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December 05 , 2008

A Pending Glut of Retail Space

A Pending Glut of Retail Space

December 5-11, 2008 - Dallas Business Journal - By Bill Hethcock
Sources Say Construction, Lease Rates Likely to Drop in 2009
With national retailers closing stores and bracing for sluggish holiday sales, real estate experts already are predicting that vacancies will climb and rents will fall in North Texas shopping centers and malls next year.
"The economic meltdown that's affecting the overall economy is certainly going to challenge retail," said Steve Lieberman, CEO of the retail real estate firm The Retail Connection. "It's likely that we will see a greater number of store closings. Supply is exceeding demand, and vacancy will clearly increase."
The North Texas vacancy rate is about 11% of the total retail inventory of 170 million square feet, said Ian Pierce, a real estate analyst at The Weitzman Group and its affiliate, Cencor Realty Services. That's about the same as it was at year-end 2007.
North Texas will feel the effects of stores such as Linens 'n Things and Circuit City filing for bankruptcy and other retailers closing locations to cut costs, but those negative impacts will be at least partially offset by stores, especially discounters, that are expanding, Pierce said.
The Weitzman Group is working with some discount retailers that are adding locations despite the economy, he said. Other retailers that aren't in ideal locations are using the downturn as an opportunity to upgrade, Pierce said.
"We're continuing to do deals, and to do very significant deals," he said.
Retail construction is on pace to add about 4.2 million square feet of retail space in North Texas in 2008, compared to 3.8 million square feet in 2007, according to Cencor Realty Services. Projections for 2009 were not yet available, but industry sources expect the amount of new construction to drop.
Quoted rental rates in the Dallas- Fort Worth area are projected to finish 2008 at $15.77 per square foot per year, an increase of less than 1% from 2007, according to projections from Marcus & Millichap Real Estate Investment Services. Rates are likely to fall next year, although it probably won't be a dramatic decrease, Lieberman said.
Fueled by continued population and job growth, the North Texas economy is faring better than most metropolitan areas, said economist Bernard Weinstein, director of the Center for Economic Development and Research at the University of North Texas. But the pace of population and job growth is slowing and likely will continue to do so throughout 2009, Weinstein said.
"Right now we're in better shape than many parts of the country," he said. "But we are slowing down, and I think 2009 is going to be pretty weak for retail because incomes won't rise as fast as they had been and because the unemployment rate will pick up here."
"We are, by many measures, one of the most over-retailed markets in the country," Weinstein added. The Dallas-Fort Worth area has 29.9 square feet of retail space per person, well above the national average of 20.9, according to statistics from Delta Associates, the research affiliate of Transwestern commercial real estate firm. Some retail projects have already been put on hold and more will be postponed or canceled next year as the economy goes into its second year of recession, population growth slows and would-be developers postpone construction of shopping centers because the credit crunch prevents them from finding financing, Weinstein said.
"The bottom line is, yes, retail vacancies will be up next year,!” he said, "but I don't think we're going to see abandonment like we'll see in other parts of the country."
Tenants find better deals
While landlords dislike vacancy, tenants can get better rates and more concessions when demand exceeds supply, Lieberman said. "When markets are overbuilt and there are limited solutions for the space that becomes available, you're seeing very good deals for the retailers that can become that solution," he said.
The Retail Connection has developed a "market stabilization initiative" that encourages landlords and tenants to work together to meet both sides' needs.
"The best landlords and retailers understand that their relationship is a partnership, and they need to achieve a balance that allows both of them to survive, which means they really need to work together on how these deals are structured," he said.
Real estate attorney Kevin Kelley of Gardere Wynne Sewell LLP in Dallas agreed that 2009 will be a tough year for retail real estate.
"There's a lot of stress out there," he said. "If you have one of these big-box retailers go dark on you, it can be a very problematic situation. I think in 2009 you're going to see more tenant defaults and more vacancies."
Even when shopping center landlords can find a tenant to replace a big-box retailer that closes shop, the process is complicated by the fact that the remaining tenants' leases often contain provisions that prevent the landlord from signing competitors, Kelley said.

DBJ Circuit City
DBJ Steve & Barrys
DBJ Dillards
DBJ Western Wearhouse
Tough times ahead:
Circuit city and Western Warehouse, both on Central Expressway in Dallas, and Steve & Barry's and Dillard's, shown here in Valley View Center, all are slated for closure.
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