COVER STORY, OCTOBER 2011

TEXAS RETAIL ROUNDTABLE
Retail real estate professionals from across the state discuss the industry’s performance in 2011 compared to last year, and what they foresee for 2012.
Compiled by John Nelson

Texas Real Estate Business recently spoke with several retail real estate executives in the state to get their impressions of the market. Participants included: Jason Baker, co-founder and principal, Baker Katz; Gerald Crump, vice president and director of Central Region, Weingarten Realty; Jerry Goldstein, senior director — National Retail Group, Marcus & Millichap; Jeff Read, principal, Read King Commercial Real Estate; R. Carson Wilson IV, marketing director, Fidelis Realty Partners; Jason Claunch, principal, Catalyst Commercial, Inc.; Tim McNutt, director of leasing and sales, Bright Realty; Jean Smith, COO, UCR Realty; Keith McRee, vice president, NAI REOC — San Antonio; David Simmonds, principal, Retail Solutions; Ramiro Aleman, manager of business development, Harlingen Economic Development Corp. ; Bob Ayoub, President, MIMCO — El Paso; Michael Blum, Partner and Managing Broker, NAI RIO Grand Valley; Max Prestridge, broker, Huntington Group; Randy Summers, Vice President, Davis Equity Realty and Jason Clanton, broker associate, Curt Green & Co. Commercial Real Estate.

Houston

From Houston, the following professionals participated in the roundtable discussion: Jason Baker, Co-Founder and Principal, Baker Katz; Gerald Crump, Vice President and Director of Central Region, Weingarten Realty; Jerry Goldstein, Senior Director — National Retail Group, Marcus & Millichap; Jeff Read, Principal, Read King Commercial Real Estate; and R. Carson Wilson IV, Marketing Director, Fidelis Realty Partners.

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

Baker: Retail activity is high in Houston, unlike anything we’ve seen in the last 3 years. What vacancy has been created through the fallout is all but gone. We’re hearing retailers reference the market activity as reminiscent of 2005-06. Retailers who struggled with a backlog of inventory 2 years ago are flowing products off the shelves now and activity is very positive.

Crump: The Houston and Texas market in general has performed remarkably well compared to other parts of the country and the retailers have taken note. We are seeing fairly strong activity from the national and regional retailers and retail service providers. The mom-and-pop startups are still struggling to get financing so we are seeing fewer deals from them; however we are seeing good small shop franchise activity. We have released the vast majority of our big box vacancies in the Houston market and at the state level with overall occupancy above 92 percent. Small shop leasing has been strong in the dominant grocery and soft goods anchored centers within the various trade areas. Second tier centers or unanchored strips are the laggards in the marketplace unless the landlords are willing to drop rents to maintain occupancy.

Goldstein: The sale of retail properties, which is the area I’m involved in, has improved in 2011. It’s not just for the reason that investors got sick of low interest rates being paid by banks on their sidelined cash, but more that some sellers have met the market with where they are selling their properties. There has also been an acceleration of lenders (banks and special servicers) discounting notes and retail centers to reduce their REOs and defaulted loans.

Read: Although still not near pre recession levels, 2011 has been a breath of fresh air for developers, brokers and investors. Grocery store anchored retail continues to be the most active segment of the market followed closely by restaurants, service users, and medical. Big box retailers are being very selective and opportunistic and are opening a reduced number of stores. Medical clinics and hospitals have branched out into neighborhoods in an effort to be convenient to patients and are now focused on the same real estate characteristics as retailers — location, visibility, access, and co-tenancy.

Wilson: Driven by the heath care and the oil and gas business sectors, Houston’s economy is amongst the most robust of any major metropolitan area in the country. The Houston Business Journal listed Houston as the No. 2 city in the U.S. in terms of job growth, adding an estimated 51,000 non-farm jobs from April 2010 through April 2011. As a direct result, suburban Houston communities are amongst the fastest growing in the U.S., with Katy being listed by many publications as the single fastest growing community in the country. The Houston retail market is significantly more active than at any time since the onset of the recession in 2008. After several years of dormancy, many retailers are starting to expand in order to meet the growth demands of Wall Street. Given Houston’s thriving local economy relative to the rest of major markets in the U.S., it has become an obvious destination for these expanding retailers. This excitement is significantly tempered somewhat by the overregulation, debt and fiscal problems created by the federal government.

TREB: What retail leasing/development trends have surfaced during the economic downturn? Have any major developments come online this year? Are any planned?

Baker: The sites with the most activity are those properties landowners have been sitting on throughout the recession the last 3 to 4 years, like the Whole Foods development at Cinco Ranch. We’re also seeing new projects on existing tracks of land, and even more commonly, activity igniting the second or third phase of an existing project that had been postponed while landowners let the market catch up. A good example of this is the Phase II and III development of LaCenterra at Cinco Ranch. There is a continued increase in non-traditional users backfilling retail space left vacant by traditional retailers. The banking category, once known for overpaying in rents during the boom of 2005-06, has slowed to a crawl in activity.

Crump: Deals have become much more difficult to get done especially where approvals are needed from other tenants. Approvals that were once easy to obtain have increasingly become more difficult due to retailers looking for any leverage to negotiate economic incentives or a change in lease terms. We are also seeing many of the big box tenants downsizing / rightsizing stores by up to 25 percent of their previous sizes. We are also seeing tenants take second generation spaces that they would not have considered in the past or that are not according to their typical prototype. We continue to see tenants that were historically mall tenants coming out into the power centers and also many medical office uses coming out of office buildings into grocery anchored centers. Most of the developments you are seeing around the city that have come out of the ground over the last 18 months have either been on the drawing board before the recession or are additional phases to centers that were put on hold previously based on market conditions. We are seeing some new projects being announced by the supermarkets, smaller specialty grocers and large discounters but in much smaller developments than before. Many of the proposed deals in this market are freestanding big box deals or deals with very little small shop space. Much of the activity has been in the more urban infill locations or in suburban areas where density already exists.

Goldstein: Very few new developments have come online this year and that is a welcome trend allowing the market to absorb the supply of space already built. Downsizing by anchors like Best Buy adds to the additional inventory of vacant space.

