COVER STORY, MAY 2009

TEXAS RETAIL OVERVIEW
From market updates to retail leasing strategies to project profiles, here’s a diverse look at Texas’ retail sector.

As 2009 is shaping up to be a little bit different year for Texas real estate, we here at Texas Real Estate Business decided to take a slightly different approach to our May retail issue as well. Instead of hosting a roundtable discussion of brokers, we asked Texas real estate icon Herb Weitzman, who has seen the state’s retail industry through many up-and-down cycles, to comment on the market from his perspective. One creative approach that many companies are taking is to fill vacant retail space, which has blighted even the best markets in Texas, with alternative uses. Tip Housewright with Omniplan highlights the benefits of adaptive re-use. Additionally, we spoke with several Texas retail development, construction and management companies that continue to make things happen. From taking a value-oriented focus to implementing strategic leasing initiatives, these companies are tackling the industry head on and are keeping business alive.

Herb Weitzman

In Texas, when people talk about the current downturn, there is one sure way to tell if they have been active in the market for a long time. The veteran players always say, “At least it’s not as bad as the ‘80s.”

As a market veteran myself, one who has been active in Texas real estate since the early 1960s, I can heartily agree with that statement. The current downturn is certainly not as bad as the 1980s. During that period, we entered a recession with a retail market that was severely overbuilt due to projects fueled by aggressive financing rather than demand. The market had a number of largely vacant centers at a time when retailers were not expanding.

This time around, we’re benefiting from the discipline of the past decade, when developers did not start projects until the anchors were in place. As a result, we are entering the downturn with an inventory that is as strong as it’s ever been. And we continue to see retailers expand, although at a slower pace than earlier this decade when they were expanding to meet the demand of the housing boom.

We’re also fortunate that the Texas market did not enter the recession until very late in 2008. We spent most of 2008 as the No. 1 market in the country in terms of job growth and population gains.

So we’re entering the downturn from a position of strength, benefiting from a fairly balanced retail market with momentum from the previous months of economic growth.

The advice I give to younger professionals who are frustrated by the state of the industry due to the current economy is this: Instead of being real estate developers right now, we are real estate repairman.

It may take a while to return to full economic health, and Texas’ retail markets may see increased vacancy as a result. But as a long-time retail real estate professional, I’m proud to say that there’s nowhere else I’d rather be now than in Texas.

Dallas/Fort Worth

Pre-leased construction and over a million square feet in net new leasing in 2008 ensured that the Dallas/Fort Worth retail market entered 2009 with stable occupancy, despite a number of closings from failed national retailers like Circuit City. At the beginning of 2009, D/FW reported an occupancy rate of 87.6 percent, compared to 89.1 percent at year-end 2007. Inventory now totals 171.4 million square feet.

The market occupancy, while showing a decline, remained steady overall because store closings were limited to a handful of locations. While more notable closings are expected this year, based on the national economic problems, no major chains have yet to pull back.

Demand for new center space resulted in construction activity that added 4.7 million square feet during 2008. For 2009, expect to see a significant drop in construction; however, a handful of major projects are to open this year in markets like Allen and in North Dallas, bringing on line anchors such as Macy’s, JCPenney, Whole Foods Market and others.

The D/FW retail market activity is driven in part by the market’s economy, which has maintained positive employment growth, even in the midst of the widespread national economic downturn. D/FW also benefits from its record of strong population growth. For more than 12 years, D/FW has added more than 100,000 people annually. Between 2000 and 2008, D/FW’s population grew from 5.3 million to 6.5 million people.

The housing market remains the area of the local economy most impacted by national trends. However, D/FW’s home prices remain relatively stable because the market never experienced rapid price appreciation during the housing market. For 2008, D/FW reported 20,000 new single-family starts, a decline from 2007’s 30,700 starts.

