March 05 , 2007

Record Years: 2006 Was and 2007 is Teed Up to be Another One

Record Years: 2006 Was and 2007 is Teed Up to be Another One

March 5th, 2007 - BOMA Editorial by Steve Lieberman

By all measures, 2006 was an exceptional year.  Expanding retailers  went on a shopping spree absorbing 4.1 million square feet of retail space in the DFW Metroplex-- more than the last two years combined and the greatest amount of net absorption we have seen since 2000.  The most remarkable aspect of this number is the actual amount of space that was leased up.

Surplus space comes on line each year as major retailers relocate to new properties, however 2006 saw an extraordinary number of store closings as well [including Mervyn's, Toys R Us, Ultimate Electronics, and a number of Albertsons and Minyard grocery stores], which resulted in over 3 million square feet of gross leaseable area [GLA] coming  back on-line.  Much of this space was leased up by fast-moving  retailers, including Burlington Coat, Shoe Pavilion, PGA superstore,  Ross, and the likes, however in most cases, it has yet to be occupied,  artificially inflating the market's vacancy rate by approximately 2%. 

Still, demand was so strong that developers added another 7.3 million square feet to the market taking our total retail GLA to 154 million square feet.   As such, the market's 2% drop to 85% occupancy, while the highest vacancy rate DFW has seen since 1993, was remarkable given this volume of new and surplus space equated to 6.5% of our GLA.  The markets strength is further reflected in that average rental rates extended their two decade run increasing 1.8% to another record high.

DFW retail investment sales again topped one billion dollars, consistent with 2005, another strong benchmark considering this measure declined 17% nationally.

Several underlying trends reinforce why, beyond our robust economy,

2007 will be another big year for DFW retail real estate and we will continue to see development in every direction.  Shopping centers are definitely evolving and the new format that every community wants is super sized mixed-use lifestyle centers.  These projects have it all-- featuring a mix of hard and soft goods, specialty retail, dining and entertainment venues. The best local examples of which are the 1,000,000 square-foot Southlake Town Square and the 800,000 square-foot Arlington Highlands. These venues are ushering in a new breed of shopping center where projects are no longer clearly defined as power, grocer, service or specialty.

We will also continue to see more projects going upscale in response to increased incomes, concentration of wealth, quality retailers and construction costs.  An extension of this is much better conceived, balanced, and executed mixed-use developments, such as The Shops at Legacy. We are seeing greater density in urban centers, such as West Village, Victory Park and Park Lane, which intensifies the respective trade areas and increases the vitality of these projects.

Retailers are clearly responding, as seen with department stores such as Barney's New York with their freestanding Co-Op shops and Neiman Marcus's edgier, smaller Cusp stores.  Traditional shopping center anchors such as Target, Bed Bath & Beyond and Circuit City are also adapting their boxes to meet this evolving variety of shopping venues.  Another major catalyst to the evolution of retail stores is that new trends are driving new focused concepts aimed at diverse and fragmented consumers, such as Chico's SOMA or women¹s retailer Coldwater Creek' targeting a more mature demographic or moderately-priced retailer Steve & Barry's.

Supermarkets are also evolving as they continue to be more innovative.  The supermarket industry is getting more fragmented as operators tailor the scope, pricing, product quality and the size[s] of their stores.  Exhibit one being Wal-Mart Neighborhood stores and Whole Foods Markets.

Equity will continue to flow into retail and we anticipate a number of new announcements by the end of the second quarter relative to current public retailers going private-- extending the privatization trend.  So far, this has been a very positive evolution, creating much healthier retailers.  We also expect to see continued recycling of a number of properties as these chains shed their underperforming units, realizing the equity in their real estate while simultaneously creating unique opportunities for expanding retail chains.  In fact,

of the 25 Texas Mervyn's properties that The Retail Connection and Klaff Realty disposed of in 2006, over half went directly to retailers, including Dillard's and Burlington Coat Factory. Now Albertsons plans to follow suit with 31 of their 109 North Texas locations.

With all this positive traction, there is a record slate of new developments both opening and set to break ground in 2007 and aggressively expanding retailers in the queue ready to fill them up.


Steven A. Lieberman is CEO and Co-Chairman of the Board of Directors of The Retail Connection, LP, a real estate advisory, brokerage and investments firm exclusively focused on retail.  The Retail Connection represents over 125 of the leading national retail and restaurant chains in the country, over 17 million square feet of properties for its clients, and operates three investment services platforms; Connected Development Services, Connected Acquisition Services, and Connected Capital.