A couple of weeks ago, I spent a day in Plano at Legacy Central (an 85-acre, technology-oriented, mixed-use campus still under construction at US 75 and Spring Creek Parkway). Myself, along with about 100 commercial realtors, developers, retail brokers, site selectors, etc. were there for Bisnow and National Retail’s Retail South Conference. The day was packed with keynote speakers and panelists from Herb Weitzman (Executive Chairman of the Weitzman Group) to Steven Levin (President and CEO of Centennial), to Doron Valero (Managing Partner of Global Fund Investments), to Sumner Billingsley (VP of the acclaimed Billingsley Company).
If these names aren’t familiar to you, let me just say that in my field of work, these are some of the mega-players in the nation when it comes to commercial development and retail mixed-use. The topic of the event was the retail market in DFW, Texas, and the southern U.S. and what we can all expect to see in the months to follow. Please note that included in the industry called “retail” are uses such as restaurants, entertainment, services, and the general provision of goods. Here are some of the insights I wanted to share with you:
- Currently in DFW, retail occupancy is at 95%. Although DFW occupancy rates are higher than in any other MSA in the nation, the number of new projects in process or planned for the next 24 months has declined by more than 98% year-over-year. What does this mean? It means that we are in what is known as a “crucial cycle point” which sets off at the precipice of marked decline. Retailers have saturated the market to a crucial point in which they have a lowered appetite to expand further but are instead going to begin focused on stability and brand presence. More simply put – don’t expect to see as many new project announcements in the next year or two around DFW and if you have existing tenants, DON’T lose them! There isn’t as much chance to refill vacant space as there was this time last year.
- Rising property values in DFW perception of market stability = higher lease rates for retailers across all communities in North Texas
- Higher lease rates decline in traditional sales volumes (due to consumer expectations for convenience and/or experiential shopping which is not common in many existing, traditional service models) = small stores going out of business AND/OR larger stores moving from class A to B and C retail centers
- Small stores going out of business = vacancy rates will increase in next 12-24 months with little available to backfill
- Large stores moving from class A to B and C centers = GREAT time to invest in rehabilitation of older B & C centers, beautification, façade improvements, etc. to attract these retailers
- RISK IS HIGH RIGHT NOW and only going upward. Lenders are pulling back funding, retailers are pausing growth, developers are tightening spreads, and cities are throwing money at retailers. Don’t forget there is a significant delay in what happens in a market and its outward appearance to the consumer. It is important to know what is coming down the pike and adjust accordingly now, before it hits. A general rule of thumb: it is almost never a good idea to incentivize retail. Retail is the most dynamic, unstable, and temporary industry there is. For this reason, the field of economic development generally does not even consider retail development of consequence to the work of local economic stability. Retail options are seen as amenity businesses only for the benefit of quality of life improvements and not as economic drivers. For these reasons, incentives for retail use should only be considered on a very limited scale and only for initial, infrastructure-related costs. Typical restaurant failure rates in the U.S.: before first anniversary of opening = 32% will close. Between first and second anniversary= 49% will close. By year 5 = 76% will close.
- What is doing well? Grocery-anchored strip centers. Entertainment opportunities. Fitness centers. Health & beauty stores. Discount retailers. Fast-casual restaurants. The service industry. Creative and unusual designs and projects that incorporate public space, technology, and art. Corporations with guiding mission and purpose behind sales. Mixed-use projects with significant multi-family on-site. Independent living and age-restricted multi-family. Walkable developments. Connected developments with complementary adjacent uses. Developments with less parking ratios than typically required by cities (pulls project closer, enhances walkability, costs less per SF for developer, feels more people-oriented, addresses movement toward shared ride services, etc.). Projects with whimsy and character.
I can’t say that I was surprised by what was discussed at this event – anyone who studies economics and market conditions has been watching these realities pushing their way into the forefront of discussion. But what I was surprised at was that retail developers were outwardly admitting it for once.
For the last 2 years, retail brokers and developers have been adamantly, intensely, and desperately screaming from the mountain-tops that RETAIL ISN’T DEAD and that things are better than ever before. Although I do agree that retail is certainly not “dead,” I am glad to see a hefty dose of reality regarding the current state of the market finally being voiced.
Now is a great time to invest in our older centers and infrastructure. To beautify and enhance our main street and put ourselves out there as welcoming to business. Although costly to make needed change, the benefits and future growth that come from beautification are substantial. Through these enhancements, we are likely to benefit from national retailers who will be seeking more reasonable rental rates in this bursting DFW market. Finding ways to bring visitors into our community, whether through festivals and events or fun new public spaces and art are also going to be very worthwhile pursuits at this time as we set ourselves apart from the pack.
It is also a great time to appreciate our existing businesses more- to stay in tune with what they need and find ways to protect them against rising rents and aging service models. It is significantly-harder to reverse decline than to prevent it. A solid business retention program with funding to assist in technology upgrades and educational programming is in the near future for Saginaw. And, of course, now is also a great time to continue to support our industrial businesses that are the backbone of this local economy. Making sure they have the workforce they need, are provided exceptional service by the City, and are able to grow their business is one of my top priorities.
Retail may come and go, but the work that we are doing to ensure Saginaw is a recognized, unique, and welcoming community is the most important and meaningful thing for a successful future.