Austin

Austin’s retail market continues to report steady occupancy, thanks to new projects opening well leased, steady leasing in existing projects and the absorption of several of the market’s large vacancies left by the recent pull-out of Albertsons. As of year-end 2008, the Austin retail market reported an occupancy rate of 93 percent, for a retail inventory of 38 million square feet.

Austin did see a limited number of store closings in 2008 from national retailers like Circuit City and Linens ‘n Things; however, these were not enough to impact overall occupancy, and several of the vacated spaces were re-leased before year-end.

Anchors, as well as smaller chains and restaurants, all were active in 2008. And we continue to see Austin experience a good level of leasing activity this year.

For 2008, Austin’s market added 2.8 million square feet of new retail space, down notably from a year earlier. Projects that came on line included the largest retail phase of The Triangle, a mixed-use environment in urban Austin. The Triangle completed 90,000 square feet of retail space for a mix of local, regional and national restaurants, retailers and services. The Triangle now offers a total of 125,000 square feet of retail space, in addition to apartments and lofts.

Austin’s retail market benefits from an economy that has slowed but continues to outperform the nation. During 2008, Austin reported positive job growth throughout the year, although it was significantly lower than in 2007, according to the Texas Workforce Commission. Nationally, employment growth was negative during the same period. Austin also continues to see strong population growth.

The local economy has seen an impact from the nationwide economic slump, primarily in the housing arena. Home starts are significantly down compared to the pace seen for most of this decade. However, that slowdown is keeping inventories in check.

Houston

The Houston area’s retail market entered 2009 with an occupancy rate of 87.8 percent, down slightly from 88.5 percent in January 2008. The market is boosted by steady retail demand and the Houston-area economy, which remained a national leader throughout 2008. Houston now reports a retail market inventory of approximately 142 million square feet of retail space.

Houston saw 4.9 million square feet of retail space added to the market during 2008. This is the highest level of building activity since 6 million square feet came on line in 2001. Most of the new projects were planned and funded before the current credit crunch. For 2009, a number of projects will be completed, but announcements of new projects should slow notably as both developers and retailers remain cautious in light of economic uncertainties affecting the nation and, to a lesser extent, Houston.

During 2008, Houston saw regional and community projects come on line, as well as two new open-air malls, making Houston one of the most active mall markets in the country. The largest of these projects came on line with 90-percent-plus occupancy.

San Antonio

San Antonio’s retail market continues to post one of the lowest vacancy rates among Texas’ major markets. However, that vacancy rate still increased in 2008 due to several factors, from existing retailers like Mervyn’s closing their San Antonio stores to a slight increase in vacancy in existing retail. Additionally, new projects coming on line were well-anchored but had small-shop vacancy.

San Antonio’s retail market reported a year-end occupancy rate of 91.5 percent, down from year-end 2007’s rate of 92 percent. The year-end 2008 retail inventory totaled 35.6 million square feet in retail projects with 25,000 square feet or more.

Demand from new and expanding retailers resulted in one of the highest levels of new construction for the San Antonio market. During 2008, the market added 3.6 million square feet, in line with 2007’s level of 3.5 million square feet. The active construction market is due to demand for new space from national chain retailers, as well as regional and local concepts.

The retail market in 2008 continued to benefit from San Antonio’s economy. While the metro area experienced slower economic growth in 2008, it still remains one of the best-performing markets in Texas, if not the country.

On the housing front, one of the most closely watched areas of the economy due to the national housing doldrums, San Antonio has seen a notable slowdown in residential construction. However, at a time when the nation on average is seeing double-digit declines in home prices, San Antonio’s home prices are remaining relatively stable with low single-digit declines on average for median prices.

Opportunities abound in any market, and now is the time to grow your business and to grow market share. All real estate professionals should feel a huge sense of urgency right now to grow their business.

Be a student of the market, that is my advice. I’ve been in this business for decades, and I’m still a student of the market. I can’t imagine a day when I’ve learned everything there is to know about this growing, changing, challenging and rewarding retail market in Texas.

