May 04 , 2009

Texas Retail Market Stronger Than Most, But Adjusts To Change

Texas Retail Market Stronger Than Most, But Adjusts To Change

May 4th, 2009

by David Sorter* for REDNews

“Thank goodness we’re in Texas.”  Weitzman Group managing partner Bob Young may not have been sent to spread that message, but his sentiments are echoed throughout the state among those involved in retail development.

Though retail development and leasing certainly have been affected by the ongoing recession, with many major projects having been put on hold because developers can’t find financing, brokers, developers and owners all say the downturn in development and leasing is much less brutal than it is in California, Florida, Arizona and the Great Lakes region.

“We’re definitely better off in Texas,” said David Sacher, a senior vice president at Retail Connection, a leasing broker and tenant representation outfit in Dallas. “Everything went up so much higher in other parts of the country, so they’re dropping harder. Every conversation we’ve had with national people said that Texas is in relatively good shape.”

What this means is that many projects that obtained approval and financing before the worst of the economic downturn hit in 2008 are moving forward. With the exception of some Houston projects that may receive some municipal help, few, if any, new-project announcements are on the horizon.

“Right now, prospects for us or anybody for near term are pretty limited,” Young said. “Most of the new construction are all projects that started in 2008.”

Vacant space in currently built centers is growing, with large chunks on the market from recent closings of big-box retailers such as Circuit City and Linens n’ Things. Grocery stores such as Albertsons have significantly retrenched, and those store layouts won’t fit the new model of larger, more diverse supermarkets that offer amenities not found in Wal-Mart Supercenters, the leader in market share in much of Texas.

“People are definitely going into existing spaces,” Sacher said. “They don’t want to wait to see if developers get a deal done.”

With a changing economy comes change in the type of projects that are moving forward. Discount stores - Dollar General, Ross Dress for Less and the like - are the hottest trend, reflecting consumers’ tendencies to spend less money on goods. Casual-dining restaurants also are growing in numbers, and grocery-store-anchored centers are in demand. Fashion shops for the frugal also are popping up.

“Most people that are active are discounters, from dollar stores to Ross,” Young said. “The whole market is becoming more value-oriented from a consumer standpoint. It’s the same thing as the restaurant market: Quick-serve and casuals that have competitive price points are holding their own.

“Another group doing quite well in food market is grocery stores. Fewer people are eating out because of the cost, and the new prototype of grocery stores offer prepared meals at a lower price.”

Said Sacher: “We are seeing, in some circumstances, that grocery stores with new, bigger models may begin to build in the next 18 months. There won’t be any new power centers for awhile.”

Jeremy Zidell, another senior vice president at Retail Connection, also sees discounters finding better space and landlords seek to fill space left vacant by more upscale shops that went out of business.

“In previously higher-priced spaces, the discounters and the landlords have come together, Zidell said. “In the future there’s going to have to be absorption of the space; with that, the discounters get more market share.”
Specialty stores, such as Sprouts Farmers Market, Market Street are filling some of these vacancies – even subdividing the old stores. One example of theme changeover is in Houston’s Wesleyan Plaza, where a Spec’s Liquor and Fine Foods is moving into a former Linen n’ Things box.

Also filling space is a group of people trying to find a silver lining in the cloud of losing their jobs.

“With large companies doing layoffs, we’re seeing more people with wherewithal financially go with franchises,” Zidell said. “Where national retailers are going down, franchises are growing. The environment is going to spawn entrepreneurs.”

Said Young: “While general activity is not as robust as in past years, we’re still making leases. Most now are for local/regional tenants as opposed to the nationals.”

Of course, landlords want to fill space, and they have to give a little bit to do so.

Retailers, just like consumers, have a hard time trying to borrow money, so it’s more difficult for them to build out space and fill inventories,” Young said. “The other issue is that landlords want rent for space, and will include leaseholds for tenants. Tenants are asking for more help - deals are getting done; it just takes longer.”

