By Taylor Williams
DALLAS — As a metroplex, Dallas-Fort Worth (DFW) has the physical sprawl, population density, pace of job growth and volume of housing development to fairly be labeled as one of the biggest consumer markets in the country, on par with New York City and Los Angeles. It’s the extent to which affordability has matured in New York City and Los Angeles that marks the key difference between DFW and the coastal behemoths.
Aside from rental housing, no asset class within commercial real estate captures a given market’s affordability better than retail. Retail rents in the most sought-after corridors and districts of New York City and Los Angeles seemingly have no ceiling, and that is reflected in the prices of the products and services that are dispensed from those spaces.
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It’s fair to assume that for most households that have relocated from the coasts to DFW, housing and jobs have been the most decisive factors. Yet retail spending does account for a good chunk of the average family’s disposable income. In that sense, being able to buy the same goods and services in DFW at a percentage of the cost of what they retail for in New York City or Los Angeles certainly doesn’t hurt.
There will always be uncontrollable factors that will force retailers to adjust the prices of their goods and services. But the fact that retail rents in DFW are nowhere near those of New York City and Los Angeles keeps those prices in check, relatively speaking. And according to several retail investment sales professionals who are based in the metroplex, the massive discrepancy between rents in DFW and New York and/or Los Angeles is also a major reason why the sector is poised for strong future investment activity.
This line of reasoning represented one of the first major narrative arcs to take shape among a panel of investment sales brokers who spoke at the InterFace DFW/North Texas Retail & Mixed-Use conference that took place in late September. The half-day event was held at the Renaissance Dallas Addison Hotel and drew approximately 250 attendees. Chris Adams, vice president in Northmarq’s Dallas office, moderated the discussion.
Jennifer Pierson, managing partner at STRIVE, was the first panelist to invoke comparisons between DFW and New York City/Los Angeles. She said that in terms of overall deal volume and velocity, the metroplex ranks in between those two coastal markets — behind New York and ahead of LA. But the population densities, average housing costs and household incomes within DFW hardly compare to those of the coastal giants.
“For someone who makes $100,000 per year, and with the average home in DFW being about $450,000, it’s only about four-and-a-half times their income,” said Pierson. “In New York, the average home price is $3 million, and in LA, it’s $1.2 million. That’s why so many people are moving here, and that’s why we have the disposable income.”
Pierson’s analysis implicitly underscored the simple fact that retail rents are, to some degree, a function of sales, and sales are a function of consumers’ disposable income. Ipso facto, the more people coming to the metroplex with a greater overall proportion of money to spend relative to New York or LA, the more potential there is for retail sales growth. More retail sales growth typically leads to rent growth. She later touched on high-water marks for rents in each of those markets, adding some numerical validation to her analysis on why retail investors should like what they see in DFW, especially as alternatives to the top primary markets.
“Because DFW is now the fastest-growing city in the country, and because of our affordability, it’s a really exciting time, Pierson concluded. “We have a lot of upward growth coming over the next 10 to 15 years.”
Harrison Tye, vice president of the national retail partners group at CBRE, noted that like many other markets, DFW’s retail rents were sort of reset after COVID, when lockdowns and social distancing policies curbed foot traffic and sales at brick-and-mortar retail establishments. With the market only four-ish years removed from full re-openings, time has limited just how much rent growth could realistically be achieved in the post-pandemic era.
Yet within that relatively short period of time, dynamics have changed dramatically. As Tye noted, landlords today are not fretting nearly as much over potential store closings, whether mom-and-pop or corporate bankruptcies, knowing that with limited availabilities, there will be tenants lined up that are willing to pay healthy rent for the space.
“Today, landlords are looking at rent rolls and saying, ‘the likes of Conn’s [HomePlus] or Bed Bath & Beyond are paying $6 [per square foot], and the market rate is $15 [per square foot], so those groups vacating is now good for us,’” he said. “And as brokers, we don’t’ have to sell around the risk of the rent roll, but rather the upside, and that’s made for big change in the capital markets over the past several years.”
Michael Kaplan, vice president in the Dallas office of national brokerage firm SRS Real Estate Partners, echoed the DFW rent-growth story as a major selling point for retail investors.
“Looking at where rent growth is coming from — the national average right now is trickling up anywhere from 0.5 percent to about 1.25 percent,” Kaplan said. “In DFW, it’s closer to 2 to 3 percent. So we’re seeing better returns for investors in terms of where the growth lies.”
Kaplan reiterated the market’s strong occupancy rate — the panel consented that retail occupancy had been at or above 95 percent marketwide for the past several years — as proof that the pace of rent growth would likely remain healthy. As a percentage of the metroplex’s total inventory, the volume of new retail product in the development pipeline “doesn’t even make a dent,” Kaplan added. Lastly, he pointed out that within the product in the pipeline, the majority of space — about 80 percent, according to Kaplan — was already preleased.
“In DFW, developers know that when they underwrite a deal, they can get numbers locked in and confidently say that the development will pencil and stabilize and that the returns for investors will be there,” he said. “And that’s something that can’t be said for a lot of other MSAs right now.”