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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www.REBusinessOnline.com Texas Real Estate Business • October 2017 • 51 ties and grocery-anchored are still trad- ing in the 5 percent range, but every- thing else is likely to be in the 6 to 7.25 percent range." The result of this submarket delinea- tion, after factoring in the e-commerce ef- fect and interest rate hikes, is that demand in the Dallas retail investment market fluctuates more than in past cycles. "Besides grocery-anchored and mixed-use, we've seen a significant de- cline in institutional demand for most retail product," says Vitorino. "But smaller-shop, well-located retail prop- erties are still moving fairly aggressive- ly. So it's fair to say that over the past 12 to 18 months, the market has been coming in waves." Vitorino estimates that Texas-based investors are snapping up about 65 percent of retail assets changing hands in the market. This common denominator within the buyer pool also speaks to an emerg- ing financing trend, which involves fa- voring large banks or private lenders over CMBS lenders. "Many retail borrowers will come to private lenders just because they want to avoid CMBS," says A10's Lofman. "Ten years ago, if you were financ- ing or refinancing a retail property, you could expect to get an 80 to 85 percent loan-to-value (LTV) ratio on a 10-year, interest-only loan," he adds. "But in today's market, if you don't have the equity to put into the asset, frequently you'll be forced to sell instead of refi- nance." Developers Exercise Control Despite the stable rent appreciation and burgeoning job and population growth in the intra-loop retail sector, developers are not overloading the market with speculative projects. Marshall Mills, CEO of Dallas-based development firm Weitzman, sees this as a sign of the times. "Developers never used to be con- cerned about overbuilding during market peaks," says Mills. "The DFW area added only 2 million square feet of retail space in 2016; two decades ago, it wasn't uncommon to add that much space at a single intersection." Mills notes that other metros are also constraining their supplies of new re- tail space. His firm projects that Hous- ton will add only 2.7 million square feet of new space in 2017, or less than 2 percent of the exist- ing inventory. Austin and San Antonio are expected to add about 900,000 and 360,000 square feet of new space, re- spectively, in 2017, despite both metros having sub-4 percent unemployment and strong population growth to boot. Lending practices and evolving trends in consumer preferences are equally responsible for the tightened reins on retail development. "Overheated speculative develop- ment is a thing of the past," says Mills. "This is due to a combination of lender requirements for pre-leasing, contin- ued pressure on loan-to-cost ratios and the ongoing retailer contraction." Beyond these emerging practices of the post-recession retail market, sim- ple economics lie at the heart of the rent growth, and subse- quently, the toned- down volume of de- velopment in urban submarkets. "It comes down to costs versus rents," says Lucas Patter- son, executive vice president at Bright Realty. "What sell- ers want for dirt and what we pay for labor and materials makes the cost of new projects such that rents have no option but to rise significantly." Patterson adds that tax assessors' valuation of new retail projects are key factors in the rent growth equation, and consequently in the competition for premium space. "A potential increase in property tax- es hurts the level of base rents you can achieve," says Patterson. "When value increases, taxes increase, which can cause lags in rent, leading to decreases in value, creating an unsteady equilib- rium on a shopping center's value." n Property Management & Accounting | Leasing Advisory Services | Tenant Representation Development & Construction Services | Asset Disposition | Land Brokerage brightrealtyco.com | 972-410-6600 2520 King Arthur Boulevard | Suite 200 | Lewisville, Texas 75056 Bright Realty Presents The Realm at Castle Hills 1.5 million square foot North Dallas mixed-use development With the first phase of 5,000 planned multi-family units currently leasing, The Realm at Castle Hills will be the premier living, retail, dining and entertainment destination. Surrounded by a pedestrian-friendly outdoor plaza and entertainment area, The Realm is uniquely situated to take advantage of an exploding residential market. THE REALM HEBR O N P K WY. PRESIDENT GEORGE BUSH TURNPIKE S. H. 121 SAM RAYBURN TOLLWAY SAM RAYBURN TOLLWAY DALLS NORTH TOLLWAY W. PARK BLVD. JOSEY LANE MAIN ST. LEWISVILLE LAKE I-35E NEBRASK A FURNITURE MART TOP GOLF LEGACY WEST LEGACY DRIVE CROWN CENTRE The Realm Lakeside Entertainment District ICSC Texas Deal Making Booth 541 Nov. 8-10, 2017 972.410.6600 Request a Meeting Today Marshall Mills Weitzman Jason Vitorino STRIVE Lucas Patterson Bright Realty

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