This article appeared in The Dallas Business Journal
Since January 2024, naysayers have been out in full force, touting a single message: Commercial real estate (CRE) is doomed. It’s in “big trouble.” Or, according to the International Monetary Fund, it “remains a risk.”
Here’s the issue. The “sky-is-falling” commentary focuses predominantly on office space. Certainly, this sector continues to struggle, the victim of high vacancy rates, reduced cash flow and a challenging interest-rate environment.
Yet commercial real estate is more than office. CRE is commonly defined as property used to generate income. Within this definition are multiple types and subtypes. As a result, it’s a bad idea to broad-brush an entire industry based on a single struggling sector.
While pessimists continue to cry doom over office, the smart money and capital are on the thriving retail sector. And it is thriving, especially in Dallas and Fort Worth.
From overbuilt to high demand
Anyone driving from AllianceTexas in North Fort Worth to the Cedar Hill Town Center south of Dallas understands that DFW has a lot of retail space. The statistics support this assertion — in the 1980s, the Metroplex earned the dubious reputation as America’s most overstored market based on gross leasable area (GSA) per capita.
This state of affairs continued, with malls, power centers and strip centers going up on every available land parcel. Then, two things occurred that halted this activity — first, the Great Recession of the late 2000s. And second, the Amazonification of retail, which encouraged consumers to shop from the comfort of home.
These factors drove retail vacancy into double-digit territory and halted most retail construction, a trend lasting into the 2010s and early 2020s. But ignoring a real estate asset class for a time means things turn around, and space eventually leases up.
This is what happened in the Metroplex. For the past 15 years, the Dallas-Fort Worth area lacked new retail construction while experiencing a population boom that generated an increase in rooftops.
A commercial real estate adage claims that retail follows rooftops. In the real world of Dallas-Fort Worth, the numbers bear this out. Real estate firm Weitzman reports that Metroplex retail occupancy during late 2023 stood at 95.2%, with 847,000 square feet under development. Demand for retail space continues to outstrip supply as more people move into North Central Texas. Supply is coming online, but slowly. From a capital standpoint, this could be considered a perfect confluence of events.
Breaking down the retail asset class
Returning to the dictionary, the retail asset class is defined as property used to market and sell goods and services to consumers. The convenience center where you get gas and morning coffee falls under the retail category. So does the neighborhood center where you buy your groceries. The power center with the home improvement store where you purchase power tools, the restaurant down the block where you eat a couple of times a month and the massive mall within a 15-minute drive bursting with department stores, entertainment and specialty shops — all are retail.
Understanding the differences in the retail sector is essential to investment success. A well-positioned mixed-use strip center with independent restaurants, a small grocery anchor (think Trader Joe’s or Sprouts) and a freestanding pad or two for a bank or Starbucks draws multiple consumers. Grocery-anchored centers and shopping destinations anchored or shadow-anchored by big-box retailers or general merchandise stores like Target or Walmart perform extraordinarily well.
Malls are at the other end of the retail spectrum. According to the pessimists, malls are dead. But this isn’t 100% accurate. Stonebriar Centre in Frisco and NorthPark Center in Dallas perform well. Older malls — think The Shops at RedBird in South Dallas or The Shops at Willow Bend in Plano — have undergone, or are undergoing, massive redevelopments.
But there are the “problem children” consisting of older, poorly placed malls. These properties continue to struggle and aren’t on investors’ radars.
Understanding geography and demographics
Here’s another real estate adage: Location, location, location. However, the right location should also consider the right demographics.
Situating a big-box home improvement center in an area occupied mainly by apartment buildings isn’t a good idea. The same goes for putting bars, “bougie” restaurants or high-end boutiques near primarily single-family home communities.
And these days, even in DFW, retail serving office communities is running into trouble. Take the business mecca of Las Colinas. The retail springing up in the shadows of those high-rise and mid-rise buildings was explicitly geared toward office workers.
However, that retail struggled when workers sheltered at home during the pandemic. While today’s Las Colinas has the Toyota Music Factory and a 17-acre mixed-use entertainment and restaurant district, much of the retail dedicated to only serving employees is gone or continues to have problems because of ongoing remote work and office vacancy increases.
Location matters with retail. So do shopper demographics. Well-located stores and centers selling desirable goods and services are the retail that is attracting investors and capital interest.
Narrowing the subject matter
When considering commercial real estate, the takeaway is to be wary of the negative broad brush. Just because the office sector deals with hardship doesn’t mean the entire industry is on the verge of collapse. There are still some good office deals out there, you just need to be strategic in identifying the best opportunities. Retail in DFW is thriving. The smart players targeting CRE for investment understand the differences between the asset types and asset classes. Because of their due diligence and knowledge, they can direct their capital toward property that generates positive results.