Dec 29
From first-to-market concepts to established chains, eateries and bars are propelling retail absorption in each of Texas’ major markets, say retail brokers.
Over the past couple years, retail investors and developers have begun paying special attention to the food and beverage components of retail properties they’re buying or building.
The logic is simple: the act of sitting down for a meal or grabbing a drink inevitably lengthens the amount of time a customer spends at a mall, shopping center or mixed-use destination. More time spent at a retail property typically translates into more money spent at its stores.
But while choosing the right food and beverage (F&B) concepts for a given retail property is critical, selecting the wrong ones can be equally costly. As it pertains to Texas’ four largest markets, retail rents are not necessarily contracting, but they’re not exactly skyrocketing either – unless you’re in Austin or certain parts of Dallas. To maintain occupancies and push rents in large markets, retail landlords and developers are giving restaurants and bars their due as traffic drivers that promote cross-shopping.
Brokers who represent F&B users are also seeing their knowledge of the sector evolve, as the definition of what a truly successful concept is has changes dramatically.
Texas Real Estate Business contacted retail brokers in Dallas, Houston, Austin and San Antonio to get the scoop on how effectively marketing and leasing F&B concepts in large markets is evolving. Other facets of the markets, including tenant demands, site selection criteria and rent growth trends, are also discussed in detail.
Participants include Chris Burrow of Dallas-based Range Realty Advisors; Jason Baker and Kenneth Katz of Houston-based Baker Katz; David Simmonds of Austin-based Retail Solutions; and David Nicolson of Weitzman’s San Antonio office.
What follows are their edited responses:
Texas Real Estate Business: What steps are retail landlords taking to ensure they get F&B components correct?
Chris Burrow: There is more focus on local restaurants, draft houses and live entertainment – largely to attract millennials. Edgy and funky is in. The more unique the concept, the more successful it will be in many cases. Districts with multiple such venues can be big draws and pack in the crowds. Dallas’ Design District, Deep Ellum, Uptown and Fort Worth’s West Seventh are a few local examples.
Kenneth Katz: Historically, retailers didn’t enter Texas through Houston, but that’s changing. Because of that, landlords are more sensitive now than ever before as to whether or not those concepts will be successful in Texas. Good landlords are paying careful attention to sales per square foot and what volumes these restaurants have done historically. Landlords are doing deeper dives into price point sales and operations, and they’re looking at menu items to see how they fit in with their tenant mix and overall development.
David Simmonds: F&B has become a critical part for every successful project, whether to define the personality of the project or to maximize rents in as much space as possible. Local players that are original, indigenous, have sex appeal or mimic other projects in the region are finding the most success.
David Nicolson: San Antonio is seeing tremendous demand in the restaurant category. To make restaurants work in their retail spaces, landlords put a lot of thought into layout and design. You have to meet specific restaurant needs in terms of infrastructure, like parking and utilities. And in Texas, it’s important that you offer restaurants options for patios and outdoor seating.
TREB: How do F&B concepts in your market rate against other sectors that are resistant to e-commerce?
Burrow: The restaurant, hospitality and entertainment sectors are all in high demand in North Texas, while traditional anchors such as neighborhood grocery stores are holding back on expansion. In some cases, hotels, multifamily and entertainment venues are replacing traditional anchors in very successful mixed-use developments.
Jason Baker: We’re seeing more first-to-market restaurants in and around Houston. Food across all segments is in high demand – from fast food to fast-casual to full-service and even chef-casual. It’s more difficult now than ever to find great spaces with adequate parking, visibility and access.
Simmonds: Poké restaurants, fast casual salad concepts, cannabis products outlets, fitness concepts of all kinds and pet supplies are performing well. Concepts that were born online are evolving to brick and mortar.
David Nicolson: Demand stems from concepts in the service, restaurant, fitness, medical and entertainment categories. The operators run the spectrum from local to national, and we’re seeing franchises in all of these categories.
TREB: What’s the story on rents in your market? How much have they changed over the last 12 months, and what is your forecast for 2019?
Burrow: Overall, rents have continued to hold steady over the past 12 months. Some upward pressure exists in high-growth markets with very high retail occupancy rates and at high-end retail properties. Rents in Highland Park Village, for example, have increased over the past 12 months as the center continues to attract luxury fashion retailers and restaurants. The same applies to Legacy West in Plano, which has attracted numerous new restaurants and a major food hall. This trend is likely to continue well into 2019.
Baker: Inside the beltway, we’re definitely not seeing a drop in rental rates, but we are seeing rents beginning to flatten. When restaurants and retailers are looking at space, they look at things in terms of gross rent. High taxes and high common area maintenance (CAM) charges are becoming more and more difficult for retailers to stomach. We haven’t seen much change over the past 12 months, and don’t anticipate much change in 2019, mainly because there’s still a high demand for space and limited inventory available. When demand exceeds supply, you’re going to see stable to slightly increasing rents.
Simmonds: Per CoStar Group, retail rents in Austin are up about 4 percent over the past year, well above the 1.3 percent year-over-year rent growth the U.S. market has seen. CoStar is expecting more of the same next year, with forecasted rent growth of about 4 percent in 2019. This is, of course, the result of strong performance in Austin’s economy, which is adding jobs at one of the fastest rates in the country.
Nicolson: The San Antonio market is seeing retail rents remain flat overall, after several years of steady gains, and we expect rents to also remain flat next year. Higher property valuations and higher property taxes have significantly increased triple-net costs for tenants, which raises effective rates. The higher effective rates are hampering landlords’ ability to raise retail space rents.