Read: Power center development has slowed significantly and we don’t see any new projects coming out of the ground in 2012. Grocery store development continues to be the golden ring with HEB, Kroger, and Walmart competing for market share. HEB has been aggressive on strategic land acquisition in the Greater Houston Area and has several future developments in land inventory. Though online retail only currently accounts for 10 percent of all retail sales, it is growing at a rate of 10 to 15 percent per year and has created a focus with the bricks and sticks retailers on downsizing prototypes. This trend in online sales also puts a value premium on grocery store anchored retail that traditionally has a tenant mix of daily needs retailers, service users and restaurants that are not significantly impacted by online retail. The urban core has several mixed-use developments and redevelopment projects currently under construction, with additional projects planned to break ground within the next 12 months. The demand for “close in” new apartment units is driving the mixed-use development which benefits from a retail component that increases apartment rental rates, accelerates lease up and contributes to the return on high priced land. West Ave, a mixed-use project at Westheimer and Kirby streets that features a good mix of restaurants, soft goods retail, and service/office tenants, has been successful with effective apartment occupancy above 92 percent and good velocity on the retail lease up. At least four other projects will break ground inside the loop within the next 6 months.

Wilson: As for trends, one of the great lessons we learned from an economic downturn is that we need to return to the fundamentals of retail development — building anchored shopping centers with credit tenants and a limited amount of spec space. Prior to the downturn, it was fairly common to see unanchored strip centers being built mid-block at inferior intersections. This trend has ceased to simply because lenders won’t finance these types of properties and they have proven to be too challenging to lease in down economies. As times improve, it is important to remember these lessons to prevent repeating the same mistakes in the future. There are a few major developments that have come online this year or are being planned for next year. Speaking specifically for Fidelis Realty Partners, we recently completed development on a 200,000-square-foot center anchored by Academy Sports and Burlington Coat Factory in Humble. We are also currently working on a 125,000-square-foot power center in Cinco Ranch. We are also beginning to work on an 18-acre redevelopment of an existing multifamily site located at San Felipe and Fountain View, which will be mixed-use but predominantly feature retail.

TREB: What submarkets are performing best? What types of retail product?

Baker: The markets undoubtedly shining in Houston are on the west side, Katy and Cinco Ranch. These areas are looking to sustain the most growth and retailers are showing consistent interest as a result. Additionally, retailers in The Woodlands are doing very well. Grocers and restaurants are large categories of high performing retail in this extremely competitive market. We’re consistently seeing in most categories of retail that those who have traded down in market and those who have maintained performance as luxury are doing best, which explains why Tiffany’s and the outlets are doing so well. It’s those with price points in the middle who are struggling.

Crump: The dominate grocer and/or soft goods-anchored centers in the various submarkets have performed much better than the smaller unanchored strips. We have also seen that the centers and strips located in the more dense population bases have fared better as the retailer is no longer chasing the new center on the edge of the trade area. We have also seen well-located big box vacancies and small shop space release quicker and has remained in high demand from retailer looking to expand or enter theses tighter centers/submarkets. Demand seems stronger near the core of the city.

Goldstein: The Woodlands, West Houston/Cinco Ranch/Grand Parkway and the Inner Loop/River Oaks/West University/Bellaire areas are the most desirable.
Restaurants are leading the way — international concepts and healthy fare are popular startups. Medical users are more prevalent in retail spaces (emergency clinics, cosmetic practices, schools, etc.).

Read: The submarkets performing best in the overall Houston market are the Inner Loop, Katy-Grand Parkway Corridor, Cypress — 290 Corridor, and The Woodlands. The demand inside the loop is driven by strong incomes, strong densities of both population and employment, and lack of available real estate. In addition to the proposed mixed-use retail, “inside the loopers” will see Walmart open their first store in the urban core at the intersection of Interstate 10 and Yale in the Washington Heights submarket. The retail development in the Katy/Cypress/Woodlands markets is driven by continued home growth and high demand for daily needs shopping, service retail and medical. Grocery store anchored retail and medical development are the most active product types in these suburban markets. Continued home growth has created new store opportunities for grocers such as HEB, Kroger, Walmart and Whole Foods. Cinco Ranch in Katy was the No. 1 master-planned community in the country for new home sales in 2010. As a result, Cinco Ranch will add a Randall’s, Kroger and Whole Foods in 2012. The Woodlands will benefit from the biggest employment shift in Houston with the recent announcement of Exxon moving their corporate headquarters to the south side of the master-planned community. This employment gain is another example of why The Woodlands is defined as the as the most complete master-planned community in the greater Houston area and has become the model for developers around the country.

Wilson: Class A retail product is clearly performing the best, and all product classes below that have proven difficult to lease, finance, and sell. Suburban markets such as Katy, The Woodlands, Sugar Land and Baybrook are very active as well as are infill locations inside the loop and in the Galleria. In general, retail that is located around mid-to-high income demographics in established trade area is thriving.

TREB: What, if any, major retailers have entered/exited Houston?

Baker: Nordstrom Rack has come into the market to open a 30,000-square-foot store at Post Oak Boulevard and Westheimer Road, and a 35,000-square-foot store at Highway 6 and Highway 59 in Sugarland, and are planning to continue expansion in Houston. The retailer is doing very well with its lower pricing structure. Additionally, Ross Dress For Less is expanding its dd’s concept in the market. They’ve signed four leases at about 20,000-25,000 square feet each, which opened September 24th. CompUSA, who left the market during the downturn is now coming back, and major discount grocers like Aldi and Trader Joe’s are showing interest.

Crump: On the niche grocer side we have seen new tenants to the Houston market like Sprouts and Trader Joes looking for space. We continue to see HEB, Kroger and Walmart selectively looking for infill locations and holes in their market coverage. Yogurt, dental and burgers have been the hottest concepts filling space on the small shop side. Restaurants, beauty and medical related uses seem to be the more prevalent uses doing deals. Luckily we have not seen many retailers leaving the Houston market other than those like Borders who have filed bankruptcy in recent years. Generally speaking retailers are doing well in Texas.

Goldstein: Few major retailers have completely exited the Houston market. However, there are a few: Krispy Kreme Donuts finally bit the dust as well as Spence Diamonds. Restaurants have been the primary driver in retail expansion. Two majors, one retailer and the other a restaurant chain, are entering/re-entering the market: Trader Joe’s and Bennigan’s.

