The Dallas-Fort Worth (DFW) economy is booming with tremendous population, income and job growth trajectories that directly benefit the local retail sector. Shopping center investors have taken notice, as evidenced by the total transaction volume for retail properties during the last 12 months reaching its highest level in more than 10 years.
Compelling Fundamentals
Investors continue to buy retail properties in Dallas as a result of DFW’s healthy and diversified economy. Population growth and in-migration patterns are significant factors with more people moving to DFW last year than any other metro area in the nation (246 people arriving daily), according to recent data from the U.S. Census Bureau. This surge has pushed DFW’s population to more than 7.5 million residents.
David Disney, Disney Investment Group
Additionally, employment growth has exploded, with DFW leading the nation in job creation last year by adding 116,400 jobs. The Dallas metro unemployment rate has recently dropped to 3 percent, which is the lowest rate in 20 years, and this has further contributed to powerful employment dynamics that continue to fuel consumer retail spending.
DFW was also recently ranked as the No. 5 market in the nation for technology jobs, which typically are higher-paying and will add strength to an already strong retail consumer.
On top of the strong economic backdrop, metrics for existing and future retail space in the metroplex are equally impressive. Overall retail occupancy in DFW in the second quarter of 2019 reached a record-high of 94.7 percent, with over 2.6 million square feet of retail space under construction and more than 893,000 square feet of space absorbed, according to Real Capital Analytics.
DFW led the nation with 3.8 million square feet of net absorption of retail space during the last 12 months. During this same time period, approximately 3.1 million square feet of space was developed, which is almost 25 percent lower than the amount of retail space constructed in the previous year.
Retail rents in the Dallas metro area this year are expected to increase 4.8 percent on a year-over-year basis to $17.74 per square foot and eclipse the previous five-year average growth rate of 4.3 percent. Strong absorption and high occupancies, coupled with reduced deliveries of new retail space and increasing rents, provide a perfect storm for continued retail investor appetite in the DFW market.
Deal Volume Peaks
Deal flow and demand for well-located retail product is robust. In 2018, deal activity in DFW totaled $3.15 billion, which is the highest level for shopping center transactions since the Great Recession in 2008-2009.
Between the second quarters of 2018 and 2019, retail transaction activity has totaled $3.17 billion, indicating continued momentum in investment sales volumes in the Dallas metro area. There are more core/infill shopping center trades on the horizon in Dallas that are expected to trade in the second half of this year. This activity should continue to support heightened retail sales volumes in 2019.
Buyer Competition
Favorable asset pricing continues to attract new capital to DFW. Depending on the specific asset type, pricing for shopping centers in DFW compared to similar assets in gateway or West Coast cities remains more attractive to investors.
In the trailing 12 months through the first quarter of 2019, private investors comprised 47 percent of the buyer pool while cross-border buyers completed over a third of retail property acquisitions. Notably, REITs and institutional investor participation was more muted at 15 percent.
Irreplaceable shopping centers in Dallas have traded at very compressed cap rates consistent with similar product in top U.S. and gateway markets. But most multi-tenant retail assets in DFW present more compelling investment opportunities with cap rate arbitrages ranging from 100-150 basis points compared to the West Coast or gateway cities.
Cap rate pricing dislocation, coupled with historically low interest rates, drives investor interest in the metro area from both foreign and domestic sources of capital. Beyond pricing, institutional investors and well-capitalized private investors including trade buyers are investing in larger markets like DFW in order to reduce risk and protect cash flows.
Abundant Financing, Liquidity
Despite capital market headwinds including trade tensions, tariffs and end-of-cycle recession fears, interest rates remain extremely attractive for retail investors.
According to Dallas-based Metropolitan Capital Advisors, users of debt capital have focused on fixed-rate debt options for existing product, while construction lending for retail projects has been restrained as new development activity has been kept in check.
With the 10-year Treasury yield currently hovering just above 2 percent and interest rate spreads tightening, all-in permanent fixed-rate mortgage rates currently range between 3.5 to 4.5 percent. Historically low cost of debt capital helps leveraged investors maximize returns and push pricing for retail acquisitions.
Retail Landscape Shifts
Around the country, talk of a retail apocalypse is rampant. Coresight Research estimates as many as 12,000 store closures could occur this year, which would exceed the record of 8,139 store closings in 2017.
On a macro level, retailers adjust to the realities of physical versus digital retailing while increased tenant bankruptcies and box vacancies highlight the collateral damage along the way.
This disruption has increased investor anxiety and impacted pricing of retail assets, including power centers and malls across the nation, particularly in secondary and tertiary markets. On a micro level, DFW has shown resiliency by remaining largely immune to retail disruption as investors continue to underwrite and price in the mitigated risks associated with a very strong local economy.
A Top-Ranked Market
PricewaterhouseCoopers and the Urban Land Institute named DFW as the No. 1 market in their prestigious annual forecast report titled Top 10 Markets in Emerging Trends in Real Estate in 2019.
Investors certainly agree. With a relatively low cost of living and powerful population and income growth, top corporations and individuals will continue relocating to DFW.
A balanced yet strong-performing retail market that accommodates ever-growing consumer demand, the Dallas metro area will continue to attract additional private and institutional investor capital for retail investment for the foreseeable future.
— By David Disney, principal, Disney Investment Group. This article first appeared in the August issue of Texas Real Estate Business magazine.