RUNDOWN ON RETAIL

Forty-seven years ago, Fortune magazine focused the eyes of the nation on Dallas as a retail leader when it “discovered” Neiman-Marcus. While Dallas glowed in the spotlight, retailers around the country pored over the Dallas numbers-the buying power and the high demographics- and attempted to gauge the city’s level of sophistication. As this first wave of national recognition turned into a second wave of action, large retailers from outside Dallas packed up their goods and moved in to compete with what was already a strong home-grown market. The national chains knew a good thing when they saw it and bought out the locals, while others brought in their own stores: Saks Fifth Avenue, Marshall Field’s, Sakowitz, Gump’s, Bloomingdale’s, Mervyn’s. Now Macy’s will join the competition in the malls-the “shrines to spending,” as they were called this year by a National Geographic writer after a visit to Dallas. A third wave is forming as Dallas’ reputation for a virtually unshakeable economy and tremendous buying power gains more world recognition. “We are experiencing an influx of specialty retailers that have never been here before-from New York, Paris, California-that adds to the level of sophistication and broadens the variety of options for the shopper,” says Thomas F. Angstadt, executive vice president of the commercial/retail division of Henry S. Miller Co.

Although some of the exclusive specialty retailers have found a home in upscale malls such as the Galleria, many are opening their shops in strip shopping centers, once considered undesirable locations. Until recently, many shopping strips were no more than bland or-even worse-a mixture of ticky-tacky storefronts.

Going hand in hand with the influx of upscale specialty retailers in Dallas is a new generation of upscale shopping strips. “I think there is an interest on the part of more and more developers in putting more money into their properties and upgrading things architecturally, in creating a better face to the street and being a better neighbor that, as a resident of the city, you want to see happen,” says Kenneth H. Hughes, who formed his own development company, Kenneth H. Hughes Interests Inc., after leaving the Henry S. Miller Co., where much of his work involved the development of the specialty market. “This upgrading is happening at all levels-low-price, high-price, mid-price. I think that this kind of trend can happen here because, overall, there’s a high disposable income. That’s not true of the rest of the world today. Dallas is really a wonderful exception,” says Hughes.

This new generation of shopping centers is being created in what is the hottest market in the history of the area, one that started shortly after interest rates went down in 1982 and the housing industry began to boom. In 1982 and 1983, as the market started to dart upward, developers completed 9.3 million square feet of retail space, according to the annual Shopping Center Survey by Henry S. Miller Co. If 1982 and 1983 were boom times, then 1984 is an explosion: Developers are increasing the total retail space in the Dallas/Fort Worth area by another 11 percent with the addition of 7.3 million square feet of space, according to the company’s midyear survey. The activity during the last three years alone accounts for about 20 percent of all the 84.8 million square feet of retail space that will be on the market by the end of the year.

With the high level of interest has come a diversity of activity. In every corner of the market, the longtime retail developers, along with a host of new ones following the flush money supply recently available for retail investment, are making their mark. “There are major renovations going on within the inner city. Outside the loop, there’s a lot of suburban growth-a lot of retail development following the residential home starts,” says Steven G. Shafer, a partner in Hopkins-Shafer, one of the fastest-growing retail developers in town, with $75 million worth of development and renovation started since its formation in March 1983.

One of the most significant trends in terms of the longtime vitality of Dallas is the renovation of strip shopping centers that are closer to downtown. The sale of shopping centers has been brisk this year, with the increase in sales in July 1984 over July 1983 a whopping 133 percent, according to George E. Roddy, chairman and CEO of Dresco Inc., a real estate market analysis firm. He gives one rationale for the purchase of existing centers: “Strip shopping centers have proven to be a high increase in appreciation . . . If you buy one this year, then you’re probably going to get a higher appreciation in shopping centers-as far as what you’re going to get out of it next year- than probably any type of real estate investment.” The increase in the selling price of retail space reflects both the optimism and the activity in these properties: up 45 percent per square foot during the first six months of 1984 over last year for an average selling price of $56 per square foot, says Roddy. Clearly, many of the buyers are investors, but a host of the older properties eventually end up in the hands of developers who rehabilitate them.

“You see a lot of redevelopment today, in part because the first- and second-generation shopping center is only now becoming old enough that it’s reasonable to spend the money to redevelop and achieve increased rents in amounts sufficient to economically cover the cost of remodeling. Office buildings have been candidates for redevelopment for the past 100 years; shopping centers haven’t, because they haven’t existed but for about 30 to 35 years,” says Joe J. Lancaster, president of Arcus Development Corp. and a former president of the Henry S. Miller Management Corp. Lancaster’s company is developing a number of sites in Carrollton and has completed one renovation of a shopping center in Farmer’s Branch.

Although the natural aging process of the centers, the high appreciation of the properties and a ready supply of money are pragmatic reasons for the activity in older, near-town centers, the result of the heightened interest has also been of a more aesthetic nature. With the revival of these older centers, the new generation of architecture, coupled with the influx of specialty tenants, is increasingly becoming a part of Dallas. Uniform design is taking the place of the multifaced storefronts; brick, cut stone, Italian tile and polished marble are supplanting painted concrete blocks and other less-refined materials; consistent, readable signs are emerging to take the place of the discordancy of mismatched signs; bell towers, extensive landscaping and lighting, and even sculpture add to the centers’ appeal.