Read: Several specialty grocers have committed to new stores in the Houston Market – Mi Tienda (HEB Hispanic grocery concept), Joe V’s (HEB warehouse foods concept), Aldi (discount small venue warehouse concept), and Sprouts. Trader Joe’s has also appeared on several site plans, but has yet to commit to their first store. Other retailers entering the market include Neiman Marcus Last Call, American Girl, H&M, Santikos Theater, Equinox and Foundry. Many big box retailers are downsizing existing stores, creating excess space to sublease. In the Houston market, Office Depot, Ashley Furniture, Best Buy, Old Navy, Sears, and Sports Authority are examples of big box chains planning to scale back. In an increasingly competitive environment where the consumer can cross-shop pricing from inside the store with the use of mobile devices, retailers are looking for ways to reduce operating costs and to improve efficiency in store design in an effort to maintain profit margins.

Wilson: Nordstrom Rack, Trader Joe’s and Aldi are all retailers entering the Houston market. The most notable exit from the market is Borders, which has declared Chapter 7 bankruptcy and is currently liquidating.

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

Baker: Vacancy in Houston is about 10 to 11 percent and decreasing. Houston, on a per capita basis, has about 30 to 40 percent more retail than most markets similar in size. If you discount those ill-conceived projects from the 1980s that every market has, our vacancy rate is even lower. There is a delta as it relates to rental rates. Where there is a strong co-tenancy, we’re seeing an increase in rental rates. There’s a flat to downward slide in rental rates where co-tenancy is poor or properties are unanchored or poorly anchored.

Crump: As mentioned before, rental rates and vacancy on well positioned and anchored centers remain strong. We are seeing more growth in our renewal rates than in our new lease deals. As occupancy increases landlords should begin to see rental rates increase as well for good space. We have seen occupancy for our Houston portfolio increase about 140 bps since third quarter of last year.

Goldstein: Market occupancy is hanging in the high 80s percentage-wise. Rates have stabilized with less concessions/reductions with existing tenants. There is still stress in some suburban markets where rates are trending down in un-anchored strips.

Read: Overall occupancy is increasing due to very little new product being developed. Most of the big box space vacated by bankrupt chains such as Linens ‘N Things, Circuit City, and Borders has been absorbed by direct competitors and/or multiple tenants as the space is quite often being subdivided. Rental rates are also benefitting from a lack of new product and in some cases are increasing where demand exists from several competitors in the same category competing for the same space. Generally landlords are finding themselves funding higher tenant improvement dollars to achieve the same rental rates. The Class B and C centers have seen the most significant increase in vacancy mostly due to a tenant mix made up of under-capitalized mom and pop shops.

Wilson: Rental rates for non big box spaces in Class A product are on the rise, in some instances surpassing the pre-recession levels due to a lack of supply on the market. One of the most common statements we hear from tenant rep brokers is there is very little available Class A space on the market, and there is a high level of demand from retailers looking to expand which in turn causes rents to rise. Rental rates for available big boxes in the market have risen somewhat but not to the same extent as the smaller players, mainly due to the availability of big boxes in other parts of the country.

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

Baker: By the second quarter, we were seeing a major uptick in optimism, and for the second half of the year we’re seeing activity increase significantly. There is renewed tenant interest in the market that should point toward a strong finish in 2011 and a special 2012.

Crump: Activity and optimism seems to fluctuate with the global economic concerns, both good and bad. The brokers we work closely with in the marketplace seem to be optimistic and busy with retailer tours so we view this as a positive sign for deals to come. Much of our business the second half of the year has been national, regional and franchised deals with very few startups. This is a trend we are seeing across the country the second half of the year versus last year and into the first part of this year. Financing and overall economic worries affect smaller business much more than the larger well capitalized business. We have very good assets, a strong platform coupled with seasoned dealmakers who remain focused on finding opportunities for both types of users within the portfolio and marketplace.

Goldstein: The second half should be improving because of advanced economic growth. Undo caution is still dominating certain investors outlook because of unwillingness to recognize the progress Houston is making. However, the second half should be productive.

Read: 2011 has been a rebound year for our brokerage business and our projects. Our brokers did more gross volume in the first six months of 2011 than they did for the entire year in 2010. We have seen a similar increase in volume of new leases in our own portfolio. However, a significant amount of our leasing activity has been from non-traditional retail tenants — medical users (emergency care, physician’s clinics, dialysis, diagnostic, and dentist) and more traditional office tenants looking for a street front presence.

Wilson: While performance is roughly the same, there is significantly less optimism than there was several months ago due to the uncertainty of our national monetary and fiscal policies, the lack of leadership coming out of Washington and the great amount of uncertainty in Europe. Our goals, as always are to develop fundamentally sound shopping centers and to keep our existing shopping centers leased with quality merchants and increasing vacancy where possible.

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

Baker: We want to continue to think long term. We’re looking at every part of our business, from technology to people. We hope to continue to increase our market knowledge and strengthen our client relationships. We’re encouraged and looking forward to 2012.

Crump: We are focused on getting as many of our tenants under construction today open for the holidays. We have several larger retailers including Kohl’s, Marshalls, Nordstrom Rack and Saks opening in the fourth quarter in the Houston market. We are already focused on our 2012 pipeline, which is already shaping up to be quite strong. We remain focused on our acquisition and disposition goals for the year and remain committed to our new development program within each market.

Goldstein: Doing more of what I’ve done so far working for lenders, special services and private clients to deliver properties to that market with investor appeal and demand.

Read: A direct benefit of the contraction in our industry has been our ability to increase our market share and make several strategic hires of seasoned professionals. In the last 2 years we have doubled our third party management and leasing contracts and significantly increased our tenant representation business.

Wilson: Our goals through the end of this year are to continue to pursue strategic user driven development, broaden our third party management and leasing platform, increase our tenant rep accounts and add several key employees and brokers.

TREB: Do you believe things will turn around in your market in 2012? Why or why not?

Baker: The Houston market isn’t in need of a drastic turnaround. We experienced a slight downward tick and slowdown in new construction, which allowed us to catch up. The next wave of activity should reflect the beginning of new construction and an increase in new projects.