So to get that lease signed, tenants are getting some good deals.

“Yes, tenants that are using this climate to expand expect more than ever and are leaning on landlords to finance their growth,” Sacher said. “Deals are becoming more expensive for landlords.”

Retail Connection managing director for brokerage Steve Zimmerman broke down what breaks tenants are receiving.

“They’re asking for capital for construction reimbursement,” he said. “And whereas they previously tried to cover cost of construction, now they’re asking to cover inventory or actual space build-out.” Discounted rent also helps get deals done.

Young, though, said landlords also benefit from the carrots they’re holding out.

“Clearly, there are more incentives in the marketplace,” he said. “But what it really boils down to is retailers’ ability to add to a shopping center mix; that’s a good thing. There’s a ton of stuff that has to be blended together.”

Though existing centers are finding ways to fill their space, most new projects remain simply drawings on paper or CAD software.

In Arlington, for example, various owners of Texas Rangers baseball franchise have foreseen a retail/mixed-use component to complement Rangers Ballpark in Arlington since the modern stadium opened in 1994. Speculation that Glorypark, as current  Rangers owner Tom Hicks named it, would come to fruition increased as the new, still unnamed, $1.1 billion Dallas Cowboys stadium began to rise and attract events such as the 2011 Super Bowl, the 2010 NBA All-Star Game and the 2014 NCAA men’s basketball Final Four.
However, Hicks announced in late March that funding for development, cost of construction and some financial difficulties of his own have forced him to put the project on hold temporarily. Perhaps he felt a little burned by the free-fall of the other stadium-related mixed-use development in which he was involved.

Victory Center, adjacent to American Airlines Center, home of the NHL’s Dallas Stars, also owned by Hicks, and the NBA’s Dallas Mavericks, has lost several upscale restaurants and retail shops within several months of their openings. Its developers have started to reconsider the very upscale atmosphere they wanted to create.

In Houston, the Sonoma mixed-use project in the Rice Village area has been put on hold, as has a development in the River Oaks district. 5–acre mixed-use project in the Heights area, though the older community is seeing something of a renaissance. Trademark Property Company has stopped construction on a retail project at the former Center Ford dealership on Westheimer near the West Loop.

However, the Regent Square development in the River Oaks area, which looked to be on the brink of further postponement, is now back on track after Houston Mayor Bill White announced it could receive $10 million in municipal incentives. The city infrastructure work is slated to begin in October, while GID Urban Development Group will start building the $850 million, 4-million square-foot mixed-use project in the fourth quarter of 2010.

Major developments with retail components still on track are the Nassau Bay Town Square near Houston, the Town Center at La Cantera at the Bexar/Medina county line in San Antonio, the Village of Allen and the Village of Fairview in the northern Dallas suburbs, and an addition to the Shops of Southlake in that community just west of Dallas/Fort Worth International Airport.

The question everyone is asking – and no one can really answer – is when the downturn will end. The March/early April stock-market surge provides hope to many, but the retail development experts don’t expect a rebound anytime soon.

“My gut feeling is that there are more layoffs yet to be done,” said Retail Connection’s Zidell. “It will take a while for market to absorb current vacancies. I don’t think it will take place by the end of this year.”

Weitzman’s Young said, “We’re going to be in this for a while. Any uptick in economy will be welcomed.”

But going back to Young’s statement, “Thank goodness we’re in Texas,” he sees its four major cities’ retail markets in good comparative shape.

“All the cities are pretty healthy, but for different reasons, he said. “Houston has its ties to energy industry. Austin continues to grow and is a very good market because of UT and the state government. Dallas has a pretty diversified economy and we’re OK. San Antonio seems to be pretty solid, and it’s an affordable destination for tourism.”

Still, no one should start breathing easier or letting up.

“What we’re seeing in the marketplace is that people who are focused will have opportunities to gain market share in a variety of ways,” Sacher said. “Companies that do that will be in really good shape. I think a lot of centers are going to change hands.”