Herbert D. Weitzman is Chairman & CEO of The Weitzman Group/Cencor Realty Services.

NewQuest Properties: Projects in the Spotlight

Houston-based NewQuest Properties, founded almost 10 years ago by Steve Alvis, started off predominantly as an acquisition company. Today, the firm has become a full-service real estate company offering development, brokerage and management services. Even though, in light of the economy, NewQuest Properties has temporarily shifted its focus to third-party leasing and the property management fee business, the firm has a number of projects it hopes to wrap up in the near term. Check out a few of these projects below:

Town Center at Creekside is 500,000 square feet in New Braunfels, Texas.

Brazos Town Center II spans 600,000 square feet in Rosenberg, Texas.

Stone Hill Town Center in North Austin will be 550,000 square feet.

The 750,000- square-foot Victory Lakes project is in League City, Texas.

Interfin’s New Leasing Strategies Attract Tenants

Houston-based Interfin, a diversified real estate company specializing in the development, construction and management of residential and commercial real estate projects, is one of many companies altering its retail marketing strategies during the current economy. While national retailers are still important to Interfin, the company has moved its focus to local and regional independent businesses and franchisees.

“We are spending more time and energy visiting these retailers face-to-face, with a more ‘boots on the ground’ approach to leasing,” says Melissa Goedde, director of retail management for Interfin.

Vintage Park

Interfin also is offering incentives in the form of reduced rent for the early months of a lease and the construction of move-in ready retail spaces. These strategies already have proved successful at Vintage Park, one of the companies’ lifestyle shopping centers located at State Highway 249 and Louetta Road in Houston.

“The first retail spec space has leased up within 2 weeks of marketing the concept,” Goedde says.

Jeanne’s Monogramming & Gifts will occupy this space. Co-owner Linda Fowler says that they chose Vintage Park due in large part to the move-in ready option.

“Having the space move-in ready was a factor that made it more affordable, allowing us to put our money into making our business grow,” Fowler says. 

According to Goedde, tenants not only are able to move in quickly with minimal disruption to their businesses, but they also save a good deal of time and money by having a space ready for them.

Interfin hopes to see more shop owners follow the lead of Jeanne’s Monogramming & Gifts.

“By leasing these spaces to quality soft good and retail tenants, the right momentum will be set in place to encourage others to follow suit and bring their businesses to Vintage Park,” Goedde says.

Goedde believes the firm’s new strategies may eventually fall by the wayside, as tenants once again want to build-out their spaces to their own specifications.

“We feel that once the economic situation settles down, retailers will again see the attraction of being able to customize their stores to their specific needs,” she says.

But for the time being, Interfin’s leasing strategies are keeping business alive and well at Vintage Park.

— Lindsey Walker Marcec

Value-Oriented Focus Keeps Mimco on Track

More than 30 years ago, Meyer and Clement Marcus, together with their father Morris Marcus, founded Mimco, Inc. (Marcus Investment Management Company) in El Paso, Texas, to manage the properties owned by themselves, their immediate family and relatives. At the time, their portfolio consisted mostly of apartments and small retail projects. By 1994, all of the apartments were sold, allowing Mimco to focus its efforts on its primary objective: the development and leasing of shopping centers and other commercial properties. Today, Mimco — now with 22 employees — takes great pride in its more than 150 strategically located retail properties on the U.S./Mexico border in Texas and New Mexico.

Thanks to the markets in which the company manages, Mimco continues to perform well in today’s challenging economic conditions.

“All of our markets were very strong through September of last year,” says Scott Walker, director of leasing for Mimco. “They slowed down, but remained active, through the end of the year, and they have all picked up in activity and seem to be holding steady so far in 2009.”

