Texas Real Estate Business

OCT 2017

Texas Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in Texas.

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30 • October 2017 • Texas Real Estate Business www.REBusinessOnline.com M A R K E T H I G H L I G H T: F O R T W O R T H With occupancies, rental rates and volumes of new construction on the rise, the Fort Worth retail market con- tinues to draw a great number of in- vestors and available debt lenders to the area in search of deals. Stabilized strip centers in high-traffic areas are in high demand, often trading at first- year returns in the high-6 percent to low-7 percent range. The Dallas-Fort Worth (DFW) me- troplex's thriving economy and grow- ing population has prompted greater retail spending, which, in combination with the shifting retail landscape, is generating strong demand for space. During the first quarter, area em- ployers added 24,300 positions. Many of these jobs were created at busi- nesses that are situated within master- planned, mixed-use developments that combine office, retail and rental units, which has helped foster greater retail spending. As of the first quarter, average retail spending per house- hold in Fort Worth reached $4,439 per month — 17.3 percent higher than the U.S. average. Looking forward, it seems likely that these trends will continue as the DFW population is projected to expand by 728,000 people over the next five years. This should help sustain healthy demand and pos- itive momentum for retail real estate. Along with the positive economic outlook, the reconfiguration and di- versification of tenant mixes in area shopping centers has bolstered traffic and invigorated tenant demand. Con- sequently, this year's volume of deliv- eries of new retail properties should increase by 1.5 million to 4.8 million square feet. During the first quarter, 470,000 square feet of new space hit the mar- ketplace, with completions concen- trated in the North Dallas and Cen- tral Fort Worth submarkets. Although construction volume is elevated com- pared to last year, supply additions continue to lag behind the pace of net absorption and will further impact the market's vacancy rate, which has tum- bled 90 basis points year-over-year to 4.7 percent. By comparison, Dallas' va- cancy rate of 5.2 percent represents a drop of 100 basis points from one year ago. While vacancy has constricted throughout much of DFW, rent growth has been muted over the last two years. In the aforementioned yearlong period, average asking rents ticked up 2.1 percent. It is also worth noting that the average retail rent in the metroplex is the lowest among the four major Texas MSAs, which suggests upside opportunities still exist. This confluence of positive property performance metrics is helping to sus- tain a healthy level of investment and financing activity. A bright economic outlook and healthy property opera- tions will continue to draw investors and lenders to metroplex retail assets. Texas buyers are dominating sales, but are facing increasing competition from West Coast players in particular. Monetary Policy in Transition The yield on the 10-year U.S. Trea- sury bond remained in the low- to mid-2 percent range as of August 2017. Despite the devastating floods in Southeast Texas and Florida, markets seem to be at peace, thanks to data un- derscoring the resilience of the Ameri- can and Chinese economies and dissi- pating concerns over North Korea. A primary point from last month's annual Federal Reserve meeting that may affect interest rates is Congress' failure to address the issue of rais- ing the debt ceiling, which currently stands at $19.9 trillion. This could af- fect U.S. credit ratings and potentially have a negative impact on interest rates and capital markets. However, the 10-year Treasury yields currently sits at 2.12 percent and is trading within the low end of its 2017 range. This has allowed lenders to provide extremely advantageous rates to borrowers. The widely held perception is that policymakers will forgo additional rate hikes this year and will only raise rates twice (a total of 50 basis points) in 2018. Financing Availability Banks have continued to dominate originations in the Fort Worth market throughout 2017, while credit unions have significantly increased their ac- tivity in the market. Life companies and other portfolio lenders are getting creative by offering non-recourse and interest-only periods. New acquisition and refinancing loans remain widely available, but are becoming more se- lective. Lenders are shying away from big box centers and pursuing more op- portunities in service and strip centers. Contingent on location, term, bor- rower credit and tenant(s) quality, loan-to-values (LTVs) range between 60 to 75 percent with interest rates between 4.25 to 5 percent and amor- tization schedules averaging 25 years. Thirty-year schedules can be secured through agency lending programs. A prevailing underwriting trend in- volves increasing reserve costs within new loans, which frequently hamper cash flows available for debt service coverage ratios (DSCRs) and loan proceeds. New construction lending is also tightening, with LTVs ranging from 55 to 65 percent and interest rates between 5.5 and 6.5 percent. However, more attractive new construction fi- nancing is available for experienced developers with stronger corporate credit, single-tenant deals. Over the past 18 months, we've seen many regional and community banks in Tarrant County sharpen their pen- cils and become more restrictive in their underwriting standards. They're being proactive by diligently evaluat- ing new acquisition loans and placing higher limits on the DSCR they're will- ing to lend against. In the past, the minimum bench- mark DSCR had been 1.25 percent, but today we're seeing that increase to 1.35 percent. This represents an effort to stringently mitigate the probability of placing bad debt on over-evaluated income-producing investment proper- ties, which is the primary concern for banks during periods of substantial growth and appreciation in markets similar to DFW, and rightly so. Although lenders are tightening their financing standards, capital is still readily available for retail assets in DFW. That said, the Federal Reserve's work toward the normalization of monetary policy after years of quanti- tative easing is likely to push up the cost of capital. Many real estate inves- tors expect a modest increase in inter- est rates over the short term, a transi- tion in the financing environment that could weigh on transaction activity as investors evaluate their yield options. RISING OCCUPANCY BOLSTERS FORT WORTH RETAIL MARKET OUTLOOK Kyle Palmer Regional Manager, Fort Worth Marcus & Millichap Roger Burke Associate Director, Capital Corporation Marcus & Millichap Pricing Stays Steady for Fort Worth Retail Yield Trends in Fort Worth

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