactors driving the absorption of retail space ultimately tie back to the job count. According to the Texas Labor Market Review, total nonagricultural employment in Texas rose by 22,700 jobs in February, or 0.2 percent. Six of the 11 major industries grew over the month, with Professional and Business Service jobs contributing to more than half of the job gains. At the local level, Houston’s MSA had the largest monthly job increase, with 9,600 jobs added in February, followed by Dallas with 7,700 jobs added.

Houston’s above-average population growth is expected to reach 9.5 million by 2035, led by strong growth in suburban Fort Bend and Montgomery counties. Houston’s diverse population spanning all economic brackets continues to be a strong draw for retailers. Several new retailers leased space in the Houston market during the first quarter, with one of the more notable being Sundance Cinemas. Sundance Cinemas leased the former Angelika center space at Bayou Place in the theatre district of downtown Houston. Sundance began extensive refurbishment work on the eight-screen complex and plans to be open for business in November. The Houston venue will be the third of its kind and will have all reserved seating, filmmaker screenings, and exclusive events. Houston’s strong long-term outlook is expected to continue attracting retailers seeking to expand marketshare in one of the fastest growing metropolitan areas in the U.S.

Vacancy & Availability

Houston’s retail vacancy rate fell to 8 percent in the first quarter, down from9.1 percent at this time last year. By product type on a year-over-year basis, lifestyle centers posted the largest decrease of 390 basis points (bps) to 4.2 percent vacancy, followed by community and power centers which fell by 280 and 240 basis points to 8.7 and 4.8 percent, respectively. In contrast, outlet centers year-over-year vacancy rates rose by 750 bps.

Houston’s retail vacancy has steadily decreased over the past seven consecutive quarters with the last five quarters remaining below 10 percent.

Limited new supply will continue to help the market remain stable over the coming 12 months.

Construction activity picked up between quarters with six additional retail projects added to the four that were already in the construction pipeline. The retail projects under construction total 480,608 square feet and are 37.9 percent preleased.

Absorption & Demand

Houston’s retail market posted 267,981 square feet of positive net absorption in the first quarter which is significantly less than the 593,490 square feet of positive net absorption posted in the fourth quarter of 2010. On a year-over-year basis, absorption declined from the 609,223 square feet recorded in the first quarter of 2010.

By property type, single-tenant retail led the market in the first quarter with 132,258 square feet in positive net absorption, followed by power centers with 113,945 square feet. Community centers, strip centers, and lifestyle centers followed, posting positive net absorption of 67,463, 65,634, and 33,595 square feet, respectively.Neighborhood centers had the largest loss reporting (88,696) square feet of negative net absorption followed bymalls with (56,518) square feet of negative net absorption.

Some of the single tenants that moved into their space during the first quarter include Walgreens in the Jersey Village submarket, Black Diamond Café in the Northwest submarket, Loan Star Title Loans and Luis DeLa Torre, both located in the Inner Loop submarket.

Rental Rates

The citywide average quoted rental rate remained relatively unchanged, decreasing to $14.83 from $14.85 between quarters.

Lifestyle centers’ average quoted rental rates had the largest gain between quarters increasing by 4.6 percent to $32.98 per square foot NNN (from $31.52 per square foot). Outlet centers’ rental rates increased by 2.5 percent to $13.33 per square foot NNN (from $13.01 per square foot), followed by neighborhood centers and single tenant increasing by 1.5 and 1 percent to $13.40 and $11.41 per square foot, respectively.

In contrast, power centers posted the largest quarterly decrease of 17 percent to $17.69 per square foot NNN (from $19.03), followed by malls and community centers with a decrease of 1.4 and 0.9 percent to $18.23 and $14 per square foot NNN, respectively.

Sales Activity

Investment sales for Houston’s retail properties picked up slightly in the first quarter, recording 10 more transactions than the previous quarter. There were 55 transactions in the first quarter with a total dollar volume of $7.5 million, averaging $75 per square foot with an average 7.4 percent capitalization rate.

The most significant transactions that closed during the first quarter areas follows: Avk Properties LLC acquired the 27,573-square-foot Silver Lake Plaza located at 9607 Broadway in Pearland. The property sold for $4 million or $145 per square foot.

Jc Swift Properties purchased the 54,005-square-foot Aldine Mail Crossing located at 5415 Aldine Mail Road from Rockwell Debt-free Props for $604,300 or $55 per square foot.

