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Commercial Real Estate

Dallas Retail and Hotel Construction Plows Ahead

Despite significant headwinds and the threat of recession, commercial construction in North Texas is booming.

Dallas construction activity remains strong in 2019, despite continued pressure from tethers like tariffs, land costs, labor costs, and the threat of a looming recession (or correction, depending on your optimism and preference).

According to data from JLL, Dallas ranks among the top commercial construction markets in the country, with 3.3 million square feet of retail development and 7,454 hotel rooms underway, putting it in the No. 4 and No. 3 spots, respectively.

This is a testament to the resilience of demand in these markets, where it has only gotten more difficult to build. Weitzman’s annual retail outlook revealed that retail occupancy just made it through its sixth consecutive year over the 90 percent mark. Occupancy currently sits at about 92 percent, with the potential to rise to 95 percent by the end of the year. This is likely what is giving developers the courage to continue building in the face of significant barriers.

The uptick in hospitality construction looks a little more risky, as supply is rising faster than the projected growth in demand as of Q3, according to CBRE Research (5.9 percent supply growth vs. demand growth of 4.9 percent), but this is normal says Jeff Binford, managing director of hotels at CBRE.

“As more rooms enter the market, occupancies begin to trend downward—which is where we are today. Occupancies are sliding for the right reason: the market is robust,” Binford said. “It should also be noted that on a national level, the number of new rooms are declining from just a couple years ago.  In Dallas, CBRE Hotels is projecting the rate of supply increases to start slowing in 2020.”

There is quite a bit of room to give before alarm bells need to ring, as hotel occupancy is still well above the historical average of 62 percent at 67.8 percent.

For builders, margins continue to be squeezed. Construction costs (factoring in labor, material, and equipment) grew by 3.4 percent in 2018, and it doesn’t look like the situation will improve. A stubborn bottleneck in skilled labor across the nation is expected to push construction wages up by more than 3.4 percent. Builders may turn to an increased use of modular construction to help achieve cost relief.

Despite challenges, the overall outlook is good, said Todd Burns, president of project and development services at JLL. “All forward indicators for construction are still flashing green,” he said. “However, a year with growth equal to that of 2018 would be considered a success, given concerns of a broader economic slowdown.”

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