Low Retail Inventory Sustains Sales Prices in Dallas, Austin

by Taylor Williams

By Taylor Williams

The combination of a flight by investors to highly targeted segments of the physical retail market and a lack of new development in 2020 is keeping prices high for select properties in some of Texas’ biggest markets.

Retail investment sales brokers in Dallas and Austin say that for specific subtypes of well-located properties — such as single-tenant, net-leased (STNL) assets and multi-tenant strip centers with essential businesses — there simply aren’t enough of these deals being brought market to go around. These supply constraints ensure that pricing continues to rise and cap rates continue to compress for these in-demand assets.

According to data provided by CoStar Group and Real Capital Analytics (RCA), Dallas-Fort Worth (DFW) was a top 10 market in 2020 in terms of average retail sales price growth. Although total transaction volume was, unsurprisingly, down for the year, the metroplex saw an average price of $396 per square foot for single-tenant retail assets, a year-over-year increase of 5 percent.

The average sales price for multi-tenant retail properties rose 6 percent to $329 per square foot over the course of the year.

The data from CoStar and RCA for Austin also illustrates more muted sales price elevation and cap rate compression for retail assets in 2020. Yet positive growth still occurred in both metrics, largely due to heightened transaction volume in the second half of the year. For single-tenant assets in the state capital, the average sales price rose by 1 percent to $407 per square foot, while the average cap rate for these deals increased 10 basis points to an even 6 percent. The average price for multi-tenant properties in Austin grew by 1.2 percent to $323 per square foot.

“The most popular deals right now are for the smaller neighborhood centers and shadow-anchored inline product with small tenant spaces and a mix of local, regional and national users,” says Philip Levy, senior managing director in Marcus & Millichap’s Dallas office. “For some properties that fit the desired profile — drive-thrus, internet-resistant, essential users — pricing is actually a little better now than it was pre-pandemic.”

Rents for these properties are generally at — if not above in some cases — pre-pandemic levels, and there’s no shortage of buyers looking to take advantage of all of the long-term growth patterns that have come to define major Texas cities. This is particularly visible in Austin, perhaps the most glamorous of those markets.

“Most landlords [in Austin] responded to vacancy by holding firm with pricing and concessions that they might have given on the front end of a lease because they expected the market to rebound,” says John Heffington, vice president of the retail services group at CBRE’s Austin office.

“Those owners, particularly those in the STNL and strip center spaces, are being rewarded for their patience,” he adds. “There’s a lot of competition among tenants with new entrants coming in and others back to being in expansion mode, so rents in Central Texas are increasing.”

Yet deal volume remains low in both the state’s capital city and its largest metroplex.


CBRE is marketing this single-tenant property in Austin that is net leased to Wells Fargo. Assets like this one that are occupied by essential users and have drive-thrus for conducting business without contact have risen in popularity among retail investors.

According to data from CBRE, the total volume of retail investment sales in Dallas-Fort Worth (DFW) in the first quarter of 2020 — essentially before the pandemic unfolded — was about $2.3 billion. That figure plummeted to just over $1.5 billion in the second quarter of last year and has continued to decline in every subsequent quarter.

“We’re getting interest on properties the moment we list them, and there’s not enough product to satisfy demand,” says Jennifer Pierson, managing partner at Dallas-based retail brokerage firm STRIVE. “Part of the constraint on new supply is due to very high construction costs, plus very little new retail product coming out of the ground in 2020.”

The dearth of new development and store openings in 2020 is understandable. With the economy rocked by COVID-19, construction projects that were underway or set to begin were delayed, and deals for new stores that were being negotiated were put on hold.

Many retailers, particularly nonessential and local mom-and-pop businesses, found themselves in survival mode practically overnight. This massive disruption to new development and leasing last year is driving the supply shortage this year.

“If projects had been ongoing and more de novo locations were built in 2020, now — the first and second quarters of 2021 — would be the time when that product would typically be delivered and on the market,” says Rob Solls, director of retail investments and acquisitions at Dallas-based Mohr Capital. “That’s causing the existing supply to see more competition and compressed cap rates.”

Solls adds that he has noticed a pronounced flight to quality over the last 12 months. Investors in Texas are duking it out for newly delivered product leased to internet-resistant tenants in markets with the strongest in-migration and job growth, driving up prices for these assets in the process.

“We didn’t really see a mass exodus of investors out of retail in response to the pandemic,” he says. “But by the third and fourth quarters of last year, retailers had generally done their triage and were starting to brainstorm about growth strategies again. In 2021, we’ve started to see those strategies — preferred development programs, rolling out of smaller prototypes — start to play out, which led to an uptick in deals at the end of the first quarter.”

But these new deals are being snapped up quickly. Pierson says that under normal circumstances, her firm typically carries about 50 to 60 listings and 10 to 20 properties under contract throughout the metroplex. At present, STRIVE is marketing about 25 available properties for sale and has about 35 under contract or in negotiations.