Crump: It is hard to tell what will happen next year as much of our deal volume will depend on how the retailers do this holiday season and their open to buy for the coming year. We have signed a good number of deals this year that will open next year. If the economic pulse stays the same or improves somewhat I think we will have a good 2012/2013. Retailers who are public need to expand / grow and those that have been on the sidelines have missed some good opportunity for lower rent deals the past couple of years. Today there is little new development of any significance coming out of the ground and will continue to be light for several years so good existing product type should see an increase in occupancy and cash flow. If we can avoid a double dip recession and more bankruptcies things could be quite good for 2012 and beyond. Our grocery-anchored product type has performed well over the past couple of years given it is made up of tenants who for the most part provide basic goods and services. Much of our success in the coming years will depend on the consumer.

Goldstein: Things have already turned in Houston. 2012 should be a continuation of that trend.

Read: While there is continued talk of a double dip, it is imprudent to keep waiting for an upswing. It is time to invest and to “expand out” of current circumstances. Texas is undoubtedly going to be in the spotlight between now and November 2012. On the upside, Texas has fared relatively well since the economic downturn. According to the president of The Federal Reserve Bank of Dallas, 37 percent of new jobs since June 2009 were created in Texas. Additionally, Houston is credited with creating one out of every 20 U.S. jobs. Though challenges remain, Houston persistently outperforms the rest of the country and the outlook remains optimistic. Job growth is fundamental to Texas’ recovery. Overall, retail jobs in Texas are up 1.9 percent while nationally the retail sector is experiencing a downturn of 7.2 percent. Houston is also adding new retail-trade jobs, posting an increase of 5,900 jobs since July 2010. Although the consumer is cautious, Houston is benefiting from a resurgence of inner loop development. The city is also home to four of the nation’s upper income, top-selling, master-planned communities, indicating that Houston is positioned for recovery.

Wilson: While there is a great amount of uncertainly, much more than existed 6 months ago, I think the economy in Houston will continue to improve which will make development in Houston viable.

Dallas/Fort Worth

From the Dallas/Fort Worth Metroplex, the following professionals participated in the roundtable discussion: Jason Claunch, Principal, Catalyst Commercial, Inc.; Tim McNutt, Director of Leasing and Sales, Bright Realty; and Jean Smith, COO, UCR Realty.

TREB: What is the current state of retail activity in Dallas/Fort Worth?

Claunch: Dallas has been very active in 2011. Most activity has been generated by grocery expansion (HEB, Kroger, Tom Thumb, Walmart) and fast food growth.

McNutt: Bright Realty’s leasing and brokerage team is seeing a dramatic increase in tenant inquiries on all of our projects. These tenants are predominantly existing operators as opposed to startups or new concepts. We get the general sense that good operators are seeing rental rates stabilizing so they are taking advantage of lower rental rates and growing their operations into multiple centers.

Smith: Residential development and job growth continues in the major Texas metropolitan areas, albeit slow. Due to this growth retailer demand is still strong for anchored and non-anchored retail in Class A locations.

TREB: What retail leasing/development trends have surfaced during the economic downturn? Have any major developments come online this year? Are any planned?

Claunch: We have seen a lot of requests for public involvement in transactions. A few years ago TIF, TIRZ, 380 Agreements where fairly exotic, where today this is often the first information requested, followed by market data. While this does necessarily conform to logic, it’s definitely en vogue. Tenants in The Village at Fairview/Allen are still expanding that area. HEB has more than 18 locations that they are working on. The Terrel/Forney area should announce a significant project soon. Target should also go public on a couple of locations under contract.

McNutt: We have seen a very high demand for “turn-key”second generation space from tenants, especially restaurants, dentists and salons. The current lending environment is still difficult to navigate so both tenants and landlords are trying to get deals closed with minimal deployment of capital. Bright Realty has a large mixed-use project on the books, The Bridges, that is beginning to generate some substantial interest from retailers but it will most likely be a 2014 delivery.

Smith: The conventional and specialty grocer segment continues to remain strong, specifically in the Dallas/Fort Worth (DFW) market. Some of this is driven by the economy and people choosing to eat at home rather than dining out. Grocer-anchored developments are one of the few segments in the industry that have been able to get funding in the major Texas markets. HEB, Kroger, Sprouts Farmers Market and Trader Joe’s are some of the more active grocers in the Texas markets today with many more planned for near term development. The only other major development that has come on line in Dallas/Fort Worth specifically is a new format for Texas — a two-story Walmart/Sam’s Club prototype. JC Penney is also a part of the same development with a freestanding store located in urban north Dallas.

TREB: What submarkets are performing best? What types of retail product?

Claunch: We are seeing activity in most second tier areas with the strongest activity along transportation corridors. Grocery definitely gets first place. We are working in areas with more than 25 grocery store transactions working.

McNutt: Where the basic fundamentals of retail are in place (high density and/or high income, and high traffic), activity continues to be strong and retailers continue to seek space in these locations. The second opportunity is on the very low end of the retail spectrum. Owners who have an extremely low basis in the property and can offer an exceptional value to the tenants with aggressive terms.

Smith: Urban infill markets of DFW, Houston, Austin and San Antonio are all still highly sought after by a number of national retailers with new smaller square footage urban prototypes looking to enter these densely populated submarkets. Specifically Target, Walmart, JC Penney and numerous other retailers now have smaller non prototypical urban formats.

TREB: What, if any, major retailers have entered/exited Dallas/Fort Worth?

Claunch: In-N-Out Burger and Trader Joes have generated the most excitement. Alamo Drafthouse Theaters are also under contract on a north Texas project.

McNutt: In-N-Out Burger has created quite the uproar in the DFW area with their aggressive growth plan. The general attitude of the national tenants at ICSC RECON in May was retailers in general were trying to plan modest growth over the next few years and most were very “bullish” on the DFW/Texas markets. Major national/regional tenants such as HEB and H&M have also entered the DFW market.

Smith: The latest retailer to exit is Borders. Trader Joe’s and Nebraska Furniture Mart are the latest looking to enter DFW.

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

Claunch: Vacancy is starting to decline with recent rates around 11 percent. We are actually seeing rates start to increase. Most of the rates we are hearing are renewal rates that were structured pre-recession, but net new transactions are increasing with favorable concessions (tenant improvements). It is still very much a tenant’s market.

