FEATURE ARTICLE, MAY 2012

THE RETAIL ROUNDTABLE

Texas Real Estate Business has compiled commentary from professionals in the retail real estate markets of Houston, Dallas, Austin and San Antonio for our annual Retail Roundtable. Several of our participants are optimistic about the state of the market, pointing to big deal developments such as the planned $1.5 billion Nebraska Furniture Mart or aggressive rates of debt capital as proof. Others are wary of the lack of construction in the marketplace.

In any event, these professionals have taken the time to look back — as well as look ahead — at the state of the retail market in the Lone Star State.

Dallas/Fort Worth

Laura Aufleger is the vice president of leasing for Direct Development; Mike Geisler is the managing partner of Venture Commercial; Brian Glaser is the president of the D/FW Commercial Retail Division of The Weitzman Group; and Jason Vitorino is the first vice president of investments and the senior director of the National Retail Group of Marcus & Millichap.

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

Aufleger

Aufleger: On Class A, first-quality products, activity has actually picked up during the last 12 months. Finally, after low absorption rates for the last 3 years, Class A product is nearly full. Unfortunately, the rest of the market has been extremely slow with deals being very difficult to make.

Geisler: The current retail activity level and pulse feels much stronger and steadier this year than last.

Glaser: The retail market is in motion again. The gains of 2011 are continuing in 2012. Retailers are expanding, but new space is limited, bolstering existing centers. Junior anchor spaces are backfilling again.

Vitorino: Investors are expected to increase their real estate holdings in an effort to hedge against inflation and volatility in the equity markets. With cautious optimism, albeit concerns over the global economy and an imminent election, investors are returning to fundamentals and are again acquiring assets only after an in-depth view of market rents, tenant mix and lease turnover dates, demographics and traffic patterns and scrutinizing NOIs to derive true and correct income and overall returns.

Vitorino

Well-located, long-term, single-tenant properties leased to credit tenants are in high demand and cap rates have compressed to an all-time low. Buyers will take less of a return in exchange for quality and safety. Additionally, core Class A multi-tenant properties, especially grocery-anchored assets, are in high demand but supply seems limited. Currently, unanchored retail properties are trading at cap rates between 7.75 percent and 9.5 percent, while core anchored assets have pushed into the 6 percent range.

As the financial markets continue to improve with the conduit market and insurance companies reentering the marketplace to compete with portfolio lenders, debt capital has returned at aggressive rates and terms. This will drive more activity and velocity in the marketplace.

The heavy onset of Texas capital is continuing to increase as compared to previous years when a majority of the capital was coming from out-of-state investors. In 2011, more than 16 percent of Marcus & Millichap’s Texas office’s $1.35 billion in property sales were acquired by local Texas investors.

However, there are still some concerns in the market. At the end of 2011, more than $800 million in retail properties were in some level of distress. Banks will continue to be more active in listing REO assets this year, particularly lower-tier, multi-tenant buildings that have deferred maintenance issues.

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

Aufleger: We have completed more deals with value-oriented tenants, specifically groups that focus on pets, kids and apparel. Consumers are looking for a good deal, and this is reflected in the groups with the most expansion plans.

Geisler

Geisler: Medical office uses have been active and have become a very desirable addition to most properties during the last year.

Glaser: In terms of development, our market is demand-driven, so when tenant demand slowed in the recession, so did new space. We are seeing new space come on line now, but it’s all anchor-occupied. Spec space is virtually non-existent. Last year, we added 1.7 million square feet, most of it for anchors like Kroger Marketplace, Costco, Walmart, Sam’s and the like. This year, we’ve already got 1.5 million square feet coming out of the ground, and again it is almost all anchor space. The only big exception is an outlet mall now under construction in the suburb of Grand Prairie. In terms of leasing, we saw 1.8 million square feet of absorption in 2011, which was a big gain over negligible absorption in 2010. We expect it to be even higher this year.

Vitorino: The rapid pace of employment growth and in-migration has accelerated the retail recovery in the Metroplex. Absolute job gains are among the highest in the country this year, and the 88,000 new positions represent the largest total since 2006. Developers are responding by refilling the retail pipeline, though operations still need several more quarters of improvement to warrant significant new construction.

