The Dallas-Fort Worth (DFW) economy is booming with tremendous population, income and job growth trajectories that directly benefit the local retail sector. Shopping center investors have taken notice, as evidenced by the total transaction volume for retail properties during the last 12 months reaching its highest level in more than 10 years.

Compelling Fundamentals

Investors continue to buy retail properties in Dallas as a result of DFW’s healthy and diversified economy. Population growth and in-migration patterns are significant factors with more people moving to DFW last year than any other metro area in the nation (246 people arriving daily), according to recent data from the U.S. Census Bureau. This surge has pushed DFW’s population to more than 7.5 million residents. Additionally, employment growth has exploded, with DFW leading the nation in job creation last year by adding 116,400 jobs. The Dallas metro unemployment rate has recently dropped to 3 percent, which is the lowest rate in 20 years, and this has further contributed to powerful employment dynamics that continue to fuel consumer retail spending. DFW was also recently ranked as the No. 5 market in the nation for technology jobs, which typically are higher-paying and will add strength to an already strong retail consumer. On top of the strong economic backdrop, metrics for existing and future retail space in the metroplex are equally impressive. Overall retail occupancy in DFW in the second quarter of 2019 reached a record-high of 94.7 percent, with over 2.6 million square feet of retail space under construction and more than 893,000 square feet of space absorbed, according to Real Capital Analytics. DFW led the nation with 3.8 million square feet of net absorption of retail space during the last 12 months. During this same time period, approximately 3.1 million square feet of space was developed, which is almost 25 percent lower than the amount of retail space constructed in the previous year. Retail rents in the Dallas metro area this year are expected to increase 4.8 percent on a year-over-year basis to $17.74 per square foot and eclipse the previous five-year average growth rate of 4.3 percent. Strong absorption and high occupancies, coupled with reduced deliveries of new retail space and increasing rents, provide a perfect storm for continued retail investor appetite in the DFW market.

Deal Volume Peaks

Deal flow and demand for a well-located retail product is robust. In 2018, deal activity in DFW totaled $3.15 billion, which is the highest level for shopping center transactions since the Great Recession in 2008-2009. Between the second quarters of 2018 and 2019, retail transaction activity has totaled $3.17 billion, indicating continued momentum in investment sales volumes in the Dallas metro area. There are more core/infill shopping center trades on the horizon in Dallas that are expected to trade in the second half of this year. This activity should continue to support heightened retail sales volumes in 2019.

Buyer Competition

Favorable asset pricing continues to attract new capital to DFW. Depending on the specific asset type, pricing for shopping centers in DFW com-pared to similar assets in gateway or West Coast cities remains more attractive to investors. In the trailing 12 months through the first quarter of 2019, private investors comprised 47 percent of the buyer pool while cross-border buyers completed over a third of retail property acquisitions. Notably, REITs and institutional investor participation were more muted at 15 percent. Irreplaceable shopping centers in Dallas have traded at very compressed cap rates consistent with a similar product in top U.S. and gateway markets. But most multi-tenant retail assets in DFW present more compelling investment opportunities with cap rate arbitrages ranging from 100-150 basis points compared to the West Coast or gateway cities. Cap rate pricing dislocation, coupled with historically low-interest rates, drives investor interest in the metro area from both foreign and domestic sources of capital. Beyond pricing, institutional investors and well-capitalized private investors including trade buyers are investing in larger markets like DFW in order to reduce risk and protect cash flows.

Abundant Financing, Liquidity

Despite capital market headwinds including trade tensions, tariffs, and end-of-cycle recession fears, interest rates remain extremely attractive for retail investors. According to Dallas-based Metropolitan Capital Advisors, users of debt capital have focused on fixed-rate debt options for an existing product, while construction lending for retail projects has been restrained as new development activity has been kept in check. With the 10-year Treasury yield currently hovering just above 2 per-cent and interest rate spreads tightening, all-in permanent fixed-rate mortgage rates currently range between 3.5 to 4.5 percent. Historically low cost of debt capital helps leveraged investors maximize returns and push pricing for retail acquisitions.

Retail Landscape Shifts

Around the country, talk of a retail apocalypse is rampant. Coresight Research estimates as many as 12,000 store closures could occur this year, which would exceed the record of 8,139 store closings in 2017. On a macro level, retailers adjust to the realities of physical versus digital retailing while increased ten-ant bankruptcies and box vacancies highlight the collateral damage along the way. This disruption has increased investor anxiety and impacted the pricing of retail assets, including power centers and malls across the nation, particularly in secondary and tertiary markets. On a micro level, DFW has shown resiliency by remaining large-ly immune to retail disruption as investors continue to underwrite and price in the mitigated risks associated with a very strong local economy.