McNutt: Vacancy continues to hold fairly steady at our retail centers. Rental rates have continued to be depressed from the last 2 years, but we are not seeing the declines we experienced in 2009. Tenants are still pushing very hard for rent concessions and TI allowances as they see this as a buyer’s market and are taking advantage of the downturn.

Smith: Rental rates are holding steady and in some cases increasing in highly desirable Class A urban retail shopping centers.

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

Claunch: Most of north Texas has been bullish on activity in 2011. The problem is making equity multiples work with 65-70 percent leverage. Debt is available for core assets and grade A tenants.

McNutt: Cautiously optimistic may be the way to best describe our thoughts right now. The Texas market continues to be on the radar of most retailers. However the uncertainty in the national financial market still has everyone concerned. Leasing activity is substantially better than earlier this year so hopefully that trend will continue and the financial markets will settle down and remove much of the uncertainty in the consumer’s eyes.

Smith: From a broker’s perspective, we are cautiously optimistic about the future for retail real estate service providers in Texas. Barring a double dip in the national economy we feel marginal increases of more than 5 percent are achievable for the major Texas metropolitan markets. Work out for lenders and special services on distressed assets have supplemented some lost revenues derived from new development and new tenant representation assignments a few years ago.

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

Claunch: We continue to work with public and private entities on selecting the proper merchandising strategy and recruitment. We are expanding products and markets this year and will be adding staff and infrastructure to enable greater productivity.

McNutt: Bright Realty has grown our leasing staff over the last 2 years and will continue to focus on grassroots efforts to generate leasing activity. Plans for an additional broker or two before the end of the year will put us in a position to capitalize on our efforts for 2012. We are aggressively seeking third party leasing and management opportunities and will continue to work hard to perform for our clients.

Smith: Continue to prospect with new lenders and servicers seeking leasing, management and disposition servicers as well as prospecting for new tenant representation assignments with tenants taking advantage of vacancies coming available on urban infill Class A and B centers.

TREB: Do you believe things will turn around in your market in 2012? Why or why not?

Claunch: The market will have a long, slow recovery. We anticipate new development to be feasible with 80 percent LTV in 2013. Vacancy rates will continue to decline and rental rates will continue to increase with supply constraints.

McNutt: Strong holiday sales news will influence consumer confidence but until the market sees the high unemployment figures start to drop, the consumer will continue to be frugal with discretionary spending. I anticipate the recovery in Texas to lead the way as in-migration continues along with our favorable business climate. The current federal and political environment continues to force capital to remain on the sidelines, which restrains growth and jobs. The basic fundamentals of companies in general are solid across the country. However, the “panic” mentality of the stock market and other global economies has real estate investors very nervous about the future. As always, we are hoping for a solid rebound in 2012 but will remain lean and flexible until the trends solidify.

Smith: As long as the Texas major markets continue to show sustained job and housing growth, we believe that retailers and restaurants will follow suit in providing goods and services to these growing new markets; both of which are looking in the urban areas of all four major Texas metros as well as high growth emerging suburban markets in each of these four markets. Central Texas

From Austin and San Antonio, the following professionals participated in the roundtable discussion: Keith McRee, Vice President, NAI REOC — San Antonio; and David Simmonds, Principal, Retail Solutions.

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

McRee: On the landlord rep side I am seeing increased activity in San Antonio and deal velocity over this time last year, and especially over this time 2 years ago. We are finally starting to have competition for certain spaces as opposed to fighting just to get a single prospect interested. Things did slow down during August, which is something we see every year with summer vacations and such, but I also believe it was in part to the troubles in the financial markets and talks of a government default. On the tenant rep side I am seeing clients moving forward with plans to open additional locations. The trend is still towards quality not quantity.

Simmonds: It is surprisingly resilient in Austin. We are seeing good leasing activity across all retail product classes. Deals are still much tougher to do than pre-financial crisis, but it is still the best place by far to be a landlord in Texas and thus I would venture to say, the country.

TREB: What retail leasing/development trends have surfaced during the economic downturn? Have any major developments come online this year? Are any planned?

McRee: Preleasing and smaller projects seam to be the new normal in San Antonio. You have definitely seen a slow down in the development of small, un-anchored neighborhood centers, which are hard to prelease unless they are just a homerun location. Most new development have been smaller retail development in and/or around new anchored projects. You have had a couple HEB-anchored developments come online this year in the market, but overall new development is down, which is helping to keep occupancy rates up.

Simmonds: Leasing and development have both trended back to staple and value-oriented retail in Austin. The days of mixed-use, lifestyle and luxury are pretty much gone. The most active retailers in the market have been offering the essentials to consumers at a discounted price. And mostly any development we have seen in our area has been grocery anchored: HEB Plus! in Dripping Springs, HEB Plus! in New Braunfels, Walmart Supercenter at Northcross, Randall’s out at Steiner Ranch, etc. And the ones being discussed are also grocery anchored…one in the Lakeline Mall submarket and one in the Buda/Kyle/San Marcos area as well.

TREB: What submarkets are performing best? What types of retail product?

McRee: As of the end of the second quarter 2011, overall vacancy for all product types in San Antonio stood at 13 percent. Power centers and malls continue to lead the market with the lowest vacancy rates and highest overall average rents. Smaller strip centers and neighborhood centers have continued to see the highest vacancy rates of 19.5 percent and 17.8 percent, respectively. We have seen vacancy rates stay steady over the first two quarters of the year and I expect to see the same overall scenario with the third quarter numbers. Overall, most submarkets are performing about the same, it is more in the different product types that you see differences. The north central, far north central and northwest submarkets are still the better performing submarkets, but I am seeing good activity across all submarkets.

Simmonds: For Austin, the closer to the city core, the better the submarket is doing. Upscale restaurants and retailers continue to make an impression on the retail landscape in and near Austin’s CBD and Arboretum areas, but, again, value-oriented retail is the call of the post-financial-crisis era.

TREB: What, if any, major retailers have entered/exited the market?

McRee: Over the last year you have seen a good increase in the number of new tenants coming into the San Antonio market. Several new restaurant groups have either entered the market or in the process of securing locations. Corner Bakery Cafe’s and Cheddar’s are just a couple of the new restaurants. You have also seen several established groups add additional locations. Baskins Western Wear has entered the market. Sprout’s has entered the market with the acquisition of Sun Harvest. Borders and Lack’s have been the two prominent retailers to exit the market. Yogurt and Pay Day/Car Title Loans have been two of the more active categories in the smaller tenant market.