Several of the planned large projects, previously on hold, anchored by Walmart and other big box discount retailers, will come on line by year end. These developments will compete for the limited number of retailers able to expand, thus applying pressure to smaller centers that fail to generate as much traffic. In Dallas, owners have been challenged to draw down inline space vacancy much lower than 15 percent. Fort Worth operators have fewer concerns, though neighborhood and community center vacancy will finish the year 200 basis points above the market wide average of 11.6 percent.

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

Aufleger: Very few major developments have come on line. Most of the development activity we have seen is in the continued build out of centers that were caught in the tsunami of 2008.

We are under construction on a new Tom Thumb-anchored, neighborhood center in Flower Mound­— Cross Timbers Village. We are only building about 20,000 square feet of small shop space and have pad sites available. Chase Bank and Walgreens are already committed. This center will focus on a high attention to detail on everything from the architecture, landscaping, to the family oriented patios and play areas.

Geisler: Luton Ranch, at the northwest corner of US 377 and Highway 4 in Granbury, is leasing well and the developer is already planning Phase II. Phase I of the power center component of Rayzor Ranch Marketplace, at the northeast corner of Interstate 35 and State Highway 380 in Denton, has come on line in the last year as well. In addition, The Trails, located just a half mile from the new intersection of Interstate 20 and Chisholm Trail Parkway (Highway 121) in Benbrook, has been announced and will be a significant addition to the landscape.

Glaser

Glaser: Quite a few new projects are under way in Dallas/Fort Worth. The most active anchors for new space are Kroger, which is rolling out several different formats, and Walmart, which is in the works with new Supercenters this year and is also backfilling existing vacancies with its smaller Neighborhood Market concept. Probably the largest project is the Paragon Outlets in Grand Prairie, which will exceed 400,000 square feet.

Vitorino: In 2012, completions will increase to 27 million square feet of space planned for the market as development resumes.

TREB: What submarkets are performing best?

Aufleger: It is hard to say what submarkets have performed best. It really depends on the asset. Sponsorship and co-tenancy still seem to be driving forces.

Geisler: Inner Loop retail and the luxury category of retail (i.e., Highland Park Village) have been performing best.

Glaser: In Dallas/Fort Worth right now, it’s all about the close-in urban markets. Concepts like Kroger, Walmart, LA Fitness, Trader Joe’s and more are positioning themselves to take advantage of the density and incomes in the market’s urban and close-in areas. At a time when few new homes are being built, retailers aren’t following rooftop growth, they are following density.

TREB: What types of retail product?

Aufleger: For us, assets with good sponsorship lead the way. Centers anchored with quality tenants have continued to perform strongly throughout the downturn. Our best sponsorship asset, Market Heights shopping center in Harker Heights, has been a success story based on the tenant mix and the support from the local community and Fort Hood. There is a great synergy between Target, Cinemark, Barnes & Noble, Dick’s Sporting Goods and Bed Bath & Beyond to name a few. The center is 95 percent occupied.

Geisler: Urban centers of all types, from grocery-anchored to fashion-focused, have seen high occupancy rates and rents have been trending up.

Glaser: Today’s theme is grocery-anchored community centers. Mixed-use centers are last year’s theme, and these are seeing better occupancy.

Vitorino: Buyer interest in single-tenant offerings remains strong and cap rates have continued to compress, causing many yield-seeking investors to move down the credit-rating scale to include more franchisee or secondary retailers. On average, single-tenant sales velocity jumped 30 percent during the most recent 12-month period with improvement across nearly all sectors.

Overall sales prices remained relatively stable, as the median price in the past year was $165 per square foot. Average cap rates have dipped 50 basis points to the high 8 percent range, though first-year returns vary significantly by product type. Among sought-after investments, drugstores traded in the low-to-mid 6 percent range, while fast-food properties clear the market in the mid 7 percent range. Finally, extremely well-located, long-term, single-tenant properties leased to credit tenants are in high demand and cap rates have compressed to an all-time low of 4.5 percent to 5.5 percent.