A Top-Ranked Market

PricewaterhouseCoopers and the Urban Land Institute named DFW as the No. 1 market in their prestigious annual forecast report titled Top 10 Markets in Emerging Trends in Real Estate in 2019. Investors certainly agree. With a relatively low cost of living and powerful population and income growth, top corporations and individuals will continue relocating to DFW. A balanced yet strong-performing retail market that accommodates ever-growing consumer demand, the Dallas metro area will continue to attract additional private and institutional investor capital for retail investment for the foreseeable future.

When Amazon bought Whole Foods last year, naysayers in the real estate industry saw the beginning of the end for many traditional grocery stores. Amazon was already poised to take over the retail world and now they want to revolutionize food distribution and redefine how groceries are purchased by consumers. Amazon realized it needed a substantial brick and mortar presence to successfully grow its online presence of grocery sales, and they saw this multi-channel network as a perfect opportunity to disrupt and potentially dominate the food/grocery sector. As a result, Amazon bought Whole Foods in an effort to grow online grocery sales through retail locations that extend Amazon’s massive fulfillment network with the goal of substantially growing Whole Foods’ existing 2% market share of the huge $641 billion market for grocery sales generated in 2017. 

The Amazon Effect on the Grocery Competitive Landscape

So, what has changed in the grocery sector since this acquisition was announced in 2017? Quite a bit to be sure. Amazon’s acquisition of Whole Foods has changed the competitive landscape for grocery stores including larger grocery retailers such as Walmart and more traditional grocers like Kroger. Consumer buying patterns are also changing and shopping for groceries is no exception. While approximately 4% of all groceries are now purchased online, it is anticipated that more than 20% of all groceries will be purchased online by 2025 so supermarket and grocery retailers have been forced to respond. Walmart purchased online retailer Jet.com last year and recently acquired a NY-based last-mile delivery start-up called Parcel to be more competitive with Amazon/Whole Foods in delivering general merchandise and fresh/frozen groceries from Walmart. Kroger has implemented an online grocery ordering service called ClickList that allows consumers to order products and groceries online and then pick up their order at the store. For its part, Amazon/Whole Foods has continued it cost-cutting and efficiency measures using Amazon’s vendor leverage to reduce Whole Foods’ costs and now offers Amazon Prime’s more than 100 million members many discount benefits, including price cuts which are now available in 121 Whole Foods stores in 12 states along with free two-hour grocery delivery. The Amazon/Whole Foods delivery program is currently available in 7 major cities and will be expanded in the U.S. later this year.  Whole Foods, along with several of its competitors including Sprouts and HEB’s Central Market, also uses Instacart to provide same-day grocery delivery to its customers.

Grocery Chains Who Invest in Technology & Strong Management to Hold Their Own

Well-run, market share-dominant grocery store chains like HEB, Kroger, Publix, Wegmans and Whole Foods will continue to compete for increased market share and will essentially win the supermarket grocery wars. Conversely, weaker grocery store chains such as Southeastern Grocers (which owns Winn Dixie and Bi-Lo) and NY- based Tops Friendly Markets have been forced to file for bankruptcy protection this year. These types of grocery chains have been saddled with debt and have been unable to invest in the technology needed to respond to the ever-changing grocery market. Other weaker grocery stores that cannot adapt and invest will be more likely to fail and will not be able to competitively survive in the long term. At the same time, successful discount grocery chains such as ALDI continue to increase market share and grow aggressively without having to adopt an online or grocery delivery strategy to compete for more price-conscious and moderate-income consumers. As a value and price leader, ALDI has been able to grow its market share and customer base by investing primarily in private label brands (which account for approximately 18% of the total market for grocery sales) and has perfected the concept of brand deletion through its generic offerings. 

The Amazon Acquisition of Whole Foods Necessitates a Grocery-Anchored & Retail Evolution

What does all of this mean for the future of grocery-anchored shopping centers? For owners, investors and lenders, well- located necessity-based retail centers that are anchored by market-leading grocery stores will continue to be in high demand and will command the lowest cap rates in the marketplace. While the number of grocery store openings declined 29 percent in the year that Amazon acquired Whole Foods, investments in grocery-anchored shopping centers increased 5.3% over 2016. Grocery-anchored centers continue to be viewed as a highly sought-after defensive play against e-commerce and are generally viewed by investors as a safe investment.  Internet-resistant junior box retailers like Ross, TJ Maxx and Ulta combined with experiential concepts such as movie theaters and sit-down restaurants offer an additional layer of safety and convenience for owners and buyers of larger grocery-anchored shopping centers while service-oriented retailers and QSR’s are defensive and in strong demand for smaller, cookie-cutter sized grocery-anchored centers. In addition, technological innovation and adaptation will continue to drive the future of retail and grocery shopping as retailers and property owners continue to implement the latest technology available (including consumer-driven data and blockchain applications) to better understand and predict evolving trends and changes in consumer behavior.