DFW Real Estate Review — November 2020
The biggest question I get from clients is “What am I seeing and hearing out there?” The goal of this monthly (let me emphasize that) newsletter is to keep an ongoing update of my answer to that question.
I am taking the national headlines we are seeing in the real estate industry and combining that with a “boots-on-the-ground” perspective of what I am seeing and hearing in DFW Real Estate. Predictions are just that — a prediction. How the real estate sector pans out is really anybody’s guess at this point, that is why I am doing real estate in review, meaning taking a look backwards, while we keep our eyes on the horizon. At the end of the day, what actually happens is what matters. Feel free to skip to the sections that matter most to you, share your feedback, or ask any direct questions that I can respond to in a later segment.
This is DFW Real Estate in Review.
Enjoy.
If you missed last month’s newsletter, check it out here.
DFW & TEXAS ECONOMY
November was another great month for Texas and, yet again, the expert’s sentiments seem to keep ringing the same bell of “NOT GOOD ENOUGH!”
The Real Estate Center at Texas A&M in College Station reported eight straight weeks of declining numbers of Texans claiming unemployment insurance since the pandemic, but continued to mention “However, that improvement is slowing.” This could be correlated with the rise in Covid cases along the major border towns — El Paso, Brownsville, and McCallen — and, unsurprisingly, “Administrative/support/waste management/remediation services, construction, healthcare and social assistance, retail trade, and accommodation and food services represented the sectors with the most unemployment claims through Oct. 24.”
Home Mortgage Delinquencies took a slight decline by the end of the month, from 9.35% to 9.1% (the high of 2009 was 10%), given that this contraction, on a pure numbers basis, was far greater than 2008/2009, not reaching the previous recession’s peak (as of yet) is, I believe, a promising sign. On top of that foreclosures are extraordinarily low and homeownership hits all-time high, however, that is believed to be due to the FHFA’s foreclosure moratorium, which is set to expire December 31, 2020, so Q1 of 2021 will be interested to watch.
While the figures above will be representative of consumer behavior, spending, and overall sentiment, The Fed has decided to continue its holding pattern of keeping interest rates near zero and keeping them there until 2023, most likely in anticipation of what is or may come when moratoriums expire. In the linked article, it mentions how even with the Fed’s efforts to spur buying assets changing hands has picked up only a little bit, echoing what described the Fed’s actions — most likely in anticipation of what is or may come when moratoriums expire.
What does all this mean for Dallas and Texas? Well, everyone is feeling the chokehold on deal sourcing, especially in high growth markets like Texas, and the widening, of an already wide gap, on buyers and sellers expectations. “The current bid-ask spread is significant on retail, hospitality and office properties, the sectors hit hardest by the pandemic, as buyers expect to pay prices discounted from previous highs. Yet, most owners are holding out on selling at reduced prices, believing that property values will improve as the economy continues to recover.” Ground-up construction deals are still getting done, especially for those that make sense and for those that will make more sense as the economy recovers, leading to an expected construction boom in 2022.
Even though fewer deals are being done — prices are still going up…prices for certain product in certain markets. By ‘Certain,’ I mean ‘Certain-ty.’ The demand for certainty, in uncertain times (read: investor-grade product in investor-grade markets) is skyrocketing. “According to a CoStar analysis of the indices...Investors are preferring the bigger-dollar deals over the smaller ones…There has been an upward trend in deal size in the past two months, according to CoStar data. The average size in the investment-grade segment of the market, which is influenced by larger, higher-value properties, was 53% higher in September to October than the monthly average in May through August, when deal activity was at its lowest…However, it appears to be getting harder for sellers of cheap properties in secondary markets to get deals done.”
As mentioned here, it can be tough to not look this current crisis through the lens of a financial crisis. Buyers, the ones who ultimately end up moving markets, are #1 looking and #2 looking for certainty in there investment. They are moving away from the allure of value-add in the future and are willing to give up some their return, even on a pro-forma basis, for assurance today (and in the future), should the economy take another quick turn for the worse. While, what is certain today and in the future is a matter of opinion, what isn’t up for opinion are investor-grade markets. With the number of people and companies (which we will discuss more next month), DFW, which was already on the rise, is only becoming more and more of a sure bet during this contraction.
INDUSTRIAL & RETAIL
This month we are combining these sections. Althought, Industrial continues to be the prodigal child of success in this market by ultimately sideswiping market share from retail, Industrial and retail continue to mirror each other more and more.
Added to the list of retailers looking at developing an e-commerce platform or some break with traditional brick-and-mortar sites this month are the likes of:
· Discount retailers like TJ Max, HomeGoods — which early on in the pandemic, investors were worried that a large percentage of discount retailer’s revenue came from in store purchases.
· Hibbett Sports — “Sales at brick-and-mortar stores increased 17.5% while e-commerce sales increased more than 50%.”
· Chipotle
· GameStop
· Disney
· Being resurrected from the Grave — RadioShack — will go completely online.
· Wal-Mart
· J.C. Penny — An odd one on this list, however, Simon and Brookfield’s purchase of J.C. Penny is a move that other landlords are watching to see if they, too, should look to own their larger tenants. The intention would be an effort to help bring in traffic for other tenants in their properties who may not have resources to shift business models expeditiously. A break from the normal landlord-tenant brick-and-mortar relationship, which many have criticized.
