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Trademark CEO Delivers Retail Forecast

2011 Retail Market Overview:

As I respond to the question, “Where is the Tarrant County retail real estate market and where is it going?”, I start with the national macroeconomic factors affecting the United States, Texas and DFW. First, it is all about jobs. The unemployment rate appears to be stuck above 8% for the foreseeable future, which will hold back the consumer and the housing market in the U.S. from returning to historic norms. In 2011, both Consumer Confidence and Consumer Sentiment were up materially from 2010, but continue to be well below the average of the last 20 years. This led to an increase in retail sales, net gas and auto, of 7.26%. The growth, however, was not spread evenly across the industry.

In retailing, it was a year of the haves and have nots. Luxury retailers and strong brands catering to affluent, educated customers or those delivering an exceptional experience (i.e. Tiffany, Nordstrom, Neiman Marcus) generally had a successful year, as did some of the high value proposition retailers (i.e. Costco), while many of the retailers in the middle (i.e. Gap, Sears, Talbots) continue to flounder.
In 2011, online sales grew 15% and now total more than 7% of all retail sales, or about $200 billion.

The supply of new retail space in the United States grew at the slowest rate in the last 25 years, with very few new large multi-tenant projects added in 2011. As a result, retailers are running out of good sites for expansion and rental rates are starting to firm.

DFW Snapshot-Year End 2011:

According to the CoStar Year End 2011 DFW Retail Report, the overall DFW retail market was virtually unchanged versus 2010 as occupancy was at 91.2% versus 90.9% in 2010 and rental rates ended 2011 at $13.60, versus $13.59 in 2010. Total retail SF and the number of retail buildings were also virtually unchanged, as the supply grew at the slowest level in 20 years, with only 1.6M SF added in 2011 versus the 20 year average of 7.9M SF. Of note, all 6 Centers over 100k SF that opened in DFW in 2011 were dominated by or 100% occupied by the following big box users: Kroger Marketplace, JC Penney, Sam’s, WalMart, and Cabela’s. At year-end 2011, CoStar reported less than 2M SF under construction, so it appears that the supply will remain stagnant in 2012 and focused on retail build-to-suits for these big box users and grocers.

Our Strong Economy Stands Out:

As retailers contemplate where to focus their limited U.S. expansion, they are targeting Texas and DFW for several reasons. First, Texas is the only area in the country that has regained 100% of the jobs lost during the recent recession, versus only 28% regained in the U.S. The fact that 3 of the top 7 U.S. cities for job growth are in Texas, places the state atop many retailers’ expansion lists. DFW, consistently in the Top 2 in the U.S. for Job growth, typically tops the list of Texas markets. Tarrant County continues to strengthen its relative position in the state with standout population growth in 2011 of 2.52% in Tarrant County, versus 1.01% in the U.S.

The Strong Get Stronger:

Another local story line is the strengthening of the top submarkets in Tarrant County.

In central Fort Worth, University Drive continued to attract the strongest national retailers in 2011. University Park Village added Anthropologie, lululemon, and J. Crew and experienced growing sales and near 100% occupancy. Across the street, our WestBend mixed-use development is again underway with the garage put on hold in late 2008 is near completion, and preleasing resumed with a goal of late 2013-early 2014 opening of the new retail and hotel.

In west Fort Worth, Hulen Street was quite active with the opening of the first Sprouts grocery, the announcement of the area’s first Trader Joe’s, the addition of BJ’s Brewhouse and Abuelo’s to Hulen Mall, and the leasing of the former Borders space to Container Store.

In north Fort Worth, our 600,000 SF Alliance Town Center maintained its position as the area’s top regional shopping destination with the opening of a 123,000 SF Kroger Marketplace, the signing of a 14 screen Cinemark cinema and Mi Cocina.
In south Arlington, the 825,000 SF Arlington Highlands continued its momentum with the addition of Old Navy, Haltom’s Jewelers, and Container Store in the former Borders space.

In Southlake, the highly successful 840,000 SF Southlake Town Square mixed-use development added Michael Kors, Tyler’s and Sephora.
In a continuing story of haves and have nots, rental rates in the above submarkets are high and improving, currently in the $25-$40/SF range, which is double or triple the rates in lesser locations.

2012 Tarrant County Area Activity:

New Development: The area’s only large noteworthy new development is the 420,000 SF Paragon Outlets in Grand Prairie, which will open in August of 2012. It is anchored by Bloomingdale’s Outlet, Saks Off 5th, and Coach. The outlet business is poised for expansion as branded retailers see this value focused sector as a major growth vehicle.

In 2012, it appears new grocery activity will be driven by specialty grocers such as Trader Joe’s, Fresh Market, Whole Foods, and Sprouts, along with HEB as they plan their entry into DFW.

Also, restaurant activity should be a bright spot as fast casual concepts including Zoes Kitchen, Pie Five, Pei Wei, Smashburger, Five Guys and Sweet Tomatoes, join sit down concepts Houlihan’s, Abuelo’s, Mi Cocina, and Razzoo’s in their quest to expand in DFW.

National Retail Trends:

Some of the retail trends we see are a result of online retailing, such as retail stores shrinking and becoming part showrooms. With the addition of their online business, many retailers no longer see the need to stock as deeply in store, as consumers can try a model in one color and have their preferred color etc. shipped overnight.

In- store sales will likely grow more slowly than online sales, which will continue to experience double digit growth. Online sales, once predicted to be the end of retail as we know it, do appear to have slowed the long term growth of brick and mortar retail sales. The most vulnerable retailers sell commodity goods such as books and cd’s (Borders), small appliances etc. that don’t require an in-person trial for fit, finish, texture or color. Conversely, fashion, luxury and impulse items are less vulnerable to online selling.

Also, we see the surviving retailers experiencing strong profits and having healthy deleveraged balance sheets with large cash positions, awaiting stability in the political, regulatory and financial climate before investing substantially in U.S. expansion. As a result, many of the country’s strongest retailers, such as Apple, and J. Crew, as well as many international luxury retailers, will continue to invest heavily in stores in Asia and Europe in 2012.

Also, we believe most development activity will be focused on re-developments and infill sites, not in ground up projects or greenfield areas.

In summary, we foresee 2012 looking a lot like 2011 in Tarrant County and the U.S., as we await political stability and an improving job market across the country.

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