Energy-rich Texas continues to experience job growth and new residents are flooding to Houston and the Dallas/Fort Worth area. That, in turn, has led to a boom in retail development at a time when construction is slowing in other markets.

Unlike California, Florida and numerous other states across the country, Texas hasn't experienced dramatic numbers of foreclosures. Homes prices may be flat or down slightly, but they are still selling from the influx of people coming for jobs. This year, Houston and Dallas are forecast to add more than 50,000 positions.

As a result, office space is at a premium, causing a boom in office construction throughout the region. Offices for major oil companies are rising from Dairy Ashford all the way west to Katy, according to Bill Forest, senior investment advisor in Houston for Irvine, Calif.-based Sperry Van Ness, who notes that class-A office rents are $22 to $24 per square foot in and around downtown and $28 per square foot to $30 per square foot in the outlying suburbs.

The largest natural gas field in the U.S., North Texas Barnett Shale, has kept Fort Worth's economy buzzing. Meanwhile, Dallas has become a popular destination for relocations and corporate expansions. AT&T moved its offices to the region's Telecom Corridor earlier this year, bringing 6,000 jobs in the process. At the same time, Houston has invested nearly $800 million in infrastructure and capital improvements to its sports, entertainment and convention facilities making its downtown more pedestrian-friendly for visitors and residents. Brokers familiar with Houston and Dallas say, overall, the Texas economy and retail are probably the strongest in the nation.

All of that has helped spur retail development. Overall, developers in Houston will deliver 9.1 million square feet of retail by years' end, and the Dallas/Fort Worth Metroplex will see 7.8 million square feet come on-line.

That doesn't mean the picture is entirely rosy, however. The economic downturn is affecting some of Houston's outlying areas. There are a lot of vacant buildings north and northwest including “stretches along I-44,” says Don Stringham, a retail broker in the Houston office of Los Angeles-based Marcus & Millichap, noting that Bloomfield Hills, Mich.-based Pulte Homes has sold off large tracts of land to local developers very cheaply and retail centers in overdeveloped areas remain vacant, despite lower rents and generous incentives. Gas prices are hurting restaurants, and increased overhead is eating away at retailer profits, according to Forest, who explains that Houston landlords are passing through on average a $6 per square foot rent increase to cover higher utilities and property taxes, due to escalating property values.

Meanwhile, there is some danger that the amount of space coming online may be too much, especially considering that vacancy rates in both cities are not exactly microscopic. Marcus & Millichap's third quarter report forecasts the vacancy in the Metroplex will remain steady at 15.9 percent through years' end and Houston's vacancy rate will rise to 13.4 percent as a result of the new space. Once that supply is absorbed, vacancy rates will drop some because the credit crunch has halted new development.

“Investors are staying on the sidelines to see how this shakes out,” says Stephen Maulden, the manager of sales in the Dallas office for Encino, Calif.-based Marcus & Millichap. As a result, Maulden predicts the markets will slow in 2009.

The credit crunch is also hurting deal activity. “Right now you can't get a lender to give you 15 cents to build anything,” says Forest. Moreover, sellers are offering to partly finance deals, because banks aren't carrying more than 50 percent or 60 percent. Stringham adds, the credit crunch is also affecting the investment side. “I haven't seen anyone carry paper in the last few years, but now we're seeing a lot more of that.”

Cap rates are also moving up, Maudlen says, and there's still a gap between buyers and sellers. Sellers of multi-tenant properties are asking 8.0 percent to 8.5 percent cap rates, but are selling in the high 8s. Before too long, he expects sellers will be offering them in the 9s. Forest adds, asking cap for first-tier Houston properties is 7 percent, but people are buying them at 8 percent.

Dallas stars

In Fort Worth's Cultural District, four mixed-use projects: So7 by Dallas-based developer Hughes Development; Montgomery Plaza, a joint venture between Weber & Co. of Dallas and New Hyde Park, N.Y.-based Kimco Realty Corp., and Cypress Equities's West 7th (also based in Dallas) will bring almost one million square feet of neighborhood retail services for several thousand downtown residents in the central business district. The city provided Target a generous share of its sales tax to build a SuperTarget with a grocery at Montgomery Plaza, transforming a former historic Montgomery Ward building into retail and residential units.

Alliance Town Centre, in Fort Worth, developed by local developers Hillwood and Trademark Property Company, has opened the first of three mixed-used developments, which is anchored by Belk's department store. Discounter Sam Moon's and a grocery store are also scheduled for the 17,000-acre master-planned community. When completed Alliance Town Centre is slated for 1.5 million square feet of lifestyle and retail space, a hotel, 90,0000 square feet of office space and up to 3,000 residential units.

In Allen, near Dallas, Watters Creek at Montgomery Farms is rising. The $200 million mixed-use development is a joint venture between Trademark Property, Beachwood, Ohio-based Developers Diversified Realty and Coventry Real Estate Advisors of New York that will feature 550,000 square feet of retail, a hotel, office space and 300 residential units. It will double as a town center for the 500-acre master-planned community of Montgomery Farms.

Dallas too has benefited from tremendous public and private investment that has resulted in a renaissance of its central business district. More than $162 million has been invested through tax increment financing and $699 million in private investments plus $326 million in capital improvements. A proposed $2.5 billion expansion of the Metroplex's Dallas Area Rapid Transit (DART) rail system is expected to drive transit-oriented development throughout the region. Locally-based developer Trammel Crow is in pre-development on two developments along the expansion route, and Cleveland-based Forest City is planning a transit-oriented development at the former Cowboy's stadium in Irving.