The multi-tenant sector is rebounding at a slower pace than single-tenant as investors remain concerned about retailers’ expansion plans. However, due to healthy local conditions in the state of Texas, demand for well-located, multi-tenant shopping centers has increased significantly in the middle of 2011 and continues in first quarter.

The buyer pool remains bifurcated between core Cass A and value-added properties with assets in between sitting on the market for long periods of time. Core Class A multi-tenant properties, especially grocery-anchored centers, are in high demand but supply therefore remains limited. Currently, unanchored retail properties are trading at cap rates between 7.75 percent and 9.5 percent, while core anchored assets have pushed into the 6 percent range.

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

Aufleger: We have seen many quick service restaurants enter the market. Many that have exited are groups that have closed stores on a national level, like Circuit City, Linens ‘n Things, Blockbuster and Rooms - to - Go.

Geisler: RoomStore is currently exiting the local market. However, several retailers, including Specs, Total Wine, Nebraska Furniture Mart, H&M, and Bloomingdale’s Outlet, have plans to enter the market.

Glaser: In terms of exits, we lost the last Borders stores last year as the chain went out of business. Blockbuster is still operating, but it has closed a lot of stores. But openings are far outpacing closings. New market entrants include H&M, Trader Joe’s, Spec’s (a spirits superstore from Houston), In-N-Out Burger and Bloomingdale’s Outlet.

Vitorino: Several grocers have recently entered the Dallas/Fort Worth market while many of the current ones have significantly stepped up their growth plan. The supermarket Aldi has entered into the market in recent years, taking several of the vacant spaces previously occupied by Albertsons. Additionally, California-based Trader Joe’s announced Texas expansion plans in early 2012. However, at about 10,000 to 15,000 square feet, Trader Joe’s stores are much smaller than a traditional 50,000-square foot supermarket.

Other grocers have entered the North Texas market in the past few years, including fast-growing independents Sprouts Farmers Market, Natural Grocers and Sunflower Markets. Since there aren’t a lot of new retail developments in the works, several of these expanding retailers are gobbling up space in existing shopping centers.

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

Aufleger: Rental rates have remained the strongest in outparcel buildings located on a main thoroughfare in front of well-positioned centers. It has been more challenging leasing inline small shop space that is less visible from the main road. Thankfully, our vacancy rates have remained low.

Geisler: Overall vacancy continues to decline, while rental rates have flattened out and are holding steady in the suburbs. However, rental rates have spiked upwards in the more urban submarkets.

Glaser: Overall occupancy is currently at 88 percent and trend lines are pointing up. We expect to be just under 90 percent by year-end, thanks to continued leasing and low construction. Rental rates for the most part have remained flat, but we’re not seeing the big concessions that we saw in the depth of the recession.

Vitorino: Retail vacancy will decline 50 basis points through year’s end to 11.6 percent. In 2011, the vacancy rate ticked down 20 basis points.

In Dallas, vacancy at neighborhood/community centers inched up 30 basis points in the past year to 15 percent. Fort Worth owners have supported occupancy through more aggressive leasing incentives, which facilitated a 30-basis-point improvement in neighborhood/community center vacancy over the past year to 14.1 percent.

TREB: How is the first half of this year performing compared to the last half of 2011? Is there more activity/optimism?

Aufleger: We remain optimistic as it seems there is a little more activity, but it is still a difficult environment.

Geisler: The first half of 2012 feels much stronger and more consistent. We are seeing a significant amount of activity in the market.

Glaser: The first half of the year is definitely stronger than last year, and we’re optimistic that a strong 2012 will carry us into an even stronger 2013.

Vitorino: Transaction velocity increased substantially in mid 2011 and continues to remain strong the first quarter.

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

Aufleger: My leasing partner, Linda Zimmerman, and I hope to lease up the remainder of our existing product and begin pre-leasing on new construction.

Geisler: To continue to adapt to the changes in the marketplace and capitalize on current market activity.

Glaser: To continue to drive strategic growth plans for our clients, capturing new opportunities in the market and creating opportunities in the market where others might be struggling.

Houston

David Dominy is the managing director of Integra Realty Resources-Houston; Jerry Goldstein is the first vice president of investments at Marcus & Millichap in Houston; and James Namken is the senior vice president of The Weitzman Group’s Houston office.

