Jon McDaniel, NAI Robert Lynn
In 2016, uncertainty in the oil and gas industry has made a major impact on the Fort Worth commercial real estate market. While each submarket is affected differently, the need for relocations and renovations will lead to a rising demand for quality office and retail spaces across the area. Development of Fort Worth real estate is expected to remain strong in 2016, with growing opportunities that create a strong and healthy market.
Office Opportunity
Downtown Fort Worth has become a hub for major players in the oil and gas industry, such as Holland Services, Forestar Oil & Gas and FTS International. Within the last 180 days, these tenants have put over 125,000 square feet of office space up on the market for sublease.
Bobby Montgomery, NAI Robert Lynn
However, the rest of the office sector has been consistently absorbing large blocks of space, proving healthy despite oil and gas concerns. We have seen at least six transactions totaling over 385,000 square feet within the last six months. Transactions included Charles Schwab’s 130,000-square-foot lease at Circle T in Westlake, and Teague Nall & Perkins’ 42,000-square-foot lease of the former Everest College building at the Mercantile Center in Fort Worth.
The consistently strong demand for quality office space in west/southwest Fort Worth over the past three years has driven asking rents up more than 10 percent, from an average of $19 per square foot to $21.10 per square foot according to CoStar Group. Despite this narrowing gap between west/southwest office properties and their downtown competition, the steep cost and limited availability of downtown parking will likely deter many tenants from seriously considering central business district space options.
Colt Power, NAI Robert Lynn
Recently completed and soon to be delivered projects will provide additional supply to accommodate strong demand for west/southwest office space. In late 2015, Mazur Capital delivered 40,000 square feet at 111 Boland St., just northwest of the bustling West 7th district.
A bit farther west at the master-planned Clearfork development, the first office building should be completed this fall. The building will provide nearly 60,000 square feet of space for Smith & Nephew, and an additional 112,000 square feet will still be available for lease. Clearfork will follow this up with another 125,000 square feet, which will be split between two more office buildings to be delivered in 2017. Asking rates for these developments will be nearly $30 per square foot, which is in direct competition with quality downtown office space.
The strong pipeline of new office supply isn’t limited to just the west/southwest submarket. In downtown Fort Worth, Anthracite Realty Partners is constructing the 25-story Frost Bank Tower. Frost Bank and Jetta Operating will each take roughly 70,000 square feet, and 170,000 square feet will be available for lease.
To the north, Mercantile Partners is preparing to lease Gourley Plaza’s 300,000-square-foot office space, recently vacated by the FAA, and is investing roughly $10 million in renovations to accommodate future tenants. Farther north, Hillwood’s AllianceTexas is progressing on projects that target large, corporate users by delivering hundreds of thousands of square feet of office space.
In Southlake, Granite is constructing a 160,000 square foot office building at Southlake Town Square, which represents the first major addition to that submarket since Cedar Ridge Office Park.
As the supply for competing office space increases dramatically over the next two years, we expect to see leverage swing back in favor of office tenants and eventually result in more aggressive landlord concessions with slowed rate growth.
Retail Growth
The retail sector, on the other hand, has not been phased by market factors that have shifted the pendulum of power in the office market. Occupancy and absorption rates continue to rise as a result of high retailer demand for limited space.
Constricted availability is increasing competition among retailers for high-visibility projects, allowing landlords to be both more frugal on finish-out allowances and enabling them to demand higher rates. Much of this trend is fueled by the population growth in Fort Worth, which is now estimated to be the 16th largest city in the United States.
Uncertainty in the oil and gas industry has transferred savings onto consumers at the gas pump, leading to more disposable income among a growing population. Retailers have taken advantage of this trend with a continued emphasis on concepts that are convenient and offer products that are priced aggressively but carry the semblance of quality.
This can be seen in both the pervasiveness of “fast-casual” restaurant concepts such as Zoe’s Kitchen in the Westbend development and soft goods retailers such as H&M, which has recently signed leases in Sundance Square and Ridgmar Mall. Ground leases have also seen a resurgence. Stand-alone concepts like quick service restaurants are taking advantage of the bullish market and using ground leases to minimize their capital outlay, allowing them to open more locations over the short term.
Developers have seized the opportunity to deliver projects that alleviate the surging demand for retail, with the predominant type of product trending toward mixed-use developments. Large new developments that exemplify this include: Westbend, a 278,000-square-foot office/retail mixed-use development featuring The Fresh Market; Waterside, a 175,000-square-foot retail development with Whole Foods Market, REI and several restaurant concepts, and; Left Bank, a 1,500,000-square-foot mixed-use development along the W 7th Street corridor.
The medical district near Southside has seen an unprecedented level of investor activity, with at least 12 mixed-use developments either proposed or currently under development. Even downtown is expanding its retail base with mixed-use multifamily projects such as Hunter Plaza and Pinnacle Bank Place, each boasting 9,000-15,000 square feet of retail available on the ground level. The AllianceTexas and Presidio projects in north Fort Worth have also experienced significant growth and vacancy absorption.
While these new projects will deliver much-needed available square footage to the Fort Worth market, they will primarily serve to meet the rising demand for their individual submarkets. We anticipate that overall market occupancy will remain high, and owners will continue to have the privilege to be selective with the tenant mix within their projects.
Building Sales Rise
The first several months of 2016 have been eventful for the sale market, and we expect attention from out-of-state investors, owner-user purchases and redevelopment plays to continue.
Stabilized assets with creditworthy anchor tenants are becoming more difficult for investors to find in core and primary markets. In order to secure more favorable returns, attention has turned to more tertiary assets such as this one.
As long as the oil and gas market, stock market and political environment remain uncertain, real estate will continue to attract investors looking for stable returns. The greater Fort Worth market will continue to receive attention from out-of-market investors seeking less compressed cap rates.
In January, Texas Bank Financial acquired the 50,026-square-foot office building at 4521 S. Hulen St. in Fort Worth in an owner-user acquisition. The bank plans to occupy over 18,000 square feet, with the Fed providing assurance that interest rates will stay down and affordable financing for owner-user purchases will remain available.
We have seen consistent demand from office users looking to quit paying rent and become their own landlords. However, slim supply of available inventory and increased buyer demand have driven asking sale prices more than 3.5 percent higher than the previous five-year average, from $134 to $151 according to CoStar Group. We expect to see owner-user sale pricing continue to rise slightly over the remainder of 2016, as demand stays strong and new construction pricing remains a steep premium.
Redevelopment and reuse will continue to be a driving force in areas near downtown. Majestic Realty’s partnership with Hickman Investments is making real progress toward a complete renovation and rejuvenation of the historic Stockyards, which will include over 300,000 square feet of retail and restaurant space, nearly 500,000 square feet of office space and a boutique hotel.
South Fort Worth has become a hot redevelopment area, driven by TIF-funded improvements and astounding investor activity, with land prices that have climbed to unprecedented levels. We are now seeing asking prices above $30 per square foot, with certain tracts reaching as high as $50 per square foot.
Often overshadowed by its neighbor to the east, Fort Worth is now booming with as much retail and office opportunity as Dallas. Continued cap rate compression with investor-attractive market stability makes it a safe bet as a hotbed of activity in the near future. High occupancy and aggressive tenant activity in retail lend credence to the idea that this trend will continue.
— By Jon McDaniel, president, Colt Power, vice president, and Bobby Montgomery, market director, with NAI Robert Lynn. This article originally appeared in the May 2016 issue of Texas Real Estate Business.