Wal-Mart is the one pioneering this move by turning the backends of their stores into micro-distribution centers to support omni-channel distribution and, ultimately, the widest array of consumers. Those that enjoy the experience of brick-and-mortar, or curbside pickup, or pure rapid online delivery, of which, e-commerce, at this point in time, can only satisfy one of those segments.
Amazon, more the anybody, knows the constraints and stresses and limitations of only providing delivery from suburban warehouses. Acquiring Whole Foods, taking a stab at JC Penney, and even partnering with KOHL’s for returns, Amazon is trying to gain proximity to their consumers. In hopes to, not only, lower their distribution costs, but also to bring more value with quicker, if not instant, deliveries. Retailers, are on the sidelines watching how this pans out for Wal-Mart. If successful, this could give many brick-and-mortar based business a leg up over e-commerce and its goliath, Amazon. On the buyer/Owner front, It will be important for landlords to continue to watch as this may be a shift in demand for what tenants may look for. As bidding wars continue for last-mile industrial assets, returns get compressed, and rents on industrial space leveling off in the near future due to the boom in new construction, the need for industrial/distribution assets and space will shift investor’s eyes to new sectors.
Put it on the record here, I’m coining the term “The Mullet Layout.” Showroom in the front, Distribution Center in the back. You laugh now, but just wait. This is set to catch on quicker than USA Cricket.
MULTIFAMILY
Competing for industrial’s title, the name of the game for Multifamily has not changed — the need for nice affordable housing, just the way it is being played. While pre-pandemic had a major focus on affordable housing in dense submarkets, the shift to suburban lifestyles continues.
“Meanwhile, the value-weighted U.S. Composite Index, which reflects larger asset sales common in major markets, rose by a larger 3%. The index recouped losses sustained in the second quarter and is now 1.7% above its March pre-pandemic level. Growth was supported by sturdier pricing for high-value assets, particularly apartments.”
Remember in the opener, buyers and investors are looking for certainty. They aren’t interested in potential value in the future, but value now. Leading buyers and investors to the Sun Belt markets due to their high population and job growth, which means higher demand — which means higher rents, from their business-friendly environments. Ultimately, meaning they are more hesitant to shut down their economies on a whim.
Even though, buyers and investors want certainty, that could only translate to the market they own and operate in. Sellers should be cautious to execute all value-add potential on their assets, leaving the next guy with only modest appreciation, modest rent growth, and debt pay down to maximize their returns. Sellers, looking to exit, could demonstrate certainty, for a buyer, by proving the asset’s potential for rent growth on a partial number of the units, leaving the rest for the next buyer.
Infill/downtown locations are in a tough spot or a gold mine. Rents are expected to drop in the most expensive markets and downtown luxury apartments, that is stopping the “20% of new apartments being started in downtown locations.” This could be a response to distressed Malls/Shopping Centers, typically in dense infill locations, finding success in repositioning and redeveloping themselves into mixed-use projects with apartments and apartments going up around these distressed sites.
“Apartment dealmakers may find an opportunity to build new apartments around the shells of under-performing or empty regional malls… Developers have proposed to redevelop more than a hundred malls into mixed-used properties with apartments…Successful redevelopments of closed malls have often been in strong locations…“It’s premium real estate in an excellent location,” says Walter Hughes, vice president for Humphreys [one architecture firm behind Dallas Midtown, Valley View Mall’s redevelopment].”
Again, this uncertainty of downtown locations most likely won’t be a carbon copy translation for Dallas as Millennials, the now largest living generation, are making up about 40% of new renter applications here. The latest results keep the Dallas-Fort Worth metroplex in the top spot for demand nationally and vacancy rates in check amid the recession and pandemic.
OFFICE
Office, now beginning to trend for better, remains in obscurity, which in a time of uncertainty where everyone is looking for certainty, may not be comforting news, but definitely opens the door for opportunity.
Some of the strongest sectors for employment growth nationally in October were the office-using professional and business services, financial activities and information sectors. These industries combined accounted for between a quarter and a third of all jobs added in October[.]”
While Twitter announced earlier this year a permanent WFH policy, it has been expanding offices on Colorado as it shrinks its footprint on the West Coast. As mentioned above, as more infill/downtown sites find themselves surrounding distressed Malls and Shopping Centers, tenants are looking in tandem with Work From Home (WFH) capabilities for a not-so-new-new trend “Work Near Home.” And short-term, or even long-term, Co-Working, a term WeWork has perceptively tainted, is seeing a boost.
There will still be value in an office space, how that value translates into a rental amount per square foot and if that amount is higher or lower than pre-pandemic levels (which I have given comment on what I believe to be the case for office rents in my prior segment) is really anybody’s guess. But many buyers are making big bets on a rebound — see here and here.
See You Next Month,
Mitchell
Mitchell Presas is a real estate agent in Dallas-Fort Worth specializing in off-market acquisitions and listings of Multifamily, Industrial, and Land. Schedule a call with him at mitchell@bielpartners.com or (469) 256–8673.
