TEXAS SNAPSHOT, NOVEMBER 2006

Dallas Retail Market

The Dallas retail market has been performing well. The economy has grown; employment has increased another 2.5 percent during the last 12 months across the state; money has been abundant for the shoppers; tenants have wanted to expand; lenders and equity sources have been very accommodating; and Texas has had new excitement with lifestyle and mixed-use projects being built. However, this optimism needs to be kept in check. Every qualified developer, and then some, is out pushing hard to make overpriced sites work.

There are not enough retailers to go around in many situations, which results in stiff competition on rents and returns being compressed. As construction costs have escalated dramatically and interest costs have risen, some developers and investors are going to be disappointed with what they end up with. Many that are holding land for second phases and for unbuilt projects may have to wait a bit. This situation may not last long in certain areas. The key will continue to be strong tenant relationships, which underpin these projects. Texas is projected to continue to grow rapidly, and, although it will unlikely be a straight line, it should continue to be the place to be during the next 20 years.

Development is taking place all over, and Dallas/Fort Worth alone will see 3.8 million square feet of new retail space added by the end of 2006, however this number is the lowest increase we have seen in a decade. Developers in the inner city of the metropolitan areas are creatively adding or converting space. Mixed-use projects, including retail, are happening near the rail lines. Lifestyle and power centers are being built in the suburbs, while power centers are being built in the smaller cities and county seats. Strip centers are being built everywhere. The demand for space has been spread out all over as retailers follow the consumer. Wherever there is enough buying power to meet the sales volume target, the tenants remain ready to go.

In Dallas, the current retail trends indicate that enclosed malls are out. The lifestyle center is its replacement. But, every location is not right for a lifestyle center, even though every city and landowner would like such. Additionally, the need for projects that cater to the Hispanic shopper will continue to grow.

Several major retail developments are taking place in the Dallas/Fort Worth metropolitan area. The Retail Connection will be opening the first phase of a 635,000-square-foot hybrid lifestyle/ power center in Arlington in December called Arlington Highlands Shopping Center. The remainder of the project will open by April 2007. One of the unique elements of the project is that rather than having a large box anchor, there are numerous smaller boxes such as Bed Bath & Beyond, Staples, PetSmart, JoAnn Fabric & Crafts and Golf Galaxy anchoring the project. In addition, there is an impressive line-up of specialty retailers including Orvis, White House|Black Market, Ann Taylor Loft and restaurants such as P.F. Chang’s China Bistro and Mi Cocina, along with solid local retailers. The project will have a park setting with streams and fountains surrounded by buildings with turn-of-the-century “main street” brick buildings. Other developments in the area include MG Herring’s Uptown Village at Cedar Hill, which will be a 800,000-square-foot mixed-use development in Cedar Hill, Texas, and Trademark Company’s Watters Creek development, which will be a 500-acre mixed-use development in Allen, Texas.

As for the future of Dallas’ retail market, housing has slowed; the consumer has borrowed against his home to the extent possible; interest rates are up; a lot of retail space has been built in the recent past; cap rates for most retail projects are up; and construction costs have shot up quickly over the last year. Luckily, a lot of the projects built recently are an-chored and pre-leased. Unlike the late 1980s, there seems to be a natural slowdown that will be soft and easy. The money has been smart this time and the projects that have been built make sense.

— David Wilson is president of Connected Brokerage Services.

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