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Out-of-State Investors Eye Surging Dallas Retail Market

In June, Hanley Investment Group arranged the sale of a 3,780-square-foot single-tenant retail property leased to Pep Boys in Frisco. Both the buyer and seller were based in California. The property sold at a record-low cap rate at 99 percent of the list price.

The Dallas retail market has been on a historic run over the last five years.

Dallas is attracting significant attention from foreign and domestic retail investors alike for several reasons. Cap rates continue to compress, big box spaces are experiencing steady absorption, occupancy is at an all-time high of 94.6 percent, unemployment is at a historic low of 3.7 percent, population growth is holding steady and residential development remains robust.

The Dallas-Fort Worth (DFW) MSA recently ranked second in the Americas for real estate investor interest, according to a recent poll conducted by CBRE. In particular, there has been a strong increase in demand for retail properties from California buyers.

Eric Wohl, Hanley Investment Group

Many of these investors are used to paying 4 to 5 percent cap rates. So when these California buyers have the opportunity to invest in a market showing stronger signs of growth than their local regions, they jump at the chance.

According to CoStar Group, over the last 18 months, the average cap rate for a Dallas retail asset purchased by a California buyer was 6.1 percent. In contrast, the average for a Texas-based buyer was 7 percent.

This statistic clearly shows that private retail investors based in California are starving for yield and searching for quality retail assets in major MSAs that, like Dallas, are showing significant growth and development. But what do these deals say about the greater overall investment potential in Dallas?

Strong Employer Base

Employers like Walmart, American Airlines, State Farm Insurance, JPMorgan Chase, Verizon, Target, Walgreens and 7-Eleven have chosen Dallas for their U.S. corporate headquarters.

So it’s no wonder that the area has been a hotbed for corporate relocations and expansions over the last few years, with large names such as Toyota, Huawei, Samsung, Hilti and McKesson joining the region.

This robust job market is shaping the retail landscape in Dallas. Ground-up retail projects are being developed out of necessity due to labor and population growth rather than on a speculative basis.

According to the Bureau of Labor Statistics (BLS), Dallas had both the highest-job-growth rate in the U.S. (a 3.4 percent increase year-over-year) and the most jobs added year-to-date as of May 2018 (122,000).

The main drivers in job growth were the manufacturing, hospitality, professional services, education, transportation and utilities sectors. The growth and diversification of the area’s economy and labor force make Dallas an attractive place for retail investors to park their money.

Population Growth

In 2017, DFW added 146,000 residents, more than any other U.S. metro, bringing its total head count to roughly 7.4 million. An average of 75,000 people have moved to DFW in each of the past five years, which leads to increased demand for retailers.

Despite concerns about the impact of such rapid growth, overall investor sentiment is positive, assuming the economy will continue to benefit from all the construction and additional retail activity.

Ample employment opportunities, a diverse economy, low cost of living and high wages were all factors in helping DFW top the charts in population growth. The city of Frisco, for the first time in over five years, topped the Census Bureau’s list of fastest-growing cities in the nation, showing a population jump of 8.2 percent in 2017.

High Occupancy

Strong net absorption, healthy prelease rates for new deliveries and robust residential growth are the major factors behind DFW’s retail occupancy hovering around an all-time high of 94.7 percent.

North Dallas and North Central Dallas lead the way with more than 1.4 million square feet of new retail space underway. With over 21 million square feet of new space coming on line in the last five years, overall vacancy has dropped to a 10-year low.

Average retail rents are hovering around $16.80 per square foot — a 12 percent jump above the peak price reached in 2008.

Final Thoughts

Minus having a coastline, the Dallas market checks the majority of boxes that both private and institutional investors are looking for when evaluating a retail investment.

Ranking No. 1 for the highest job growth rate and population growth in the U.S., it’s hard to dispute that Dallas has become a national retail powerhouse. Out-of-state and international investor demand is at an all-time high and the DFW market shows no signs of slowing down any time soon.

With retail cap rates in the Top 10 largest MSAs hovering near 5 percent, Dallas offers an excellent retail investment market that delivers an above-average yield with strong long-term growth metrics.    

— By Eric Wohl, executive vice president, Hanley Investment Group. This article first appeared in the August 2018 issue of Texas Real Estate Business magazine. 

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