Simmonds: Major retailers who have entered Austin include buybuy BABY, HomeGoods, Galaxy Theaters, Toys “R” Us/Babies “R” Us co-branded concept, Gold’s Gym Express concept, Sears outlet and Northern Tool & Equipment. Those who have exited are Lack’s Furniture, Goody’s, Simply Fashions, Sportsman’s Warehouse and, of course, Linens ’N Things, Circuit City and Borders like everywhere else.

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

McRee: Overall, San Antionio’s vacancy has remained relatively unchanged over the last three quarters (13.1 percent in the fourth quarter of 2010, 13.4 percent in the first quarter of 2011, and 13.0 percent in second quarter 2011). Vacancy was at 13.7 percent at the end of 2009. As you can see, the numbers have not changed much over the last year and a half, but overall I would say it is a stronger vacancy rate than it was a year and a half ago, most Landlords have started looking to new deals as opposed to trying to work with existing tenants. We have seen rental rates started to edge higher over the last year. Currently we have an overall market average of $18.21 per square foot as opposed to $17.95 per square foot at the end of 2010 and $17.85 per square foot at the end of 2009.

Simmonds: In Austin, occupancy is holding steady at 90 to 93.5 percent depending who is running the numbers — extremely solid. Rents have seen their bottom for now. And while they are not taking off for the stratosphere again, they are still the highest per-square-foot rents across all asset classes than in any other market in Texas by far.

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

McRee: There is definitely more activity in the second half of this year so far. I have not seen a major increase, but the increase is noticeable. There is more optimism and I think we will see this continue for the rest of this year and into next.

Simmonds: Austin retail seemed to be doing really well during the first half of the year because the overall economy was making a comeback. It also seems to be doing really well during the second half of the year even though the overall economy is taking many steps backswards by many accounts. Throughout the year there has very good activity and (for me at least) cautious and grateful optimism…no matter what has been happening around us.

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

McRee: Keep doing what I am doing. You have to stay on top of deals or they can easily end up going down the street or falling apart.

Simmonds: Continue to position retail solutions as a market leader for the state of Texas so that when the overall economy does finally get its act together, it will be at the forefront to take advantage of the opportunities that will ensue. Texas feels like ground zero for economic activity now and I can’t wait for what it will be like then.

TREB: Do you believe things will turn around in your market in 2012? Why or why not?

McRee: I personally do not believe that you will see a major improvement in San Antonio in 2012 over 2011, but yes I think it will be a better year. Each year over the last couple of years it has gotten a little bit better. I think you will continue to see vacancy rates decrease in small amounts quarter over quarter and rental rates will in turn go up. There is not a significant amount of new developments on the horizon and what is planned will have certain leasing hurdles needed before they can begin construction, so you will not see a large amount of space at any one time hit the market. There are several anchors floating around on different sites and this will help bring some new developments to the market, but most of that activity will not be felt until late 2012 or early 2013. I do think we are headed in the right direction. Fears of a double dip recession and impacts of the financial crises in Europe could slow this growth down, but I personally do not see us going backwards much over the next 2 years. We may have a slow quarter here and there, but overall the market is improving.

Simmonds: 2012 will be steady as she goes for Austin. At best, we are in the bottom of the seventh with coming out of this financial crisis. And until that is fixed, nothing will return to normal let alone grow like the olden days. Look up the financial crises of 1837, 1873 and 1893 … these are minimum 5-year cycles, but the good news here is that there is light at the tunnel for our first, and hopefully last, 5 years with this financial chaos and thank God we get to do our jobs in Texas.

El Paso and the Rio Grande Valley

From the Rio Grande Valley and El Paso, the following professionals participated in the roundtable discussion: Ramiro Aleman, Manager of Business Development, Harlingen Economic Development Corp. — Rio Grande Valley; Bob Ayoub, President, MIMCO — El Paso; Michael Blum, Partner and Managing Broker, NAI RIO Grande Valley — Rio Grande Valley; Max Prestridge, Broker, Huntington Group; Randy Summers, Vice President, Davis Equity Realty — Rio Grande Valley.

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

Aleman (RGV): The retail industry is growing. Sales tax revenues are up in practically all of the cities in the Rio Grande Valley. Harlingen, in particular, has experienced an overall increase of almost 3 percent from last year.

Ayoub (El Paso): Better but still not as robust as we would like to see.

Blum (RGV): Year to date sales tax collections among the top 20 cities in Texas increased 6.7 percent through September 2011 compared to the same 9 month in 2010. McAllen remains at the No. 12 spot in total sales tax collections for this reporting period with more than $1 million in collections as compared to $38 million in Lubbock and $46.6 million in Amarillo.

Prestridge (El Paso): Good activity. There is lots of product in the pipeline. Occupancy is good.

Summers (RGV): Retail activity has ticked up slightly. Most of the cities are reporting improved sales tax revenue over last year, albeit just a few percentage points. Anything is better than nothing. The stagnation is having an effect on the municipalities as the majority of them are looking for slight increases in ad valorem taxes while trimming budgets.

TREB: What retail leasing/development trends have surfaced during the economic downturn? Have any major developments come online this year? Are any planned?

Aleman: Leasing in our area was not impacted as much as the rest of the country during the economic downturn. Harlingen Corners, a 150,000-square-foot development, was constructed during 2007-2008 and continues to have low vacancy with the Mattress Firm and Super Cuts recently opening. Cameron Crossing, anchored by Bass Pro Shops, will open November of this year. The typical Bass Pro Shops attract 3 million customers from a 150-mile radius. According to studies conducted by Bass Pro, 45 percent of their customers spend the night during their trip to Bass Pro. This should result in increased restaurant, hotel and retail activity throughout the Rio Grande Valley. Phase II and III of the Cameron Crossing development are planned over the next 3 years.

Ayoub: During the downturn things totally stopped and we are just now beginning to see new activity. Mimco has several pad buildings under construction and one center of about 36,000 square feet, we also are working on a 10,000-square-foot build-to-suit and we have begun working on a couple of centers for construction next year. We also understand that the Fountains at Farah development is getting ready to start (about 600,000 to 700,000 square feet) and that River Oaks has about 250,000 square feet on the boards for the next year.