“Our focus on the border has uniquely positioned us to thrive in this challenging retail environment,” adds Bob Ayoub, the company president. “Since most of our tenants are value-oriented, they are still performing well. We feel that will help us going forward, as retail customers, whose focus is on value, realize that you can have a quality shopping environment with good lighting and landscaping, attractive buildings and good prices.”

Typically, Mimco buys or builds anywhere from 100,000 to 200,000 square feet of new retail space each year. However, due to the large amount of spec inventory the company built last year (over 330,000 square feet), it is concentrating more of its efforts in 2009 on leasing up this new space. 

Plaza Del Puente

Part of their construction last year was Plaza Del Puente in Hidalgo, Texas, near the port of entry into Reynosa, Mexico. With over 80 percent of the 105,000-square-foot Phase I already leased to tenant’s like Bealls, Family Dollar, Melrose, Fallas Paredes, Perfumania, and others, Mimco is already planning and pre-leasing Phase II, which will contain about 50,000 square feet of new retail space and four restaurant pads. In addition to the Hidalgo development, Mimco is wrapping up Phase IV of the 200,000-square-foot retail center on El Paso’s east side, the Zaraplex, and a build-to-suit project in Las Cruces, New Mexico.

Zaraplex

Despite the company’s inventory, Mimco has not discounted the possibility of accepting new assignments.

“The investors we represent are poised to buy a lot more retail,” Ayoub said. “If the opportunity presents itself, we are definitely prepared to help our partners take on individual centers, a portfolio of centers, or even provide equity capital to retail projects that Mimco would manage.”

While its short-term goal is to successfully lease up its current portfolio of properties, Mimco has bigger plans. In the long term, Mimco looks to grow its portfolio of shopping centers along the U.S./Mexico border and develop the best new and in-fill projects in these Hispanic markets.  With a strong market area and promising economic fundamentals for its target customer base, the company should have no problem making this goal a reality.

Says Ayoub, “The solid economy in El Paso and in Texas makes us very fortunate to be working in a state that has a growing population, a diversified economy, low unemployment and an environment that encourages new development.”

— Lindsey Walker Marcec

Goodwin Commercial Properties Forges Ahead with Retail Plans in Texas

Dallas-based Goodwin Commercial Properties, a full-service commercial real estate firm specializing in brokerage, tenant representation, site selection, build-to-suit, land acquisition/development and property development consulting services, was founded by Pam Goodwin in February 2006. Goodwin, who has more than 20 years of commercial real estate experience working with both landlords and tenants, has found a niche with her firm by developing small projects (typically less than 5 acres) and by working with national retail tenants looking to expand in smaller markets throughout the Southwest. Goodwin recently answered a few questions about her firm and its activity in Texas.

TREB: What retail projects in Texas is your company currently developing?

We are currently developing two exciting projects in Tyler, Texas. One project we are wrapping up is a 5-acre development consisting of 3 individual pad sites located on Loop 323 and Highway 64. To date, we have two national retailers opened and we are marketing the last remaining 1.2-acre pad site. The second project consists of two pad sites directly across from a new 65,000-square-foot upscale grocery store (the first one in East Texas), which is part of a 180-acre, mixed-use development.

We have another project in Copperas Cove, Texas, in which we have 2.2 acres available for sale or lease. Also, we were hired as a development consultant to oversee an 18-acre theater development with pads sites available in Waxahachie, Texas (see siteplan).

TREB: Have you had any setbacks with these developments in light of the economy? How did you overcome them?

The biggest challenge is everything is taking a lot longer. Retailers themselves are hesitant to make decisions on future expansion plans or have delayed moving forward until next year. Luckily, we are working with tenants that are still expanding during the economy slowdown. You have to continue to network and find new opportunities everyday. In today’s market, we must continue to attend real estate events and keep informed with industry news.

TREB: Do you have any projects in the pipeline, or are you holding back until things pick up?

We can’t afford to hold back until things pick up. Texas has not been as impacted on the economic situation like other parts of the country. Still, 2009 brings a very challenging time in commercial real estate. We are preparing when the turnaround happens and will have shovels in the ground for the three new developments in the pipeline.