Although Highland Park Village, a unique center that has captured the attention of the nation, was the first major center to be upgraded and revived with a stronger mix of specialty tenants when Henry S. Miller Co. bought it in 1976, only a few other properties have since been upgraded until this recent retail boom.

Thus far, one of the biggest transformations has been the ongoing development of the mile-long strip that runs eastward along Lovers Lane (from the southwest corner of Inwood and Lovers). “Some people made fun of us when we bought in. There were people who were buying a half pint of peach brandy during the day, then sleeping in the spaces at night,” comments Shafer.

Today, no one is laughing. As the rehabilitation of the outmoded Forties block continued, the hodgepodge of storefronts took on a unified look with a wrapping of cream Italian tile and cast stone, which smoothly rounds the corner in a sleek curve. As rents escalated to some of the highest in the city ($25 to $30 per square foot), the older tenants moved out and a new breed of specialty tenants took over the freshly divided spaces, such as Turtle Cove Fish Market, owned by the proprietors of Turtle Cove restaurant; A Budding Success, a florist that promises one-of-a-kind designs; and E’lane’s, an upscale women’s boutique.

Other key corners and multistore strips along Lovers Lane, already known as the Miracle Mile and now being promoted as Dallas’ answer to Beverly Hills’ Rodeo Drive, have been purchased and are in various stages of renovation. Swearingen-Brosseau Development Co. is currently renovating Lovers West, the northeast corner of Lovers Lane and Inwood. Thomas E. Bros-seau, president of the company, describes the work on the 26,000-square-foot space that may eventually house such stores as Ann Hartley (featuring upscale women’s fashions) and Louis Vuitton (fine leather goods): “We decided to spend the dollars on Italian tile, cast stone, neon tops, intricate columns and a gallery with mosaic tiles. It’s going to be a place of fashion. We’ll have valet parking on weekends and holidays for those who want it.” A store called “Fanfare at Lovers,” to be renovated by Levin, McCall & Associates, will replace the barber shop, tire store and golf shop adjacent to the Hopkins-Shafer property on Lovers.

Dallas’ Rodeo Drive is but one key renovation that’s combining upscale architecture with the move-in of specialty retailers. “Most of your redevelopment is in older properties in downtown Dallas, North Dallas and the older areas of the suburban communities. They’re primarily along the major traffic arteries feeding the inner city, such as Greenville, Lovers Lane, Preston and Northwest Highway,” says Lancaster.

Lower Greenville is seeing its share of renovation too, particularly as it nears the Deep Ellum area. So is the comer of Northwest Highway and Preston Road, where three major blocks of Preston Center have been purchased for renovation. The purchase and revival of about 20 acres overlooking Bachman Lake will transform what has been a somewhat tarnished area, as Hopkins-Shafer renovates Walnut Hill Village (now The Village at Bachman Lake) and Jackson-Shaw Co. and the Trammell Crow Co. add more retail space as well as offices and a hotel. The Quadrangle section of the Vineyard, which has suffered from an exodus of tenants, will get some attention, although the basic character of the structure will not be changed, according to developer Ken Hughes. Additional retail spaces and restaurants, offices and possibly housing may also be in the long-term plans.

Oak Lawn is ripe for renovation and is also a key retail space featuring European-style boutiques. In late September, 3311 Oak Lawn, a center designed by well-known architects Shepherd & Boyd, opened. It includes an arbor-covered courtyard and a Wesselmann sculpture.



A SOMEWHAT PARADOXICAL type of retailing is occurring on a small scale at the same time as the specialty retailing found in the older, wealthy, high-density parts of the city. “There’s a new phenomenon in shopping centers today called the off-price, budget or discount center. The discount stores have been around for a long time, but now we have entire shopping centers devoted to off-price merchandising,” says Lancaster. Currently, one outlet exists in Piano, and another is under construction just outside Piano. Most retail developers say it’s too early to tell if the outlet center concept will catch on and be a significant part of the market, although it now accounts for about 5 percent, says Angstadt.

While inner-city developers are bringing new life and increased sophistication to the core of the Metroplex, and outlet center developers are combining the discount merchants under one roof, a host of other developers are working in the heart of the booming suburbs.

“In the last 18 months, you’ve seen the new retail developed in those areas where single-family and multifamily housing began to be built and financed and sold possibly two years ago to meet the demand, to satisfy those new customers,” says Lancaster. One of the rules of retail real estate is that retail follows the housetops. It’s not a hard-and-fast rule, but you can bet that if new development in housing is anywhere around, a retail center will be nearby. With housing starts, both single-family and multifamily, at such highs from mid-1982 throughout 1983 and again this year, retail development was bound to follow after a short lag time. Building permits for retail construction in 1983 totaled $186.6 million, up from $109 million the year before. And if that wasn’t significant, 1984 should prove to be with permits filed for $138.3 million for only the first six months of the year, says Brousseau.