Blum: Brownsville has been at an upbeat in the drugstore retail section with CVS opening five locations: Highway 48, Highway 48 and Ruben Torres, Alton Gloor and Pablo Kisel, Ruben Torres and lastly at Boca Chica and Central Boulevard. Gold’s Gym is opening its second location on Boca Chica Boulvard in 19,000 square feet at Brownsville Plaza. Feldman’s Liquor opened a 10,000-square-foot retail store at Las Tiendas. An announcement of Macy’s coming to Brownsville along with numerous other stores will occur shortly. Retail sales in Brownsville decreased 6 percent since 2006 from $1.78 billion to $1.67 billion. Harlingen will soon be home to the Bass Pro Shops’ 57th location. Bass Pro Shop will open in the fall of 2011. The site is part of a large development know as Cameron Crossing shopping center. It is interesting to note that the population within a 60 mile radius of Harlingen is greater than the population within 60 miles of the San Antonio Bass Pro or the Cabelas in Buda. City officials signed a 20-year lease with Bass Pro Shops setting the stage for a large retail shopping center north of the Expressway 77/83 interchange. This development is immediately north of Simon Properties’ Valle Vista Mall, which is home to a score of other major retail outlets including Dillard’s, Forever 21, JC Penney, Sears, and Big Lots and 70 additional stores, including Victoria’s Secret, Aeropostale, Auntie Anne’s, Bath & Body Works, Foot Locker, GameStop, General Nutrition Center, New York & Co., Rack Room Shoes, Hot Topic, Express Men, Sam Goody, Kay Jewelers, Charlotte Russe, Hallmark Coach. Retail sales in Harlingen have increase 5 percent since 2006 from $920 million to $970 million. Positive signs for the region continue in 2011 as several big box users are return to the market. First Hartford, the Connecticut-based developer behind The Shoppes at Rio Grande Valley has announced plans to build a 90,000-square-foot expansion next to JC Penney in Edinburg. Land has been sold to McDonald’s for a restaurant along Trenton Road and an expansion of the center west of JC Penney including Anna’s Linens, GNC and Petco will occupy the new space, which should be open for business during 2012. With the expansion, the Shoppes will have 428,000 square feet of retail space. Wal-Mart Super Center, Lowe’s and a host of other retailer also have locations in Edinburg. Retail sales in Edinburg have increase 31 percent since 2006 from $612.8 million to $799.8 million. In McAllen, the second Hobby Lobby is under construction at Palms Crossing. Palms Crossing is the gateway to the 165,000-square-foot convention center and home to Beall’s, DSW, Barnes & Noble, Babies “R” Us, Sports Authority, Guitar Center, Cavender’s Boot City, Best Buy and many more. The second Sam’s Club in McAllen is scheduled to be open in 2012 at the Cielo Realty Partners development in North McAllen. Sam’s Club will anchor the development, called Valencia Marketplace. The site is more than 40 acres so it will attract a number of other major retail and restaurant users. La Plaza Mall, the 1.2 million square foot retail center is the jewel in McAllen retail crown. Anchored by Macy’s, Dillard’s, JC Penney and Sears, the center may be expanding in 2012 by 160,000 square feet. Retail sales in McAllen decreased 15 percent since 2006 from $3.46 billion to $2.93 billion. The City of Mercedes also caters to a consumer market of more than 2.3 million within a 50 mile radius and 10 million within a 200 mile radius. Chelsea Outlet center is located there with more than 152 stores including Adidas, Ann Taylor, Brooks Brothers, Casual Male XL, Cole Hann, Eddie Bauer, Hugo Boss, Jones of New York, Kenneth Cole, New York New York, Osh Kosh B’gosh, Polo Ralph Lauren, Rue 21, Saks 5th Avenue off 5th, Skechers, The Children’s Place, and Tommy Hilfiger. Retail sales in Mercedes increased 77 percent from $150.5 million to $266.9 million between 2006 and 2010. Centrally located within a 10-mile trade area radius of more than 200,000 people, Weslaco is the site of Valley Crossing Shopping Center with almost 350,000 square feet currently constructed with pad sites still available. Lowe’s, JC Penney and Academy are the anchors of the center with Petco soon to break ground. Olive Garden is the first restaurant to open its doors on the site with others planned in the future for this SDI Realty Development project located on Expressway 83. Retail sales in Weslaco increased 14 percent from $577 million to $660 million between 2006 and 2010.

Prestridge: Not much change in El Paso, things have been stable. The 600,000-square-foot Fountains at Farah power center should break ground in the next few months. Two major local developers have 100,000 square feet and 250,000 square feet of spec space planned for 2012.

Summers: The Bass Pro Shop development in Harlingen is expected to come online toward the end of the year which should create some excitement on peripheral property. West Meadows in Edinburg is a 30,000 square-foot center being built at the corner of McColl and Freddy Gonzalez. No named anchor as of this time. Sam’s is under construction at 10th Street and Trenton in McAllen, Costco will soon begin construction in Pharr and HEB is almost up at Ridge Road and Highway 281 in south Pharr.

TREB: What submarkets are performing best? What types of retail product?

Aleman: The retail products that are performing best in the Harlingen Trade Area are apparel (3.6 percent increase from last year) and restaurants (2.9 percent increase). Downtown Harlingen has located several new tenants over the past few months. Occupancy in the downtown district is approximately 87 percent. Also located in the downtown district is the Reese, a mixed-use development consisting of available retail space, office space and condos in a former hotel constructed in 1929. The first tenants in the $6 million development are Colletti’s Italian Restaurant and New York Life Insurance Co.

Ayoub: From my view all markets are doing well the most new activity is in the far east and northeast El Paso markets followed closely by west El Paso. Mostly neighborhood strip and pad restaurants are performing well.

Prestridge: The far east, west, and northeast submarkets of El Paso. Mostly retail strip centers are performing well.

Summers: Mission, McAllen, Pharr, Edinburg and Weslaco markets are all performing well.

TREB: What, if any, major retailers have entered/exited your market?