TREB: How much growth in specialty retail is your market seeing? How much are non-chain, non-franchise concepts contributing to absorption?
Burrow: Non-chain, non-franchise concepts, particularly restaurants, are contributing significantly to absorption. In some cases, such concepts are serving as new anchors to vibrant mixed-use developments. A great example is Trinity Groves, a concept developed by noted restauranteur Phillip Romano. Trinity Groves is a virtual incubator of new restaurant concepts that stand out for their originality and lack of “chain feel”.
There is a renaissance in unique, locally owned restaurants popping up that are often located within a mix of local breweries, pubs, draft houses and theaters. Examples in North Texas include Uptown and Deep Ellum in Dallas and West Seventh in Fort Worth. They also appear in renovated downtown districts in Plano, McKinney, Grapevine and Lewisville.
Baker: At a macro level, we’re not seeing a significant amount of specialty retail coming in to the Houston market. The majority of growth in retail is from larger regional or national players.
Simmonds: With regard to specialty retail, it’s hard to have an exact number, since typically national retailers take bigger spaces. But there’s a lot more local retail businesses gobbling up smaller chunks. Local retail is having a huge effect on the overall market, because Austin truly does love local retail. Projects like The Linc, which offers an expansion to Easy Tiger, or Phase III of The Domain, which is solely focused on Austin-born, or at least Texas-born concepts, are great examples of this.
It’s also worth mentioning that Austin-born retail is what keeps people coming to Austin. Whether it’s the James Beard Award-winning restuarants or the shops along South Congress, retail has helped Austin become a magnet for population growth.
Nicolson: We see a lot of healthy demand from local concepts, particularly restaurants and services, but it’s concentrated for the most part in the higher-income areas of San Antonio.
TREB: In terms of spatial requirements, tenant improvements, parking, etc., what are some common demands that today’s retail users have?
Burrow: Parking is always in demand, and higher-density anchors such as hotels, apartments and restaurant rows are increasing the demand for structured parking. Fortunately, these structures decrease the amount of the wide-open concrete parking lots of old. Rooftop decks are becoming popular and can add capacity and appeal to restaurant venues and hotels. Walkability is big, so safe environments with adequate lighting, walkways, landscaping and security are in increasing demand.
Katz: There’s a real sensitivity to cannibalization of overlapping retailers in the same market among food and non-food users that we haven’t seen in the past. Particularly with restaurants, there is now more time, energy and money spent on what’s happening on the outside. These users are creating an experience on the outside to communicate what is happening inside.
Simmonds: Tenants in Austin are seeking smaller spaces than in the past – they’re getting more and more efficient. They need higher tenant improvement (TI) packages with the costs climbing rapidly and are considering mixed-use more than in the past.
Nicolson: We see tenants expecting generous TI contributions, and often receiving them. With rents at historically high levels, it’s realistic to expect higher allowances. in terms of parking, requirements haven’t changed a lot for smaller tenants. But some anchor stores aren’t as demanding as they used to be. they would rather have a smaller lot that looks busy.
TREB: How is site selection evolving and changing in your market?
Burrow: Mixed-use sites continue to be in high demand. Apartment, office and hotel users prefer to be near restaurants and provide support to help restaurants succeed. Retailers similarly like to be near high-density areas, so neighborhood grocery stores are now popping up in downtown areas and trendy districts such as Dallas’ Uptown and Fort Worth’s West Seventh. This scenario was somewhat unheard of a few years ago. Retailers that previously held back on expansion are growing in higher-density areas and less so in outer suburbs.
Katz: In Houston it hasn’t changed all that much. Inside the beltway, areas that were desirable 10 years ago are just as desirable, if not more so today. The center of the bulls-eye – where tenants wanted to be – has moved in the past five years. Maybe only three miles, but it’s moved. Tenants in the suburbs especially are thinking beyond just three to five years, projecting 10 to 15 years and asking some questions about the risk of the bulls-eye moving over time.
Simmonds: Quality, quality, quality – tenants are demanding quality and they are willing to pay for it.
Nicolson: For site selection, it used to be that tenants would meet with experts on the market and the property to determine their best possible locations. now that process includes computerization, where internal experts process sites through computer models that let concepts see locations from the standpoint of whether they will cannibalize existing stores.
TREB: What new channels and practices for reaching customers are proving most successful in your market?
Burrow: We are seeing more advertising in locations with very high concentrations of people, such as advertisements for Highland Park Village and NorthPark Center at Love Field in Dallas. Also, you see much more creative advertisement from retailers in movie theaters and in the large sports venues, such as American Airlines Center and AT&T Stadium. Of course, more and more retailers are shifting to social media and away from print advertising.
Baker: The most notable – and most obvious – are the social media platforms, including Favor and Instacart. Pop-ups and showrooms are becoming more and more relevant, but still not as relevant as bolstered online platforms.
Simmonds: Austin is way too tight for pop-ups. Online, social media and philanthropic activities work best.
Nicolson: Retailers are taking advantage of every channel they have to reach customers at a time when shoppers have adopted online as one of their options. This can mean using the store for pick-ups or returns and integrating online shopping into brick-and-mortar platforms. They want to service the customer, whether they buy in the store, buy online or both. For example, here in San Antonio, H-E-B is rolling out a program called Curbside, where stores have dedicated, covered areas for customers who order online to receive their orders without even having to leave their cars.
Original Interviews by Taylor Williams
Read the Original Article HERE