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

Dominy

Dominy: Overall, the Houston retail market experienced a slight improvement in market conditions in 2011. Vacancy declined to 6.7 percent, down from 7.2 percent at year-end 2010. Net absorption for 2011 was positive 2.8 million square feet compared to 3.99 million square feet in 2011. Quoted rental rates decreased slightly to $14.35 per square foot at year-end 2011, down from $14.69 per square foot at year-end 2010. The total amount of total inventory under construction is currently 769,413 square feet, up from 422,766 square feet at year-end 2010, indicating that the market is strengthening.

Goldstein

Goldstein: From my frame of reference in investment sales there has been a dramatic increase in activity during the past 6 months — both in transaction volume and in increasing prices. The market is better organized and the availability of financing is driving these improvements in the retail real estate sector.

Namken: Our economy is going strong, and that’s boosting the retail market. The Houston metro area created 93,400 new jobs between February 2011 and February 2012, and our unemployment rate has dropped to 7.2 percent. The strong economy is giving retailers the confidence to expand.

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

Dominy: In light of the economic recession, total development activity slowed through the third quarter 2010. However, it appears that development activity has increased since that time. Leasing trends noted during the recession are the transformation of former anchor/junior anchor tenant spaces to other uses, including gyms and educational settings. Additionally, former auto dealerships/showrooms have been converted to other retail uses, namely service stations.

Goldstein: Some retailers that over-expanded during the high-growth period have now closed or repositioned their stores. The lack of new development is providing the market to take a breather and absorb vacant space.

Namken

Namken: The downturn limited retailer expansions, which resulted in our retail construction totals declining. But that’s a good thing — you don’t want space to outpace demand. We only added 600,000 square feet last year, and most of that was for anchors. Existing centers are the name of the game for retailer expansions right now.

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

Dominy: There are three major retail developments that have been recently completed. They include Townsen Crossing, a 200,200-square-foot project completed in April of 2011; Woodlake Square Shopping Center, a 160,000-square-foot project completed in June of 2011; and Sam Houston Town Center, a 148,000-square-foot project completed in September of 2011.

Projects under construction include High Street in the Inner Loop, a 78,000-square-foot project that slated to be completed in December of 2013; Shops at Bella Terra Phase IV in Cinco Ranch, an 89,044-square-foot project that is slated to be completed in October of 2012; La Centerra at Cinco Phase II in Cinco Ranch, a 160,000-square-foot project that is slated to be completed in September of 2012; Southpark at Cinco Phase I in Cinco Ranch, a 203,097-square-foot project that is slated to be completed in March of 2013; and Brazos Town Center Phase II at Fort Bend, a 750,000-square-foot project. There is no estimated completion date.

The majority of developments under construction appear to be in the west/southwest suburban areas where new homes are being constructed.

Other notable retail developments completed in late 2010 include the West Avenue project, a mixed-use, mid-rise multifamily/retail development well located at the southwest corner of Kirby Drive and Westheimer Road.

Goldstein: No new significant developments have come on line yet. However, 2.2 million square feet of retail properties is expected to be completed this year, most of which being anchor/big box single-tenant driven. The most prominent of these is a Tanger/Simon 350,000-square-foot outlet center in Texas City.

Namken: New space will again be limited this year, but some projects are under way. One includes a new Whole Foods at BLVD Place near the Galleria and an H-E-B-anchored project in Sugar Land called The Crossing at Telfair. Walmart also is in the works with a 152,000-square-foot urban Supercenter in the Heights area, one of Houston’s older neighborhoods.

TREB: What submarkets are performing best?

Dominy: The areas currently performing best are the CBD and Inner Loop submarkets. The CBD has a 5 percent vacancy rate, quoted rents of $35.21 per square foot and experienced 119,769 square feet of net absorption in 2011.

The Inner Loop has a 5.5 percent vacancy rate, quoted rents of $20.63 per square foot and experienced 105,722 square feet of net absorption in 2011.

Goldstein: Mixed-use developments inside Loop 610 continue to be popular as those seeking the urban lifestyle are embracing these concepts. West Houston, The Energy Corridor and Cinco Ranch are leading suburban growth along with North Houston as a result of the imminent construction of ExxonMobil’s headquarters, which will employ 12,000 people.

