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Dallas-Fort Worth’s retail real estate portfolio, which historically has been overbuilt, is holding up against digital challenges, and actually benefiting from retailers not opening as many stores.
The region will reach its most stable level ever — of a 95 percent occupancy rate — next year as existing shopping centers look like better options to developers and tenants, according to Weitzman’s annual retail real estate report released Tuesday.
"Land, construction and borrowing costs are going up," said Bob Young executive managing director at Dallas-based Weitzman, a commercial real estate firm."Retail anchors aren’t building new stores. They’d rather backfill or redevelop existing space because of lower costs and a shorter time frame."
The D-FW area posted its sixth consecutive year of occupancy rates above 90 percent in 2018.
Grocery anchors using their stores to fill online orders, and entertainment-focused tenants such as Alamo Drafthouse, Pinstripes bowling and Crayola Experience which don’t compete with online shopping, have both improved existing shopping centers and raised occupancy rates.
D-FW’s 92.4 percent occupancy rate last year represented 199.3 million square feet of retail space in 1,400 shopping centers, according to Weitzman’s annual retail real estate report released Tuesday.
The rate tied last year’s and created the longest streak of occupancy above 90 percent in D-FW since the data has been collected over the past 60 years, Young said.
However, the a history of overbuilding retail space in D-FW is why North Texas has occupancy rates that are below Austin’s 96 percent and Houston and San Antonio’s 94 percent, Young said.
Sears and Toys R Us closings have also added to the weaker local number.
Another negative local trend is what Young called the region’s "mall graveyard" which represents 15 million square feet that’s been demolished or slated for non-mall redevelopment.
In the past year, Sears closings have hit the region’s A, B and C malls, doubling the mall vacancy to 3 million square feet. "It will get worse before it gets better as Sears closes more stores," he said.
It’s expensive to redevelop an anchor store, but Young pointed to the Shops at Willow Bend in Plano for turning a former Saks Fifth Avenue into an open-air restaurant plaza attached to the mall as an example of what can be done.
Community shopping centers, which are usually anchored by a grocery store, posted the biggest occupancy increase and gained 1.5 million square feet.
Those centers "are benefitting from the innovation of our grocers," Young said.
Online grocery shopping with curbside pickup offered by Kroger, Walmart, Central Market and Whole Foods is rapidly expanding.
The trend is "invigorating grocery shopping the way that drive-through invigorated Starbucks," Young said.
When groceries are picked up or delivered, the sales go to the physical store, he said.
Adding those conveniences is making existing shopping centers better, Young said. "From our perspective, digital is a big part of that."
In the past 15 years, the area has added 58.9 million square feet, while online sales expanded from 1.6 percent of total U.S. retail sales in 2003 to about 10 percent last year.
"You would expect our market to be weaker, but it’s actually much stronger," Young said. The region’s retail occupancy rate was 89 percent occupancy in 2003.
Young defines retail broadly when tallying shopping centers to mean experiential retail including AMC and Alamo Drafthouse and Flix Brewhouse, Crayola Experience, Kids Empire and Pinstripes bowling.
The market absorbed a net of 2.8 million square feet last year and is poised to fill another 3 million square feet this year, according to the Weitzman forecast.
Young predicts with the region’s consistent population growth of 250 people a day moving to D-FW, 100,000 new jobs added in each of the past four years and 35,000 apartment units under construction, will lead to the higher shopping center occupancy rate of 95 percent in 2019.