Wellhead Distributors International purchased a 54,768-square-foot vacant Walmart on State Highway 249 in Tomball from PS Misstex Ltd. for $2.6 million or $47 per square foot.

Leasing Activity

Houston’s retail leasing activity slowed significantly in the first quarter, with 280 transactions totaling 880,617 square feet compared to 390 transactions totaling 1.5 million square feet in the fourth quarter of last year. Overall, transactions under 20,000 square feet comprised the largest group of retail leases, with the market recording only five leases over 20,000 square feet in the first quarter.

Significant retail leases signed in the first quarter include: AshleyFurniture’s renewal of 52,360 square feet in Deerbrook Corner; University of Texas Medical Branch Multispecialty Center lease for 45,511 square feet in Victory Lakes Town Center; Sundance Cinemas’ 40,500-square-foot lease in Bayou Place; dd’s Discounts’ 21,121-square-foot lease in North 45 Plaza.

Central Texas’ Secondary and Tertiary Markets

Gary Davis, President of First Advisors in Austin, participated in the roundtable by answering questions about Central Texas’ secondary and tertiary markets, a specialty of First Advisors.

TREB: What is the current state of retail activity in Texas' secondary markets?

Gary Davis: Secondary market activity, consisting of discussions between owners and retailers, is taking place on a limited basis for planned store openings in late 2012 and 2013. Some of the discussions involve existing, vacant buildings and some is for new buildings, mostly to be built by the retailer on land owned by the developer. Activity in tertiary markets is spotty to non-existent, depending on the market area.

TREB: What retail leasing/development trends have surfaced during the economic downturn?

Davis: Existing buildings available for retro fitting and suitable for occupancy by the retailer dominate the activity that exists. New build to suits for retailers (excepting fast food) are almost non-existent, due to a lack of financing. Many retailers, regardless of size, will self develop on developer owned land for the foreseeable future until financing is readily available.

TREB: Have any major developments come online this year? Are any planned?

Davis: The drought encompasses not only the lack of rain, but also new projects. Thus far in 2011, new developments coming on line are as scarce as rain in most parts of Texas.

TREB: Which secondary markets are performing best?

Davis: Markets along the Interstate Highway 35 corridor are performing best, i.e. from Laredo on the south, New Braunfels/San Marcos, Austin/Round Rock, Temple/Killeen in the middle and the secondary market areas north of the Dallas/Fort Worth metro.

TREB: What types of retail product are performing?

Davis: Grocery stores are doing very well. Specialty apparel that is value priced is also doing well, along with phone retailers, such as AT&T.

TREB: Have any major retailers entered/exited secondary markets?

Davis: Grocery store chains are looking to expand in some of the secondary markets. Liquor store chains as well. Exits from the markets have stabilized since late 2009, early 2010.

TREB: What is vacancy like? Are rental rates holding steady?

Davis: Vacancy does not seem to be getting worse than it has been in the past couple of years. Rental rates seem to have stabilized after dropping for the past several years since the onset of the recession.

TREB: How is the first half of 2011 performing compared to the second half of 2010? Is there more activity/optimism?

Davis: Activity for the first half of 2011 is up, if compared to retailer inquiries for the second half of 2010. At least retailers are now calling developers, instead of being called.

El Paso

Scott Walker is the director of leasing for MIMCO, Inc., in El Paso.

TREB: What is the current state of retail activity in your market? 

Scott Walker: El Paso continues to thrive. So far, 2011 has been an extremely productive year. Our leasing activity is up throughout the city from last year. With consumer confidence growing, developers are becoming more confident and unlike the last couple of years, we are starting to see some of the first new spec developments.

TREB: What retail leasing/development trends have surfaced during the economic downturn? 

Walker: Unlike most of the country, El Paso maintained very well through the economic downturn. The city never had the large spike in prices and never overgrew with large box spaces. Therefore, spec developments slowed down, but leasing activity maintained quite well. Some landlords lowered some leasing rates and offered some move-in concessions; however, overall the continued population growth from both the military at Fort Bliss and families moving in from Mexico have helped the retail market.

TREB: Have any major developments come on line this year? Are any planned?

Walker: The Fountains Shopping Center by Centergy Retail, demolished the old Farah Warehouse at Hawkins and I-10 and expects to break ground in 2012 on an approximately 500,000-square-foot power/town center.

