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DFW Retail Real Estate on a Roll Despite
Online Shopping

by Scott Buie, Dallas, February 2019

 

The retail market in Dallas/Fort Worth is experiencing a five-year streak of occupancy above 90%. An occupancy rate of 95% is predicted for 2019, according to Weitzman's annual retail real estate report. The good numbers are the result of strong leasing in existing retail centers and a conservative development climate that has focused on demand-based new retail construction.

 

While the trend is good news for brick and mortar stores, it can lead to increased property tax assessments and higher tax bills.

 

Retail Remains Strong

 

In the past 15 years, D/FW has added 58.9 million square feet of retail space. During the same period, online sales expanded from 1.6% of the total U.S. retail sales to about 10% today.

 

"You'd expect our market to be weaker, but it's actually much stronger," explained Bob Young, executive managing director at Weitzman. The market filled a net of 3 million square feet last year and is poised to do even better this year.

 

Market Stabilizes

 

D/FW's retail market has been historically overbuilt. However, it's now reaching a more stable level because retail anchors aren't building as many new stores. "Land, construction and borrowing costs are going up," Young said. "They'd rather backfill or redevelop existing space because of lower costs and a shorter time frame."

 

During 2018, construction in new and expanded retail centers totaled only 3,501,897 square feet, which is especially low for a market that is a national economic leader in both jobs and population growth. Specifically, the 2018 space deliveries declined when compared to 2017, when 4,225,728 square feet came online. By keeping new development on pace with demand and adding little if any speculative space, the market has avoided overbuilding.

 

Innovation is Key

 

Entertainment-focused tenants such as Pinstripes, Alamo Drafthouse, and Crayola Experience, which don't compete with online shopping, have improved existing shopping centers. In addition, grocery anchors that use their stores to fill online orders have helped keep occupancy rates high.

 

Community shopping centers, which are usually anchored by a grocery store, posted the biggest occupancy increase and gained 1.5 million square feet. "Those centers are benefitting from the innovation of grocers," Young said. Online grocery shopping with curbside pickup, offered by Kroger, Walmart, Central Market, and Whole Foods is rapidly expanding. The trend is "invigorating grocery shopping the way that drive-through invigorated Starbucks." When groceries are picked up or delivered, the sales go to the physical store. Adding those conveniences is making existing shopping centers better, Young said.

 

Property Tax Implications

 

With occupancy and rental rates continuing to trend upward due to tightening of the retail market, taxable values are expected to increase again for 2019. In order to minimize the effects of rising taxes, owners must aggressively appeal any proposed value increases.

 

Underlying factors such as excessive delinquency, especially in expense recoveries, should be accounted for in the final valuation. Pending vacancies in the coming year due to early terminations, bankruptcies, or lease expirations should be addressed and their potential negative effects be factored in. In addition, values of competitive properties should be analyzed and compared to ensure an equitable position, in terms of tax expense. Paying close attention to the smaller details can help a property owner maintain a competitive edge in the market.