TREB: What do you see for your company in the short term? What about long-term goals?

Short-term goals are to help our clients leverage the current economy to get great sites for the right price at the right time. Long-term goals are to better leverage technology to highlight new retail development projects and retailers faster and quicker. I plan on writing a book regarding the industry and the love of shopping.

TREB: What sets Goodwin Commercial Properties apart from other firms in Dallas?

Goodwin has a reputation for great service, and more than 80 percent of our business is based on repeat and referral clients. We strive to do a better job than our competitors by doing what we say we can do, saving our clients money on preconstruction engineering, completing projects in a timely manner, and offering 24/7 customer service. Our common goal is to have the tenant open, happy and making money on or before the scheduled date. Also, what sets the company apart are the valued-added development services we provide to clients.

TREB: Anything else you’d like to add about your company or your projects?

A lot of national retail companies have downsized their real estate/development departments. Goodwin Commercial Properties can relieve companies in this situation by serving as a consultant or as part of their development team on as as-needed basis. It is a benefit to our clients if they do not have to hire a full-time staff and can hire Goodwin for a few weeks or as long as the project is required. It is a win-win situation for both.

— Lindsey Walker Marcec

New Life in Old Boxes: Recycling Vacant Big Box Retail Stores Can Be a Win-Win

Housewright

I attended Easter services at a grocery store. But it’s not what you think; communion was not served in the wine aisle. Actually, the space was once a grocery store, but now it is a thriving 30,000-square-foot church with an attendance of approximately 1,000 people per week.

Until just a few months ago, it was a vacant anchor space in a declining suburban strip shopping center. Now it has colorful interiors organized in a lively, contemporary and very functional way. The concrete floors have been stained and left exposed. The ductwork and steel structure have been painted black. And there’s plenty of parking out front.

This was a win-win for the landlord (he sold the space to the church), the church (their total cost of purchase plus improvements was less than half the price of comparable new construction), and the community (they have a thriving church filling a once-derelict piece of real estate).

Fellowship Bible Church in Dallas used to be a movie theatre.

As the recession has plowed through the retail industry, it has left in its wake an unprecedented number of store closings. Many once-thriving brands have had to reexamine their real estate needs and close a large number of stores or simply close the entire chain. The list of closings is long and varied but includes names such as Office Depot (126 stores), Dillard’s (26 stores), The Home Depot (15 stores), Macy’s (11 stores), KB Toys (356 stores) and Circuit City (567 stores). Some of these shuttered stores are loosely categorized as big boxes. While there is no precise definition of big box, they are always one story and 25,000 square feet or more with ample, usually surface, parking.

Landlords, developers and concerned communities are trying to figure out what to do with these stores. Some may indeed return to viable retail uses, but what about the others? What about the vacant stores that are in marginal locations or overbuilt markets? What about the stores that remain vacant while waiting for the economy to return to full health so that they can be filled once again with merchandise and shoppers? The answer for many will be to recycle the space into alternative uses.

Architecturally, big box retail is one of the most flexible and easy to adapt building types available. Big box stores have efficient column spacing, usually around 30 feet. Clear heights are generous, creating a sense of spaciousness. Mechanical systems are typically simple rooftop units with ductwork that can easily be reconfigured and rerouted for new uses. If more mechanical capacity is needed, the typical flat roof easily accommodates more units where needed. Roof structures are light-weight structural steel which can be reconfigured for skylight openings or easily reinforced for extra mechanical systems. Since big boxes are only one story, a few columns can even be removed and the structure reinforced if greater spans are needed. Big box tenants typically have plenty of electrical capacity due to their high levels of lighting and cooling. This type of store always has plenty of parking; the typical 5:1,000 retail parking ratio provides adequate space for virtually any use.

