Monday Morning Scoop - Retail Leasing Momentum Remains Strong In DFW As New Construction Nears Record Low

Retail Leasing Momentum Remains Strong In DFW As New Construction Nears Record Low

Retail occupancy is on the rise in DFW, and a tightening of construction activity could make it more difficult for tenants to find quality space in the coming months.

New data from Weitzman shows that for the 13th time in 33 years, DFW retail occupancy is higher than 90%. Strong leasing demand, especially for space in existing centers, is eating up vacancies left behind by both small and large users. New Dollar General concept pOpshelf, for example, backfilled former Pier 1 locations in Allen, McKinney, Rockwall and Watauga.

“Supply is low, and demand has been surprisingly great,” Weitzman Executive Managing Director Bob Young said. “When the pandemic hit, it slowed everything down, but it accelerated the fact that existing real estate was going to be at a premium, and our numbers have proved that.”

Midyear occupancy landed at 93.6%, up from 92% at this time last year and on par with the 93.5% occupancy recorded at the end of 2021, per Weitzman’s report. There are about 200M SF of retail projects at least 25K SF in size, which represents the largest inventory base of any metro in Texas.

Delivery of new space is struggling to keep up with demand as pandemic-era challenges keep construction activity at bay. Projects opening or on track to open this year are expected to total about 760K SF, which is up from the 639K SF recorded in 2021 but still well below pre-coronavirus totals, which easily crossed the 1M SF mark each year, according to Weitzman.

Several trends playing out at the local, state and national levels are behind the lag in new construction. DFW is seeing fewer anchor expansions, and many developers are choosing to improve existing centers rather than build new ones. New retail projects also tend to be smaller, Weitzman said.

Rental increases are also partly to blame. Developers grappling with a shortage of labor and the rising cost of materials are charging higher rents to offset expenses. For new construction, rent is above $40 per SF, which Weitzman said requires strong traffic and sales volume for retailers.

“New development is on its way, but it will slow down only because it’s expensive,” Young said. “That expense, if it continues to rise … that’s going to naturally push off new development.”

Young predicts that construction will remain conservative in 2023, but highly anticipated additions, such as the handful of stores H-E-B plans to add to the Metroplex in 2023, should ensure steady activity. 

Dallas’ favorable market fundamentals have so far abated the impacts of rising interest rates, inflation, and increased energy and construction costs. The market’s strong population and job growth will keep leasing activity robust moving forward, Young said, but the supply of quality space could dwindle as developers struggle to make projects pencil. 

“We are in a bend-but-not-break scenario,” Young said. “We are going to have to be adaptive and creative, and it might slow down the process a little bit, but it’s not going to break us.”

By: Olivia Lueckemeyer
Source: Bisnow