“Retail demand pushes development in Dallas-Fort Worth,” runs the headline of an August report in the Dallas Business Journal. Job growth and population in-migration, along with increasing residential development, are cited by Marcus & Millichap as causes for the new activity. And Reis reports approximately 3 million square feet under construction in a host of retail projects metro wide, about 1 million of which is due online by the end of the year. That sign of vitality aside, weakness persists for the market as a whole in the form of elevated vacancy and anemic rent growth in both the community-neighborhood shopping center and power center markets. With the possible exception of a clustering of several new projects in the Allen/Frisco/McKinney area of the northern suburbs, development is widely dispersed and selective. An enormous volume of space, meanwhile, waits on the sidelines in projects planned and proposed.
Historically speaking, Dallas’ high retail development profile has prevailed against low vacancy rates. Indeed, since 1985 the community-neighborhood shopping center market has seen only five instances of year-end single-digit vacancy (the latest was 2004’s 9.9%). Since 2005, active development followed by negative net absorption has caused a bout of increase in the vacancy rate, which peaked as recently as first and second quarter 2011 at 15.0%. With the market turning around in the second half of that year, a gradual descent got under way. By second quarter 2012 the rate had declined to 14.3%, same as the quarter before, down 40 basis points since year-end. The second-quarter national rate for this property category, for the sake of comparison, was considerably lower at 10.8%.
Vacancy in the local power center market ended the quarter at 7.0%, down 30 basis points from the quarter before, down 140 year-over-year, yet still above the 6.3% second-quarter national power center rate. Backfilling of big-box spaces vacated earlier, including those emptied by the Borders bankruptcy (see Special Real Estate Factors), has been a significant trend. Despite favorable trends otherwise, Marcus & Millichap expects vacancy to “remain elevated compared with pre-recession levels, hampering rent growth.” Reis, similarly, expects a slow year-to-year decline in community-neighborhood sector vacancy.
SUPPLY AND DEMAND
As with Metroplex real estate generally, little restraint has been apparent in the development of retail product, as historically strong economic and population growth profiles encouraged developers to proceed in the expectation that future growth would provided the needed demand. A more modest version of that paradigm, which recently was overthrown in some other high-growth areas of the nation (Phoenix, for example), may be manifesting in Dallas as the economy and population base expand and residential construction again increases.
Reis’ end-of-July report on individual construction projects counts 2 million square feet under way with assigned completion dates running from August 2012 to October 2013. “The development pipeline,” observes Marcus & Millichap in its second-quarter report on the Metroplex market “will continue to expand as many of the nation’s top anchors, including discount chains, warehouse clubs and grocers, maintain their preference for new space. … This trend will be most prevalent in outlying suburbs, which, in many instances, continue to post above-average retail vacancy.” In the Carrollton/Southeast Denton submarket,
for example, “prospects for significant new home construction have encouraged developers to proceed with planned retail projects.”
With no new space completing construction in Reis’ 56.3-million-square-foot community-neighborhood shopping center market, net absorption for the first half of the year was favorable at 218,000 square feet (the second-quarter total was negative 8,000). Even with new space arriving online, additional increases in occupancy are anticipated. Indeed, the firm expects 423,750 square feet to arrive online in four projects over the remainder of the year. Same-term net absorption is projected at more than 550,000 square feet. An additional 250,300-square-foot community center is scheduled to deliver this November in Greenville, beyond current submarket boundaries.
While the pre-recession community-neighborhood sector development profile was notably active, large-format projects claimed center stage. Development of such projects is again emerging. Two—a power center and a regional center—with a combined total of 950,000 square feet were under construction per report date for delivery in 2013. Also under way, but without a specified completion date, is the Rayzor Ranch Town Center regional center in Denton. Others, including a huge project in Terrell in the far eastern suburbs, are lining up. Indeed, Reis reports 15.2 million square feet of retail space in planning and proposal stages all told as of mid-year. Of this sum, more than 11.7 million square feet, 77.2% of the total, belongs to mixed-use, regional center, and power center projects (with mixed-use claiming 6.8 million square feet).
The positive turn taken by the community-neighborhood shopping center market in 2011 was accompanied by a return of positive rent growth following two years of overall loss. Small gains at about 1.0% are indicated for last year. Growth in 2012 to date has slowed but remained positive. At $16.40 psf and $14.19 psf, asking and effective averages for second quarter were up 0.1% (two cents) each from the quarter before and were up 0.1% and 0.2% (two and three cents), respectively, since year-end. Growth is expected to remain sluggish over the remainder of the year.
Likely reflecting rising occupancy and increased absorption in the power center market, the mean asking price for non-anchor power center space, at $23.65 psf, was up 0.1% for the quarter and 1.2% year-over-year. “While major new retail projects in the Metroplex will generate significant interest among national and regional chains,” observes Marcus & Millichap, “owners of existing shopping centers nearby may feel pressured to offer concessions or renovate to attract and retain tenants.” Reis expects a slow increase in rates of rent growth in the community-neighborhood shopping center market for the period ahead.