Recession worries impacting
North Texas retail market

Recession worries are expected to have a growing impact on the North Texas retail market with vacancy rates forecasted to reach 13.2 percent on average by yearÂ’s end according to the latest report published by Marcus & Millichap Real Estate Services.

According to its second quarter 2009 retail research market update, 7.8 million square feet of retail space was completed in 2008 with builders anticipated to slow that delivery pace to 6.4 million square feet this year, expanding the Metroplex stock by 2.6 percent.

The average vacancy rate, according to the report, is expected to finish 2009 at 13.2 percent, a 180 basis point rise from 2008, which alone saw a 20-basis point rise.

“The retail market in Dallas-Fort Worth is now struggling through the recession with the rest of the country,” the report states. “After recording strong economic growth through much of 2008, lower energy prices are putting pressure on the local job market.”

In fact, more than 30,000 jobs related to the Barnett Shale natural gas field have been eliminated since mid-2008, the report states, which has impacted consumer confidence and spending.

Real estate purchases, however, are becoming more attractive to the local market.

“Local investors will make up a larger percentage of buyers this year as out-of-state capital continues to dissipate,” the report states. “Many Texas-based investors still have capital reserves from the recent run-up in property prices, affording them significant negotiating leverage when acquiring distressed properties from out-of-state owners.”

Drew Kile, regional manager of the Fort Worth office of Marcus & Millichap Real Estate Investment Services, said he is still seeing good activity levels from out-of-state buyers, but sales have started to reside within more historical norms.

“[Out-of-state buyers] had just become such a huge part of the demand,” Kile said. “... Now we’re getting to a more normal flow where a lot of the local investors, who were net sellers in the past couple of years, can now pick up some deals that are challenged and underperforming, turn them around and make some good money.”

The report states some of these deals will likely be targeted by REITs, however, “keeping upward momentum on cap rates in these subtypes lower than the Metroplex’s average.”

Nearly all of the 2.2 million square feet of space under construction in Dallas-Fort Worth currently is multi-tenant, which “could place significant pressure on fundamentals during a prolonged economic downturn,” the report states. The planning pipeline has contracted by 25 percent from one year ago, however, indicating that some relief to supply-side pressure is on the horizon.

Kile said the majority of the 2.2 million square feet of multi-tenant space currently under way is gobbled up by the Metroplex’s larger projects such as the West 7th mixed-use development in Fort Worth, leaving a “relatively minimal amount of new construction being built by your average Joe developer,” he said. Deals such as Fort Worth’s WestBend, which was a $100 million mixed-use project planned along University Drive that was halted in January citing unstable capital markets, have helped to minimize damage to the local market.

“We might have some lag in development, but we’re seeing a pretty good slowdown, which is good for Texas developers. In some cases, the cost of pulling out even late in the game is still less than the perceived cost of completing it without tenants and that’s what happened with [WestBend],” Kile said.

The report also estimates asking rents will reach $15.24 per square foot by year end while effective rents retreat to $13.52 per square foot, decreases of 3.6 percent and 4.2 percent, respectively.

Given the growing impact of the national recession, Kile said indicators that retail sales are slowing are beginning to emerge. As of March, the state sales tax allocation for Fort Worth retreated 4 percent from a year earlier.

During the past 12 months, the report states, employers in the Metroplex have reduced payrolls by 39,600 positions, a 1.3 percent decrease with losses accelerating during the first quarter of 2009, which saw 32,600 jobs eliminated.

In the coming year, the report estimates the national recession will “weigh on the once robust Dallas-Fort Worth job market” and by year end, employers are expected to cut 43,000 jobs, a 1.4 percent decline.

“Everything adds up to have an impact on the retail market,” Kile said. “I think if you look at the retail sector you have to look at retail spending factors right now, so even as income increased in some recent data, personal savings increased as well. Consumers added more debt in the last seven years than in the last 40 so people are not spending. They’re saving, which is a good thing, but the outlook for spending to rapidly increase is not happening. It’s not a doom’s day scenario, just continued pressure on tenants and landlords in the foreseeable future.”