Aleman: The biggest retailer to enter the market in recent memory is the new Bass Pro Shops at Cameron Crossing in Harlingen. That development has increased the number of retailers interested in Harlingen and has spurred interested in nearby developments like Valle Vista Mall and Harlingen Corners.

Ayoub: The newest entry is the Spec’s liquor stores, Michaels opened a new store, and Apple opened its first store in Cielo Vista Mall.

Prestridge: Spec’s Liquor Store bought Cowtown Liquor. A new Apple store planned at Cielo Vista Mall. A new Michael’s in west El Paso.

Summers: Bass Pro and Costco will be entering the markets for the very first time.

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

Aleman: With the announcement of several developments, the vacancy rates are dropping with companies that hope to capitalize on the growing market. Rental rates are holding steady, but may rise in the coming years with the increased demand.

Ayoub: We don’t have hard data but my guess is 5 to 8 percent. Generally they’re steady but in the older areas there is some weakening, and in the newest areas there is some increase. The rest of the market it is stable to slightly up.

Blum: Vacancy is few and far between. Overall, rental rates remain steady.

Prestridge: Vacancy is static. Overall, we’re at approximately 90 percent occupancy citywide and rates are steady.

Summers: Vacancy rates are improving as there has not been any retail development the past 3 years. Absorption is now beginning to take place. I feel the bottom has hit regarding rental rates. Rent concessions are still happening but not as freely as earlier in the year.

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

Aleman: The second half of the year is definitely more active. National and local retail stores and restaurants are very interested in the 3 million plus people that Bass Pro Shops will attract to the area.

Ayoub: It is basically holding steady. We thought it would be stronger but it is only holding steady, again not bad and certainly better than before but not as strong as we would like. There is more activity but not more optimism.

Blum: Compared to the first half it has been steady. Bass Pro opens this fall and should have significant impacts.

Prestridge: Activity and optimism have significantly improved since the first half of this year.

Summers: The second half of the year is showing improvement and there is somewhat more optimism.

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

Aleman: Our goals are to continue to promote the strengths and advantages of a location in Harlingen by direct mail campaigns with personal follow up and participating in trade shows like the International Council of Shopping Centers. Also, increasing our advertising presence in Mexico is a priority.

Ayoub: Complete the construction projects we have going and get them filled up, start working on some of our land inventory to prepare for development next year or the following year, and continue to look for buying opportunities in all our markets — El Paso, San Antonio, Rio Grande Valley, as well as Austin and Dallas.

Blum: Keep leasing.

Prestridge: Tie up loose ends, close deals, and advance planning for 2012.

Summers: Keep beating the bushes and making deals.

TREB: Do you believe things will turn around in your market in 2012? Why or why not?

Aleman: The retail industry in Harlingen will continue to strengthen in 2012 because of the current developments. We expect to announce more retailers locating in Harlingen in the first quarter of 2012 and are currently working with another anchor for Phase II of Cameron Crossing.

Ayoub: El Paso is very stable and looking stronger so while we don’t see a turn around we do see continued growth and expansion and we see 2012 as better than 2011. Our optimism is tied to our economic drivers. The new Magoffin Villas, a market rate and affordable project of 90 new residential units, is the first in many years along with two or three new proposed residential projects and several new restaurants in the Union Plaza Entertainment district. This is all in addition to new residential development throughout the market in both apartments and single family homes. Personally I think El Paso is doing very well but the paralysis in Washington and constant negative news from around the country has dampened optimism and made confidence weak, but it hasn’t stopped deals or developments. Frankly, since we seem to be in better shape than a lot of the country I think we are attracting retailers looking for opportunities in markets like El Paso that they have been overlooking.

Prestridge: Things are relatively good, and stable in El Paso. The growth at Ft. Bliss and Mexican migration from across the border has helped. There has not been overbuilding in retail, and residential. Low interest rates and future local construction projects in the pipeline are positives

Summers: I believe we will begin to see a slight upturn in 2012. I feel people are tired of sitting on the side and watching and will start making things happen.

Texarkana

From Texarkana, Jason Clanton, Broker Associate, Curt Green & Co. Commercial Real Estate.

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

Clanton: Retail activity in Texarkana has increased over the last several months and vacancy rates have dropped considerably. Much of the activity has been through expansion of local or regional companies.

TREB: What retail leasing/development trends have surfaced during the economic downturn? Have any major developments come online this year? Are any planned?

Clanton: Lower rent rates on existing retail space in the Texarkana market have pushed much of the retail leasing activity into second generation space. However, several major retailers have entered the market in the last 12 months including Academy Sports and Baskin’s Western Wear. The construction of two convention centers, to be completed in 2012 and 2013, will support the need for future development in the area to support those centers. In addition, with the growth and expansion of Texas A&M Texarkana has created more opportunities for retail growth to support the student population.

TREB: What submarkets are performing best? What types of retail product?

Clanton: Dollar stores/general retail have performed well all year. We are also seeing expansion in the high-end retail market.

TREB: What, if any, major retailers have entered/exited Texarkana?

Clanton: Baskins Western Wear built a new store in Texarkana. It opened in second quarter of this year. We also have an Academy Sports and Outdoors that has been open just under a year.

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

Clanton: Vacancy rates are coming down in the Texarkana market. In the last 6 months, many of our retail strip centers with higher vacancy rates have filled to capacity. Rental rates have remained steady in the Texarkana market. However, there has been no increase in rental rates in the last several years.

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

Clanton: The second half of the year has seen an overall increase in inquiries for retail space in the Texarkana market. While many retailers are experiencing some apprehension in expansion, they have chosen to relocate to more competitive locations within the market to try and increase market share. Currently, there are rumors that a dollar store and national pharmacy chain are looking to expand in the Texarkana market.

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

Clanton: Our fourth quarter goals are to leverage our development company to generate quality properties for investment opportunities. In addition, we would like to increase our occupancy rates in existing properties.

TREB: Do you believe things will turn around in your market in 2012? Why or why not?

Clanton: 2012 is filled with uncertainty in the retail sector. Going into an election year with a murky outlook on the economy has put many retailers on the sidelines waiting for stability in the market. The dollar stores and high-end retailers will continue to flourish in 2012, while retailers catering to the middle class will wait to see the outcome of the 2012 presidential election before committing to future growth.

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