The situation is similar in Austin, particularly within the STNL segment, says Brad Bailey, first vice president at CBRE and head of the firm’s retail capital markets division in Central Texas.

“The STNL category has really been the breadwinner over the last six months as investors have prioritized tenant credit, lease term and location during and coming out of the pandemic,” he says. “We haven’t seen that in a long time, and it’s pushing cap rates down and creating huge demand for the asset class. But most of that inventory has already traded, and most of the new projects in the development pipeline are already spoken for.”

Bailey also says that retail owners in Austin are facing rising operating costs, mainly in the form of elevated property taxes. But the overall low level of inventory still grants them some ability to push pricing, and demand from investors that want to be in Austin’s phenomenal growth path is still strong.

“The Austin retail investment market is hypersensitive due to the combination of low supply and high demand, which creates opportunities to take advantage of unique deals coming out of the pandemic,” says Bailey. “From Tesla to Oracle to Amazon, Austin has so much going on, and retail tenants and investors want to be here — there’s just not enough space and inventory for them.”

Where Stress Exists

Investment demand and pricing for select retail assets in primary markets have generally remained healthy throughout the pandemic. However, there still exists infill properties with tenant bases that continued to operate during the pandemic and offer internet-resistant goods and services that are distressed.

“Ultimately, it all starts with the tenants,” says Pierson. “If the tenants struggle, those issues are passed up the chain to the owner and lender, so we’ve seen stress in both low- and high-end properties.”

Centers that were heavy on food and beverage users that were limited in how much patio dining or carryout service they could provide have undoubtedly struggled during the past year. Properties that housed local tenants with strong sales but minimal cash on hand also saw their occupancies and rent collections take hits.

Lifestyle centers that relied on entertainment and experiential uses — the darlings of the pre-pandemic brick-and-mortar world — also struggled with occupancy restrictions that came on hard and fast. And of course, any center whose tenants struggled to apply for or were ineligible for Paycheck Protection Program (PPP) loans likely fared poorly.

Winding Back the Clock

The onset of the COVID-19 pandemic last spring caused a brief spike in inventory due to panic sales by owners to immediately free up capital.

“Sophisticated sellers during that time knew there was light at the end of the tunnel and pulled their deals off the market or held firm on pricing,” says Solls. “But there were also sellers that hadn’t experienced major market downturns before, and when they got calls from tenants that couldn’t pay their rent or needed relief, they took their chips off the table and sold.”

Panic sellers created opportunities to acquire discounted assets during that time, sources say, and the market also saw a brief flurry of ramped-up activity from 1031 investors.

“We did a lot of work at that time for investors that just wanted out of shopping centers, with many trading into STNL assets rather than exiting retail altogether,” says Levy. “From April to June, there was a large contingency of owners that did [sell] or at least considered selling, and we underwrote a lot of deals, though ultimately some of those fell through.”

“The world essentially stopped last spring because debt dried up, although interest and demand were quick to pick back up in June,” adds Pierson. “During that time, we saw some deals in which owners had a problem with an asset they didn’t want to sell and sold a different asset to free up capital until they could get it stabilized.”

Levy concurs that there were some opportunistic deals created by owners that were suddenly motivated to sell. But that activity was somewhat offset by aggressive buyers bidding up prices, ultimately creating a very unique scenario in which both extremes of the deal volume spectrum came to fruition in the same year.

Since late spring/early summer of last year, inventory has tightened for a variety of reasons. The establishment of PPP helped many small businesses stay afloat, while landlords across the state devised creative solutions and rent structures to keep tenants in place.

These measures helped keep cash flowing at retail properties, thus reducing owners’ incentive to sell. The rollout of COVID-19 vaccines and pent-up demand to get out and shop and dine has and should continue to work to keep tenants open and owners out of default on their loans. The various stimulus funds that were disbursed with the goal of giving consumers more discretionary income has presumably had the same effect.

Given these current trends within the market and society, sources expect the volume of inventory to pick up as summer unfolds. With more supply available for sale should come a growing and diverse pool of buyers.

Capital sources from Asia have made  pushes of late. Pierson of STRIVE says that within the last six months, her firm has brokered the sales of at least six properties on the north side of the metroplex to Asian buyers.

In addition, local private citizens with other backgrounds that are pooling money together to buy real estate are among the new buyers attempting to stake heavier claims in the market.

The bottom line is that regardless of what the mainstream media headlines say about brick-and-mortar retail, the asset class comes in many shapes and sizes and within many different growth patterns. For investors that have the capital, operating knowledge and nerve to outbid the competition, there are deals to be had in the Lone Star State.

— This article originally appeared in the May 2021 issue of Texas Real Estate Business magazine.

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