Namken: The Galleria-area submarket, as always, continues to perform. Other strong markets include Pearland, Katy, The Woodlands and Sugar Land.

TREB: What types of retail product?

Dominy: Primarily lifestyle and power centers are performing best.

Goldstein: Properly conceived and located mixed-use centers continue to thrive with neighborhood centers, lifestyle centers and power centers continuing to expand and absorb space.

Namken: Most of the new space in the works is for grocery anchors, like Walmart, Whole Foods or H-E-B, but an outlet mall is also being considered for site on Interstate 45 and Holland Road. The first phase would have around 350,000 square feet .

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

Dominy: Trader Joe’s is entering the greater Houston market with locations at Memorial/Voss and Inner Loop in the historic Alabama Theater on South Shepherd.

Goldstein: Trader Joe’s has entered the Houston market with three planned stores. DD’s Discounts, a low-cost Ross concept, has also entered the Houston market. RoomStore has closed six large furniture outlets as a result of its bankruptcy.

Namken: Borders is gone from Houston, as it is from all the markets around the country. We’ve had a few closings here and there, but nothing major like we saw in 2009 and 2010 with Linens ‘n Things and Circuit City. We are seeing new high-profile market entrants, most notably specialty grocer Trader Joe’s, which will be opening its first area stores in the near future, and fast-fashion retailer H&M, which is opening in a few area malls.

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

Dominy: CBD vacancy rates are currently at 5 percent, while suburban Houston vacancy rates are at 7 percent.

Goldstein: Current occupancy is 90 percent in Houston for multi-tenant retail centers. Rental rates are holding steady with concessions slowly diminishing.

TREB: How is the first half of this year performing compared to the last half of 2011? Is there more activity/optimism?

Dominy: The first half of 2011 vacancy was 7 percent and stayed at 7 percent at year-end 2011. Net absorption increased in the second half of 2011 to 1.98 million square feet compared to 831,817 square feet in the first half of 2011.

Quoted rental rates decreased to $14.35 per square foot in the second half of 2011 from $14.45 per square foot in the first half of 2011. The amount of inventory under construction decreased to 769,413 square feet at year-end 2011 compared to 999,081 square feet at mid-year 2011.

Goldstein: Houston has renewed activity and optimism based on the growth of the city. Current unemployment is at 7.3 percent, which is one of the lowest figures in the country. And that figure is down from 8.2 percent last year. New retail development has doubled since 2011. Population in the Houston MSA is 6.1 million people, reflecting a 30 percent growth in the last 12 years.

Namken: The market has been improving since 2010, and this year is no exception.

Austin

Adam Zimel is the senior vice president of The Weitzman Group’s Austin office.

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

Zimel

Zimel: The market in Austin continues to get better. We are actually seeing activity for all product types, with multiple offers on some of the best-located spaces. Sometimes, the challenge is keeping up with all the business.

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

Zimel: On the retail leasing side, we’ve seen a real flight to quality. Austin has a relatively new retail inventory, and as the downturn caused some retailers to fall out, others relocated from weaker projects to take advantage of available space and lowered rents. Now, however, strong Class A space is in limited supply, which has firmed up rates and lowered concessions. We’re not there yet, but we will soon find ourselves in a situation where retailer demand and higher rental rates justify a new round of construction.

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

Zimel: We have a statewide company, and when we meet with brokers in our other offices, we always hear the same thing: almost all new construction is for grocery-anchored retail. That’s certainly true for Austin. The largest projects this year are: Lakeline Market, a center under way at Highway 183 and Lakeline Boulevard that will be anchored by a 117,800-square-foot H-E-B Plus! store; Costco, which is in the works on a 145,000-square-foot store — its third in our market — in Cedar Park; Randalls @ the Ranch, a community center anchored by a 60,000-square-foot Randalls grocery; The Trails at 620, an entertainment-anchored project in the Four Points area that will feature a multi-screen cinema and several restaurants; Alamo Drafthouse, a dinner-and-a-movie concept, with its largest location that is anchoring the new Parkside Village project in Southwest Austin. The Alamo Drafthouse totals 33,650 square feet.

