In DFW, retail real estate will experience its eighth consecutive year of performance gains as upward economic momentum strengthens consumption and bolsters the local retail sector.
The national economy is operating at near full employment and the rate of job creation will start to slow, bringing two million new job opportunities to fruition in 2017. At least 100,000 of these jobs will be filled in DFW and these dynamics will affect retail property by driving up wage growth, increase rental rates and promote higher retail spending.”
As a result, national retail sales are expected to increase 4 percent this year. In Fort Worth specifically, retail trade is one of largest employment sectors and accounts for more than 11 percent of all jobs. Dallas-Fort Worth is expected to see a fourth consecutive year of employers adding over 100,000 jobs as a number of large companies like Toyota, Liberty Mutual and many others expand their footprints in the metro.
Advance PCS, Dean Foods, ExxonMobil, Kimberly-Clark, Neiman Marcus, Southwest Airlines and Texas Instruments are among the 21 Fortune 500 companies headquartered in the area. The relocation and expansion of these businesses will draw new residents to the area.
Philip Levy, Marcus & Millichap
Approximately 88,000 individuals are slated to move to Dallas-Fort Worth (DFW) in 2017, supporting the creation of more than 60,000 households this year. In Fort Worth, robust population growth will support an anticipated 5.2 percent rise in retail spending in 2017, bolstering demand for retail investment real estate above 2016 levels, when Tarrant County experienced a plus-7-percent transaction velocity.
Bustling employment is also strengthening retail tenant demand and supporting development. For example, in Fort Worth, Facebook’s new, 2.5 million-square-foot data center and Lockheed Martin’s F-35 manufacturing center will create more than 3,000 new jobs.
The addition of many new households is spurring necessities-based stores to search for appropriate space to lease. Several grocers, including Central Market, Kroger, Tom Thumb and Sprouts exemplify this trend.
In some cases, these retailers expand to vacant, big-box space in existing centers. However, the area’s healthy retail real estate demand and development over the last few years have also prompted the construction of larger retail centers. Notable projects set to come on line this year include the 500,000-square-foot Shops on Broad in Mansfield, as well as a 380,000-square-foot retail center in Prosper and the 350,000-square-foot Tanger Outlets in north Fort Worth.
Overall, the number of completions in DFW will be commensurate with last year’s 3.1 million square feet brought to market. That said, strong pre-leasing activity will help net absorption outpace supply gains again this year, further improving retail vacancy.
Following a 90-basis-point decline in 2016, DFW retail vacancy will further constrict this year. In 2017, strong tenant demand is expected to produce a 40-basis-point decrease in the area’s vacancy rate, trimming overall vacancy to 4.9 percent, which is below the national average. Sound economic fundamentals, high demand for retail space and falling retail vacancy will also support rental growth this year.
Following a 2.4 percent growth in 2016, the rate of retail rent growth will climb another 2.6 percent to $15.74 per square foot in 2017, surpassing the national rate. Higher-than-average rental gains will keep investors interested in the area, supporting a healthy sales environment
Investors are flocking to the metro in search of retail investment opportunities due to its strong economic outlook and healthy property fundamentals. While buyers in the Lone Star State tend to dominate sales activity, a growing presence of West Coast investors is creating competition for retail assets. Some investors are scouring the metro for upside potential and considering deferred maintenance, vacancy and capital investment to reposition and raise rents in order to drive up values.
Prices for these properties vary greatly based on tenancy and location. Strip centers and smaller outbuildings located near big-box grocery tenants will be in high demand and trade at premium yields. Stabilized strip centers, particularly those with revised tenant mixes that favor restaurants and discount- and service-oriented retailers, will also be in high demand. Assets of this sort will trade at cap rates ranging between 6.8 and 7.3 percent.
Investors will also continue to target well-located single-tenant properties, particularly well-performing fast food and restaurant establishments.
Though it’s difficult to predict the future, DFW is in a great position. Located in a business-friendly state with strong fundamentals and labor pools, the market appeals to businesses that have capital and are interested in relocating or expanding their presence in Texas.
Many of our clients are selling off assets that have appreciated and repositioning those profits into properties that are considered value-added opportunities. This allows them to justify paying lower cap rates, which, depending on the class of retail property, are some 15 to 35 basis points lower today than they were during the last peak of the 2006 market.
Overall, DFW is experiencing more out-of-area investor demand than ever before. We attribute this to higher rental prices, lower vacancy rates and an abundance of low-cost financing. In addition, the inflation hedge characteristics that retail property provides are desirable compared to the volatility in alternative investment vehicles right now.
— By Philip Levy, Senior Managing Director, Marcus & Millichap. This article first appeared in the May 2017 issue of Texas Real Estate Business magazine.