Low Retail Inventory Sustains Sales Prices

Investors in Dallas and Austin are aggressively targeting specific subcategories of brick-and-mortar retail, but listings are scarce.

By Taylor Williams | Texas Real Estate Business

The combination of a flight by investors to highly targeted segments of the physical retail market and a lack of new development in 2020 is keeping prices high for select properties in some of Texas’ biggest markets. Retail investment sales brokers in Dallas and Austin say that for specific subtypes of well-located properties — such as single-tenant, net-leased assets and multi-tenant strip centers with essential businesses — there simply aren’t enough of these deals being brought market to go around. These supply constraints ensure that pricing continues to rise and cap rates continue to compress for these in-demand assets.

According to data provided by CoStar Group and Real Capital Analytics, Dallas-Fort Worth was a top 10 market in 2020 in terms of average retail sales price growth. Although total transaction volume was, unsurprisingly, down for the year, the metroplex saw an average price of $396 per square foot for single-tenant retail assets, a year-over-year increase of 5 percent…

The dearth of new development and store openings in 2020 is understandable. With the economy rocked by COVID-19, construction projects that were underway or set to begin were delayed, and deals for new stores that were being negotiated were put on hold.

Many retailers, particularly nonessential and local mom-and-pop businesses, found themselves in survival mode practically overnight. This massive disruption to new development and leasing last year is driving the supply shortage this year.

“If projects had been ongoing and more de novo locations were built in 2020, now — the first and second quarters of 2021 — would be the time when that product would typically be delivered and on the market,” says Rob Solls, director of retail investments and acquisitions at Dallas-based Mohr Capital. “That’s causing the existing supply to see more competition and compressed cap rates.”

Solls adds that he has noticed a pronounced flight to quality over the last 12 months. Investors in Texas are duking it out for newly delivered product leased to internet-resistant tenants in markets with the strongest in-migration and job growth, driving up prices for these assets in the process.

“We didn’t really see a mass exodus of investors out of retail in response to the pandemic,” he says. “But by the third and fourth quarters of last year, retailers had generally done their triage and were starting to brainstorm about growth strategies again. In 2021, we’ve started to see those strategies — preferred development programs, rolling out of smaller prototypes — start to play out, which led to an uptick in deals at the end of the first quarter.”

Read the full article in Texas Real Estate Business’ May 2021 issue.