MIMCO Inc. recently broke ground on Phase I of a retail center at Sean Haggerty and U.S. 54. The first phase will approximately be 40,000 square feet, followed by Phase II consisting of 30,000 square feet at Sean Haggerty and Marcus Uribe.

Hunt Development Group  expects to break ground this summer on yet another phase of the 650-acre Cimarron master-planned community located along Resler Drive in northwest El Paso. The addition of The Falls at Cimarron and Cimarron Sage will add approximately 40 acres of commercial development. Hunt will also break ground in May on Phase I of the Mission Ridge  master-planned community located  in east El Paso at the corner of Rojas and Eastlake. The development will consist of 19 acres of commercial and retail development. Its completion date is expected in late 2012. The Outlet Shoppes at El Paso located in west El Paso at Transmountain and Interstate 10, currently 378,835 square feet, expects to a 50,000-square-foot Phase II addition.

TREB: What submarkets are performing best? 

Walker: Like in years past, all of El Paso continues to perform well. The northeast continues to grow and developments are continuing with the expansion of the military. West El Paso and east El Paso continue to grow with El Paso’s economy staying strong. Central El Paso near the airport and the University is also very strong.

TREB: What types of retail product? (neighborhood centers, lifestyle centers, mixed-use, etc.) 

Walker: El Paso, because of how its location on the freeway, has become more of a strip center city. Power center developments are being planned throughout the city especially with more national retailers wanting to move into the market. We expect some mixed-use developments in the next couple of years near the University and in downtown, but at this time nothing is under construction.

TREB: Have any major retailers entered/exited your market?

Walker: Some new retailers to El Paso are Specs Wine Spirits and Finer Foods, Pot Belly Sandwiches, and Five Guys Burgers and Fries. Many national tenants such as Panda Express, The Vitamin Shoppe, Buffalo Wild Wings, The Corner Bakery, Game Stop, Dollar Tree, and Dollar General continue to expand in the market.

TREB: What is vacancy like? Are rental rates holding steady?

Walker: Vacancy rates are very low. Rental rates are starting to increase throughout the city and landlords are giving less concessions.

TREB: How is the first half of 2011 comparing to the second half of 2010? Is there more activity/optimism? 

Walker: The first half of 2011 has been the best in a number of years. There is great optimism throughout the city among the real estate community. It seems like everyone is seeing more activity and everyone seems to be getting deals signed. I expect the second half of the year to be better than the first half.

TREB: What are your goals for the remainder of the year?

Walker: Our number one goal is to continue leasing vacancies and growing our portfolio. We are in a growing mode. Steady growth is our number one goal.

The Rio Grande Valley

Michael Blum is a partner and managing broker of NAI Rio Grande Valley.

TREB: What is the current state of retail activity in your market? 

Michael Blum: Retail in the Rio Grande Valley remains stable, in spite of national economic conditions. Retail sales tax collections through April 2011 were up 4 percent over the same period for April 2010 ($63.5 million vs. $61 million).

TREB: What retail leasing/development trends have surfaced during the economic downturn?             

Blum: Significant increase in restaurant retail activity. Five Guys Burgers & Fries is nearly ready to open, Smash Burger, Texadelphia, and Lone Star Steak House have opened in the market. Pappadeaux’s opened in September 2010 and ranks first in Hidalgo County in beverage sales among all of its competitors.  Poncho’s has opened its second store in McAllen preceded by the second Red Lobster. Buffalo Wild Wings is relocating and expanding it North McAllen restaurant. We have also seen the entry of several Mexican-owned family restaurants relocating from Mexico. These would include La Masion del Prado, Arturo’s and Cabrito El Pastor. The investment by Mexican Nationals in McAllen is a growing trend. Bayou Grill, based in Corpus Christi, is scheduled to open a McAllen location soon.

TREB: Have any major developments come on line this year?

Blum: Bass Pro Shops is under construction in Harlingen. Ninety thousand square feet of new construction will begin at the Shoppes at Rio Grande Valley this summer. 

TREB: Are any planned? 

Blum: A new Sam’s Club may be announced soon for North McAllen and there is strong suspicion that a Costco will be constructed in the Valley in 2012.

TREB: Have any major retailers entered/exited your market?

Blum: Ultimate Electronics came and went.

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