No state income taxes. Predominantly pro-business government. Generally mild weather (okay – except for the summer). Convenient access to national and international freeways (great distribution networks). Two major airports: Dallas Love Field and Dallas/Fort Worth International Airport (#2 busiest airport in the world with 73,362,946 passengers). 43 Fortune 1000 companies are headquartered in Dallas/Fort Worth (54 Fortune 500 companies headquartered in Texas). Generally affordable access to good education and housing.
**Chef’s Kiss**
What’s not to like? It feels as though a new major employer announces their relocation to Dallas/Fort Worth every month, and builders can’t build enough homes, townhouses, or apartments (The North Texas metro area made headlines last month for leading the nation in population growth in 2022, according to the U.S. Census Bureau).
In a post-COVID world where consumer spending, travel, and socialization patterns have changed forever, retail in Dallas/Fort Worth is as healthy as ever. While there are some “systemwide” issues that can’t be controlled (closures from Sears, Tuesday Morning, Party City, Gordmans, Stage, Bed Bath & Beyond, etc.), retail vacancy rates hover around 5%, which is insanely and historically low.
With all the positive factors we are experiencing, many tenants, users, investors, and developers have focused their resources (time, energy, capital) into our market. While there are a lot of obvious positive side effects, this infusion of resources has led to a few challenges in recent years in our business:
1) significantly more expensive/inflated real estate costs;
2) exacerbated construction pricing (even beyond the national post-Covid spike);
3) significant competition in rapidly expanding categories.
In addition, national interest rate hikes intended to fight inflation are not necessarily helping the cause. However, the positive momentum our market possesses (residential growth, strong sales, employer influx, etc.) has allowed us to keep growing at a healthy rate.
How many newer coffee shops or fast-food restaurants did you drive by on the way to work or dropping off your kids (or pets) this morning? Raising Cane’s, Starbucks, Chick-fil-A, Salad & Go, Cava, Dutch Bros, Chipotle, 151 Coffee, McDonald’s, Dave’s Hot Chicken, Black Rock Coffee, In-N-Out Burger, Scooters, 7 Brew, Whataburger, Jollibee, Bojangles, Swig, and a flurry of other quick service restaurants are aggressively pursuing new stores in the market. Remember that we Texans cannot be separated from our cars. We drive everywhere and we don’t like to get out of our cars – hence explosive drive-thru restaurant expansion. It’s not laziness – we call it convenience.
As for actual retail (besides restaurants), small shop retail continues to be the star of the show. It leases and re-leases – many times before it even hits the market. Small shop strip centers continue to be built despite higher interest rates (highest in 16 years), higher construction costs, and higher exit cap rates (higher returns required and lower sales prices), which actually pencils with increased rental rates which are absorbed by the tenant.
Box retail expansion is a challenge because there just isn’t much existing supply and there aren’t many new power center projects on the horizon. Retailers are getting creative to get into this market. For example, splitting a vacant big box (think a former Bed Bath & Beyond) would historically be cost prohibitive, but box retailers are stepping up their rents to make those exorbitant costs for the property owner feasible in today’s environment. Additionally, retailers like Five Below, Popshelf, and Michael’s have bought existing leases at auction from retailers (who have declared bankruptcy) to get into long sought after trade areas.
Active groups in the big box segment include: Burlington, Five Below, Ulta, Popshelf, Kohl’s, Dollar Tree/Family Dollar, Planet Fitness, Target, Costco, Ross, TJ Maxx/Marshalls/HomeGoods, PetSmart, Academy Sports & Outdoors, Sprouts, EoS Fitness, Dick’s Sporting Goods, HEB…. the list goes on. Should capital market forces (ability to predictably sell/secure reasonable debt for this segment) allow for this type of product to be feasibly built with any sort of scale, we should see a lot more growth in net new big box product. Until then, retailer sales are strong, and we will all fight over what comes available.
Let’s enjoy the ride and be grateful for where we live. There are a lot of negative forces out there that could hinder our growth, but we have so much momentum with fundamental positive factors behind us. Keep eating, drinking, and shopping – it’s what we do best!
Tyler Grisham is managing principal and co-market leader with SRS Real Estate Partners in Dallas.