According to M/PF Research, the top markets in retail construction-those having the most square footage of retail space under construction during the first six months of 1984-include Piano, with 985,800 square feet, primarily in west Piano; Arlington, with 866,300 square feet, primarily in south Arlington; Mesquite, with 614,400; Denton County, with 400,200 square feet; Hurst/ Bedford/Euless, 339,700 square feet; Southwest Oak Cliff, 277,400; Carrollton, 219,200; and Oak Lawn and the Park Cities combined, with 210,900 square feet of retail space under construction.

Housing works as a catalyst for retail, Roddy says. “Look at the major announcements of single-family developments-such as those in Garland, Cedar Hill, Duncan-ville and DeSoto-and that’s where you will see more and more retail development.” Roddy also foresees more action ahead in Denton and Allen, while Lewisville may slow down some after all its recent activity.

Although housing has been a catalyst in the market, the retail development is driven by the availability of money. “The introduction of thrift financing availability for smaller developers has helped fuel the fire,” says Hughes. “A lot of lenders have been willing to finance without substantial leading commitment for construction. I think this allowed for a variety of products to be more prolific.”

“In the past, we had a check and balance with strip shopping, because most lenders required a sufficient number of major tenants-credit tenants with strong financial statements or long-term leases. They required that you had those leases fully executed before they’d loan you the money to develop the project,” says Lancaster. “Today, we’re seeing lenders and developers joining together to create shopping centers with no major tenants. The space is totally speculative space.”

Along with some projects that were purely speculative and tracts of land sold in non-prime locations for retail development, many long-time retail developers point out that the availability of money attracted many developers who had never worked in the retail field before. Although many do expect some fall-out in the marketplace as weaker centers don’t survive, the overall picture remains good.

The major supply of money pumped into retail development, lent primarily by the savings and loans companies, started the retail ball rolling. Says George Roddy: “In January 1983, 19.5 percent of all land sales were for commercial retail use. There were some good indications then, but we were still in the doldrums. In July, land sales for commercial use bumped up to 35 percent of all land sales. The record was in February 1984, when 44.9 percent of all land sales were for commercial retail development.”

The race to buy the properties was on and the competition was fierce, with both land speculators and developers vying for the properties. “If I submitted a contract to a property owner and he didn’t have four or five contracts on his desk, then I was concerned that there might be something wrong with the property. Shopping center developers are quite competitive and active,” says Jim Tonick, president of Carlisle Property Company-Retail, which has at least nine sites currently under construction. That frenzied competition to buy land sites has dropped off in recent months, according to Tonick.

As with any type of real estate, getting the right location is the singular most crucial element of the deal. Well before housing building permits are filed, many retail developers have their land deeds in hand. In fact, since prices have recently escalated, many developers are purchasing land now and banking it for development in the future. Shafer describes what he and partner Mike Hopkins go through to find the right tract: “We were looking at a site in Arlington. We spent half a day in Mike’s Wagoneer just tracking utility lines. We had heard that Fox & Jacobs was building 275 houses. There’s no way to substantiate this unless you get out there and track where they’re going to cut the roads ahead of the roads-by tracking the utility lines. You’ve got to play detective.”

The fierce competition, the investors flipping land like short-order cooks flip pancakes, and the ready flow of money all combined to cause the land prices to escalate dramatically. Prices in most places easily doubled, then tripled over an 18-month period. Lancaster says that in Carrollton, for example, prices were about $3 to $5 per square foot; today, the same land sells for at least $8 to $12 a square foot.

Land at the high end of the market, combined with the movement toward more upscale architecture, make this recent boom the most expensive yet in terms of rents paid by tenants. The average rent for existing centers (based on a standard 2,000-square-foot lease) at mid-year was $10.94 per square foot in Dallas and $8.91 per square foot in Fort Worth, according to M/PF Research. Centers under construction, however, are quoting average rents of $16.01 per square foot in Dallas and $14.05 per square foot in Fort Worth. Top-of-the-line centers under construction in choice locations command even higher square-footage rents. The average rent in Oak Lawn and the Park Cities was $31.71 per square foot at mid-year.

Although retail developers are quick to point out that the location, the design of the storefronts, the type of tenant and other factors will dictate if the rents can be borne in the marketplace, some observers are concerned that the rents are out of range for many tenants. As a whole, however, the marketplace has every indication of being vibrant: M/PF Research reports an average occupancy of 91 percent in Dallas and 90 percent in Fort Worth in all centers that have been open for six months.

What’s in sight for the future?

“To project what retail land prices will do is anyone’s guess, but it seems logical that they have peaked with buyers’ resistance becoming more evident,” says Brosseau, who predicts a flattening of rental rates for the next 12 to 18 months.

“We also project that the amount of retail space to be constructed next year could decline significantly,” he says. “There are two reasons for this: One is increased land prices, and another is a possible decrease in housing, both in single-family and multi-family. But this decline does not indicate a negative trend. It is, rather, a natural response to a period of accelerated growth.”

And real estate, after all, is cyclical by nature-even in the center of the hottest real estate area in the country.