Jason Vitorino, Vitorino Group
As market momentum from 2015 spilled over into the first quarter of 2016 for the Dallas-Fort Worth metropolitan area, commercial retail metrics are still firing on all cylinders. The three key market indicators of occupancy, absorption and development are robust and expect to remain that way for the foreseeable future.
With fundamentals in check and a thriving economy led by strong employment and population growth, metro Dallas will continue to be a thriving marketplace and a safe haven for investor capital.
Record High Occupancy
The Dallas-Fort Worth retail market ended 2015 with an impressive 93 percent occupancy — a little over a 1 percent increase from year-end 2014 — achieving its highest occupancy rate in the last three decades. The continued occupancy increase is directly related to net absorption and largely attributable to positive population and employment growth in the Metroplex.
Continued Absorption
Since 2012, absorption has continuously outpaced the delivery of new construction, and nothing in the foreseeable future looks to disturb this new norm. First quarter 2016 absorption totaled over 1.6 million square feet, with half of that figure attributed to new deliveries.
This is the seventh consecutive quarter where absorption eclipsed 1 million square feet. This is the exact opposite of the market we witnessed throughout the 2000’s, when deliveries consistently outpaced absorption leading to collapse and financial meltdown in the fall of 2008.
Conservative Development
With ascending occupancy and steady absorption, the development pipeline remains conservative and is not based on speculation. In spite of 4 million square feet of development forecasted to deliver within the next 12 months, 77 percent, or 3 million square feet, is preleased. Thus, the retail market in Dallas remains constrained and balanced.
Although Texas is associated with overbuilding, forecasted deliveries are half of historic averages. Since 1982, an average of 8 million square feet of retail has delivered annually.
Furthermore, there have only been two periods when deliveries were lower than historic averages: the Resolution Trust Corp. (RTC) days from the late 80’s through the mid 90’s, and the current marketplace commencing with the financial meltdown in the fall of 2008.
During the savings and loan crisis, which began in 1986, below average deliveries lasted nine consecutive years. This ended in 1997, when 9.3 million square feet was eventually delivered. Subsequently, for the next 11 years the metro area’s annually deliveries averaged in excess of 11 million square feet, a number well above the historical average.
From peak to peak, the RTC cycle lasted just over 20 years. Comparatively, the current period of restricted construction is more conservative and balanced.
Average deliveries since 2009 have consistently hovered around 4 million square feet. While history tends to repeat itself, we have a long way to go and I believe we are in the early innings of this cycle, rather than the later innings as many have projected.
Economic Expansion
The vibrant Dallas economy continues to grow as a result of significant inward migration associated with a low cost of living and high employment opportunities. These opportunities include existing company expansions and an influx of corporate relocations. With an estimated population just shy of 7 million, the metropolitan area is the 4th largest in the United States.
The area’s population has grown by 11 percent in the last 5 years, and growth of 8 percent is projected over the next five years. Furthermore, the population of metro Dallas is young and affluent.
With a median age of 35 years and 70 percent of the population in its prime earning years, Metroplex residents tend to earn more than the national average, with estimated median household income of $59,530 annually, compared to $53,657 per year in the U.S. The combination of low cost of living and above average household incomes results in a surplus of disposable income along with increased retail sales.
Dallas offers a competitive advantage with its low cost of living, tax advantages, amenities, climate and geographic location, all of which are drawing new businesses to the area. The city’s central location allows the region to function as a logistics and distributional hub, functioning as a highly efficient location for both truck and rail shipping.
The location allows faster travel times, with any major city in the U.S. being no more than four hours away by plane. As a result of sound planning, the infrastructure in metro Dallas has made commuting much easier relative to comparable metropolitan areas that are plagued with congestion.
Travel around Dallas is facilitated by the multiple freeways, highways and tollways efficiently connecting job centers to residential areas, allowing employees to choose from larger areas of affordable living, while also providing companies the benefit of choosing from a wider employment base.
Texas is No. 1 behind New York for the number of locally based Fortune 500 companies. Fifty-Four Fortune 500 companies are located in the state, besting California’s number of 53, and falling one short of the 55 located in New York.
The Dallas metro is home to 21 of the 54 Fortune 500 companies located in Texas. These companies include Exxon Mobil, AT&T, JCPenney, American Airlines and Southwest Airlines. Recent company relocations to Dallas include Toyota North America and Liberty Mutual Insurance.
Furthermore, the likes of JPMorgan Chase, FedEx and State Farm Insurance have consolidated regional campuses in north Dallas.
These relocations/consolidations will bring an estimated 20,000 new jobs with a speculated 3 to 4 multiple effect from associated vendors and suppliers starting sometime in the spring of 2017 (please clarify the second half of this sentence).
Recent Trends
The Dallas economy continued to expand at a rapid clip in December. In 2015, metro area employment grew 3.3 percent, outpacing both the state of Texas at 1.5 percent and the nation at 1.9 percent.
As a whole, metro Dallas created 111,600 jobs in 2015, a majority (106,200) coming in the city of Dallas. Unemployment fell from 4.1 percent at the end of 2015 to 3.9 percent at the end of the first quarter of 2016.
Dallas and Fort Worth’s unemployment rate for the quarter was 60 basis points (bps) lower than Texas (4.5 percent) and 100 bps lower than the U.S. (4.9 percent).
Strong population growth and an ample supply of well-educated workers contribute to the area’s healthy economy.
Employment and population growth over the last couple of years is reflected in the increase of home sales. In 2015, home sales were up a hearty 4.8 percent in Dallas and 7.4 percent in Fort Worth, stronger than the state’s overall 3.2 percent rise.
Home inventories remained tight at the end of 2015, with two month of supply available in the metro area. Strong demand and a limited supply continues to spur residential construction.
Prepared for Growth
All the stars have aligned for the Metroplex to continue its impressive growth while maintaining strong real estate fundamentals. A lack of supply coupled with tremendous demand has produced a fundamentally sound Dallas retail market.
The domino effect of low cost of living, an influx of corporate relocations, solid population and employment growth¸ a shortage of home inventory, a conservative lending environment, preleased, non-speculative and constrained construction and continuous net absorption outpacing deliveries leads to high occupancy rates and sustained growth in a well-balanced and stabilized marketplace.
Since we are not making any more land, and as the population continues to grow, the economy remains healthy with continued job creation and low unemployment.
Overall market conditions will remain solid for many years to come. And even if history tends to repeat itself, we are just a third of the way through the current cycle before the next major market correction.
— By Jason Vitorino, president, Vitorino Group. This article originally appeared in the May 2016 issue of Texas Real Estate Business.