In the Uptown neighborhood, Dallas-based Hillwood and Southwest Sports Realty has completed Phase II of Victory Park, a $3 billion joint venture. The development will comprise four mixed-use projects with upscale retail and a W Hotel and Residences plus a 450,000-square-foot office tower. Dallas-based Icon Partners LLC is developing ICON Midtown, a $1 billion, 120-acre urban village north of downtown. The project boasts 525,000 square feet of retail with office and residential atop.

Oil tycoons

The affluent neighborhoods of Piney Point Village and Bunker Hill Village with their median annual household incomes of $184,991 and $177,274, respectively, along Houston's I-10 Energy Corridor have led to two upscale projects — CityCentre, developed by Houston-based Midway Companies and Village Plaza at Bunker Hill by Fidelis Realty Partners Ltd., also of Houston. Scheduled to open last month, CityCentre boasts 400,000 square feet of high-end retail; a hotel, a 144,000-square-foot Life Time Athletic fitness facility; 450,000 square-feet of office space and 370 residences. Houston's Memorial area is one of the richest postal districts in Texas with average household income at $209,000, says Bradley Freels, a partner, chairman and CEO of Midway Cos. He noted many of the area's residents are associated with the energy industry.

“This is a discerning clientele, who has lived all over the world,” says Freels. “We're trying to match our restaurant product to that demographic, so we went after concepts new to Houston.” The project includes Straits by San Francisco chef Chris Yeo and Eddie V's of Austin. The Energy Corridor is also driving development of I-10 itself, which is being widened to 19 lanes to accommodate population growth west to Katy. Cinco Ranch, a 7,600-acre master-planned community near Katy by San Diego, Calif.-based Newland Communities, added 6,800 households with a median income of $115,000 per year. The $180 million LaCenterra at Cinco Ranch development, by local developer Vista Companies, is at the heart of this community and provides 344,000 square feet of retail.

Houston Pavilions, a mixed-use project by a joint venture of local developer Geoffrey Jones and Willam Denton, president/CEO of Los Angeles-based Entertainment Development Group Inc., is one example of the kinds of projects ongoing in Texas. The center offers 360,000 square feet of lifestyle retail. The city's plans to expand its METRORail system is also spawning transit-oriented development. “Houston's strong oil presence accounts for 40 percent of all positive job growth,” says Stringham.

DEMOGRAPHICS

Population

Austin Metro: 1,557,829; Dallas/Fort Worth Metro: 4.8 million; Houston Metro: 5.3 million

Median Family Income

Austin: $58,241; Dallas: $41,281; Fort Worth: $51,53; Houston: $42,925

Unemployment

Austin: 4.5%; Dallas/Fort Worth: 5.1%; Houston: 5.0%

Retail Construction 2008

Austin: 2 million sq. ft.; Dallas/Fort Worth: 7.8 million sq. ft.; Houston: 9.1 million sq. ft.

Average Rent (asking)

Austin: $20.80; Dallas/Fort Worth: $15.77; Houston: $16.02

Sources: State of Texas Office of State Demographer, 2007; U.S. Bureau of Labor Statistics, Aug. 2008; Marcus & Millichap

Austin Rocks

The seat of Texas government and progressive pop culture, Austin has experienced a tremendous in-migration of professionals and well-paying jobs. The area's large, highly educated workforce has been particularly attractive to high-tech companies, which now number 3,000 and account for 14 percent of the region's jobs. Austin added 16,300 new jobs over the previous 12 months, according to a Marcus & Millichap third quarter report. It noted job growth in other areas too, including trade, transportation, utilities, and leisure and travel. The region will end the year with 10,000 new jobs; however, this is a decline from 2007 and 2006, when employers generated 25,400 and 33,100 positions, respectively. Residential and retail construction also declined. Retail construction slowed in 2008 to 2.0 million square feet delivered, compared with an annual average of 3.4 million square feet over the past five years according to Marcus & Millichap. Home starts dropped 30 percent in the first three quarters of 2008, to 7,546 units, according to Residential Strategies, Inc. Nevertheless, the Marcus & Millichap report predicts Austin retail rents will rise 4.7 percent by year's end, to $20.80 per square foot, and the vacancy rate will stabilize at 11 percent. Well-located properties are still trading at capitalization rates in the high 6s, but single-tenant properties are going in the 7s, which is attracting “cash heavy” buyers, the report notes. Good demographics, strong economic fundamentals and long-term growth are keeping retail investors interested in Austin, says Alan P. Rust, investment advisor for the Irvine, Calif.-based brokerage Sperry Van Ness. “The biggest problem now is underwriting debt,” he says. “It's dramatically different from a year ago.” In the meantime, the second phase of Indianapolis-based Simon Property Group's Domain project has broken ground. It will add 300,000 square feet of retail and double the number of residential apartments to 700 and office space to 90,000 square feet. This new town-center community is located in the affluent high-tech corridor, where toll roads are generating lots of residential and retail growth. Mixed-use developments downtown have also boosted the population there to 5,978. More than 5,000 units have been completed since 2000, and 12 projects are either under construction and/or planned. By 2015, Austin's downtown population is expected to reach 25,000, according to Austin mayor Will Wynn. Capitol Metrorail's new 32-mile rail system is driving transit-oriented development. Midtown Commons at Crestview Station is a $100 million development by Trammel Crow's High Street Residential. When completed, the project will have 64,000 square feet of commercial space, 50/50 retail and office, 900 apartments and 500 single-family homes and condominiums. Most of the commercial space and 300 of the apartments are expected to be ready for occupancy when train service begins in March. Transit-oriented development is also in pre-development in the affluent Westlake neighborhood at the end of the line and east of Austin's Mueller mixed-use development.
P.K.