TREB: What submarkets are performing best?

Zimel: Austin is a fairly compact retail market, despite being one of the largest metros in Texas. Throughout our area, the strongest performers are the close-in submarkets, which offer density and incomes. The only areas where we see any notable vacancy are in the outlying new-growth markets, where new space has somewhat outpaced residential growth. But our new home market is recovering, and we’ll see those outlying projects succeed in 2013.

TREB: What types of retail product?

Zimel: Community centers remain the strongest performing category. New stores are being added this year from H-E-B, our largest grocer, and Randalls, a unit of Safeway. H-E-B will open a new 75,000-square-foot store in 2013 in the master-planned Mueller community, anchoring a project called Market District at Mueller (which we lease). H-E-B has also been expanding existing stores, such as adding 20,000 square feet to the 85,000-square-foot store in the Cedar Park suburb. Walmart is also in the works with four new stores, totaling 150,000 square feet each, with the first two to open next year.

We’re also seeing pretty good activity for our mixed-use projects. Whole Foods is headquartered in Austin, and the grocer is more active here now than at any time in recent memory. They are opening a new 35,000-square-foot store this month in a major mixed-use project called Hill Country Galleria. We negotiated the Whole Foods deal for the project, which includes Dillard’s, Dick’s Sporting Goods, office space and municipal space. Whole Foods also opens this year at The Shops at Arbor Trails and next year in the major mixed-use project, The Domain.

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

Zimel: Like every other major market in the U.S., we saw the exit of Borders in 2011. However, two of the market’s three vacated Borders are getting backfilled. A new market entrant, Treehouse, took one 25,000-square-foot Borders space for its sustainable home improvement concept. We also saw five locations for two different furniture stores close, one of which was RoomStore, which went out of business in Texas. Several of these locations have been re-tenanted or are being re-developed. Sprouts Farmers Market also closed three of its locations here, but one of these has already been backfilled. Other than those examples, we’ve seen many more openings than closings. Even IKEA, which already operates a huge store here, is expanding it by 54,000 square feet to keep up with sales.

H-E-B also opened its first Hispanic-oriented concept, Mi Tienda, earlier this year. The Mi Tienda opened in renovated and expanded H-E-B location on North Lamar Boulevard.

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

Zimel: Our occupancy rate is currently at 93.5 percent, which is the highest occupancy rate among Texas’ major-metro retail markets. Based on steady leasing at a time of very limited construction, we expect occupancy to reach 94 or 95 percent by year-end.

TREB: How is the first half of this year performing compared to the last half of 2011? Is there more activity/optimism?

Zimel: The second half of 2011 was better than the first half, and the first half of 2012 was even better than that. Needless to say, we’re optimistic about the rest of the year.

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

Zimel: We want to do the best possible job for our clients, and understanding the market is a big part of that. Our business will continue to grow with continued client success.

San Antonio

David Nicolson is the president of The Weitzman Group’s San Antonio office.

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

Nicolson: San Antonio’s economy is on the upswing. That is helping our retail market, both in terms of leasing and in terms of retail sales. Based on sales tax collections, our retail sales are running around 7 percent ahead of last year’s levels.

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

Nicolson: In terms of development, we saw it slow dramatically as retailer expansions slowed. But that has allowed our market’s vacancies to be absorbed by the increasing lease activity in the market. We’re also to the point where limited retail development is justified, depending on the submarket, the rental rates that can be achieved and retailer interest.

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

Nicolson: Last year, we only added around 300,000 square feet, and almost all of that was for our market’s leading grocer, H-E-B. This year, we’ll see more retail, including a 179,000-square-foot H-E-B Plus! on Bandera Road, a new 138,000-square-foot Target and a new 35,000-square-foot Whole Foods. Cencor is under way with a mixed-use project called Dominion Ridge. The project will have 60,000 square feet, and around half of that is currently pre-leased.

TREB: What submarkets are performing best?

Nicolson: Our largest submarket, the North Central, is also one of our best performing. The submarket reports approximately 10.2 million square feet, with a vacancy rate of only 7 percent.

TREB: What types of retail product?

Nicolson: Other than the specialty projects I mentioned, the new space in the works is for community retail, with a grocer anchor. This center category continues to be a strong performer.