Putting new uses in existing big box stores is not only economical and practical, it is also sustainable. Saving a big box store and recycling it into a new use preserves significant amounts of energy and material consumed during construction, as well as time and economic resources. In fact, the recycled big box can be renovated and repurposed to be much more energy and water efficient than the original retail store. New mechanical systems that use less energy can be installed. New insulation in the walls and ceiling can reduce energy consumption as well. Skylights and new lighting systems can reduce the amount of electricity used. New windows can provide ventilation and outside views scoring LEED points. New plumbing fixtures can be specified to use less water. Improvements to landscape and storm-water systems can reduce the impact on the environment.

By recycling a big box retail store, the new occupant can save significant dollars over the price of constructing a completely new facility. Total occupancy costs can be 35 to 50 percent lower than new construction when recycling an existing building. Of course, there are many variables that can influence the final cost. Since the big box format is relatively new, expenses for the abatement of hazardous materials are usually not an issue. The biggest expenses will likely be in mechanical, electrical and plumbing reconfigurations, as well as life safety and code-related systems.

In Dallas, a 120,000-square-foot freestanding cinema and restaurant complex was recently recycled for use by Fellowship Bible Church. Significant structural reconfigurations were needed to combine three movie auditoriums into one sanctuary space. In addition, the interiors were entirely demolished and a completely new arrangement of spaces was constructed. The project was completed for approximately $100 per square foot.

Of course, churches aren’t the only new uses for old big box stores. They are ideal for call centers, which consist of large concentrations of open cubicle space needing high ceilings and lots of parking. Medical office space, schools, libraries, community centers, city halls and fitness centers are all viable uses for big box space as well. Placing non-retail uses in a retail environment can bring benefits to a community by creating a healthier mix of uses. It can also bring a 24/7 user to the property instead of one that is only open during business hours.

The repurposing of big box retail space into new uses is only limited by the imagination and creativity of architects, developers and communities. The longer the economic downturn persists, the more new uses for old retail will be found and the more rewards will go to those with the creativity and foresight to create these win-win solutions.

— Tipton Housewright is a principal architect at Dallas-based Omniplan Inc.

Corpus Christi Big Boxes Lease Up

Corpus Christi has avoided the overbuilding that plagued many larger markets, but this has caused an interesting trend in the city’s retail sector.

“I think what we’re seeing is that the lack of new development has created an opportunity for us to lease up empty big boxes,” says Lynann Pinkum, broker associate with Corpus Christi-based NAI Cravey Real Estate Services. She adds that this year she has seen more activity with big-box spaces than small-shop spaces.

The recent bankruptcies of Circuit City and Linens ‘n Things have left 36,000 and 42,000-square-foot vacancies, respectively, at Moore Plaza. Across the street, the 25,000-square-foot, former Office Max building (which was shuttered in the company’s restructuring a few years ago) has a signed letter of intent from a regional tenant.

Adjacent to the Office Max building, the former CompUSA building is being converted into a cancer treatment center. The former Furniture Row building, which the company vacated in 2007 for a new building within the city, has been leased by the Salvation Army for one of its retail stores.

Amarillo is Steady Anchor in North Texas

Amarillo is defined by its steadiness, with an occupancy rate that hovers around 94 percent, and this is expected to continue throughout 2009. 

“I think we’re going to continue to be steady, and I would be surprised if, come January 2010, occupancy isn’t within 2 percent of where occupancy it today,” says Justin Kite, a retail specialist with CBC.

 Two projects were completed last year: the 172,448-square-foot Western Crossings Shopping Center, which is already at 89 percent occupancy, and the 25,942-square-foot The Markets at Hillside, located in the burgeoning residential corridor south of town.

This year will not see as much, though. National and regional tenants are holding off on deals for the market, and Kite expects to see no new retail development. The closing of Circuit City has created a big-box vacancy, but Kite, whose company is leasing the property, does not see any problems leasing the space.

©2009 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.