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

Nicolson: Of course, we saw the last Borders stores close last year, but otherwise, the level of closings is significantly down from 2009 and 2010, when major chains were hit hard by the sharp drop in retail sales nationally. As for market entrants, one of the most significant is specialty grocer Trader Joe’s, which chose a lifestyle project called Quarry Village as its first location here. The Trader Joe’s will backfill a former West Elm location.

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

Nicolson: Right now, we’re at 90.4 percent. We’ve managed to stay above 90 percent since 2010. We’re also experiencing steady job growth, with an unemployment rate of 7.3 percent, well below the national average.

TEXAS

Kelly Cofer is the president and CEO of The Retail Coach.

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

Cofer

Cofer: The markets are definitely improving across the board, although some suburban markets and smaller markets remain sluggish. Retailer demand has clearly increased, but retailers are being very discriminating, thus deals are taking longer to complete. Retailers continue to be cautious due to economic uncertainty in an election year.

Retailers upped growth plans in 2012 following strong 2011 holiday sales. We are seeing growth in all sectors with discounters, drug store chain, fast casual restaurants and popular national franchises continuing to dominate.

Having worked in 24 states, we see that Texas continues to be the choice for expanding retailers. Texas is always the last state to experience an economic slowdown and the first to recover. This is as true today as it was in 1985 when I entered the business.

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

Cofer: Increased vacancy rates and downward pressure on lease rates in all property types.

Retailers look for new opportunities, not just sites. Retailers have to be convinced they will make money. Gone are the days when you could send a demographic package and expect a response.

Retailer bankruptcies and consolidations changed the game. Markets, which historically had been developer-driven, became tenant-driven with tenants dictating lease terms.

There has been a great deal of pressure on Class B and C properties. Class B properties lost tenants who were able to “move up” to Class A properties due to high vacancy rates and the property owners’ need to fill vacant space. In turn, Class C tenants “moved up” to Class B properties. Class C properties suffered the most, and many properties were faced with a change in use away from retail.

Online shopping changed (and is changing) how and where retailers conduct business. Many are moving to smaller stores that stock only the best selling items. Customers are directed online for other items.

Upper and lower income neighborhoods grew at the expense of middle-income neighborhoods. Retailers that catered to the middle-income base are being squeezed out.

Many retailers altered expansion plans to minimize risk — choosing more densely populated areas over “emerging” suburban areas.

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

Cofer: We have not seen any movement on major retail developments, primarily due to high vacancy rates and financing issues. Most development activity has been single-tenant oriented. An exception would be in The Colony, where Nebraska Furniture Mart has announced plans to develop a $1.5 billion, 430-acre complex. The Omaha-based furniture retailer is owned by Warren Buffett’s Berkshire Hathaway, Inc. That’s pretty exciting for the entire North Texas region.

TREB: What submarkets are performing best?

Cofer: Submarkets that accommodate population bases with high degrees of disposable income typically perform the best. These submarkets generally have the strongest roster of national retailers and become a destination for consumers.

TREB: What types of retail product?

Cofer: Lifestyle centers and well-located Class A neighborhood centers are performing well nationally. Mixed-use developments continue to be a popular product type for certain retailers because you can create your own retail market by having residential, commercial, industrial, office and medical activities located together.

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

Cofer: We are in negotiations with retailers in multiple Texas markets where we are currently working.

TREB: How is the first half of this year performing compared to the last half of 2011? Is there more activity/optimism?

Cofer: Retailer activity and optimism has remained consistent between 2012 and the end of 2011.

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

Cofer: The Retail Coach will continue to expand our services nationwide by helping communities identify and pursue their opportunities for retail recruitment and retention.

Retail recruitment has become a component of most communities’ economic development strategy. However, many communities are contacting retailers without an understanding of the retailer’s specific needs or what the community actually has to offer.

A unique aspect to our consulting firm is that we identify and recruit retailers that are an ideal fit for a community. This is determined by an extensive market analysis as well as the analysis of competing communities and their retail bases.

There is opportunity for retail expansion, especially in Texas, but a strategic approach is required for success.

©2012 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) 553-9037.