DFW Real Estate Review — October 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. 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.
DFW & TEXAS ECONOMY
The slogan “Don’t Mess With Texas” should be changed to “Can’t Mess With Texas.” While the pandemic has ravaged most states, economies, and the country (to a tune of $16 Trillion), Texas, of course, hasn’t been immune, but it has certainly held the line. And there is a good argument to make that Texas, and DFW in particular, actually thrived in this time.
Dallas, and Texas, led and leads the country in employees returning back to work. Renters (Read: people; Read: demand) have been, for the past decade, fleeing pricey coastal MSAs for Sun Belt and Midwest cities, and this migration was only accelerated with the onset of the pandemic. With all major metros — Austin, Houston, San Antonio, and DFW seeing an increase in net absorption, and DFW topping that list—by a wide margin.
While the Outlook for the Texas Economy may not describe the brightest picture, the resounding mantra in that report seems to be “Not good enough” rather than “The Sky is Falling.” Which to me, seems like a pretty good status level to be at considering this is one of, if not the, largest economic contraction in modern history. The truth is fundamentals matter. And the fundamentals are, real estate follows supply and demand. While more real estate can’t be built overnight, certainly people (demand) can relocate to DFW and Texas overnight.
How that all shakes out? My hunch is that it counterbalances the effects (affects?) of the pandemic to a net neutral, my hope is that it outpaces and exceeds the effects of the pandemic. We will have to see.
But some more reasons, I am considering putting my money on the latter:
- In October, after early on the month being hit with “Initial unemployment insurance claims in Texas increased to nearly 42,900 the week ending Oct. 10, reversing a four-week downward trend.” Still — “Initial unemployment insurance claims in Texas decreased to their lowest level since the pandemic hit the economy.” (And remember, four straight weeks of decreasing jobless claims amidst one of the most cataclysmic events in a century. Again…let me repeat the mantra of “just not good enough.”)
- Big D leads nation in big commercial property deals “Forget about New York and Los Angeles — Chicago, too.The hottest commercial real estate investment market in the country in the first half of 2020 was Dallas…For the first time ever, Dallas ranked as the number one U.S. commercial property market at the halfway mark of the year, despite a dip in investment activity.”
- Dallas, TX is named by Forbes as one of the best places to retire in 2020.
Ultimately, I believe the real estate sectors that prove to endure this pandemic mostly unscathed or thrive, are going to see an increase in demand, a raise in prices, and compression in cap rates. Many will believe that the little-to-no movement on prices are due to sellers unwilling to smell the coffee in hopes of that V that is bound to come any minute now. While that does seem to be a factor, Owners are being enabled to keep that belief, due to an increase demand for yield and a decrease in areas to find it. COVID will show that the best days for real estate are ahead of us, not behind us.
INDUSTRIAL
While Industrial has been the sleeping giant for the last decade, it would seem that COVID has officially awaken the beast. The main driver, of course, being the rise in e-commerce, drop shipping, and third-party logistic companies. And even retailers, large and small, are following suit by incorporating online sales into their business models.
Jim Connor threw some stats on the baord for the industrial sector, according to U.S. Department of Commerce Data, e-commerce sales soared a record 44.4 percent in the second quarter of 2020 — more than $1 in every $5 spent came from online orders during the April-June period. And, of course, Dallas is leading the country in warehouse construction and leasing.
However, as bright as the horizon looks for Industrial, the, although small, dark clouds can’t be ignored. In his same interview, Connor stated what everyone looking for industrial acquisitions has been feeling — compressed deal flow. Of course, that is where opportunity lies and I recommend taking at Retail section of this newsletter.
MULTIFAMILY
Most likely the second poster child of a success, following only Industrial and mainly due to government intervention, Multifamily is still proving to be an recession-proof asset class. As the saying goes, “Human basic necessities are food, water, and shelter.” Probably after this pandemic, we will add to that list — Wifi, iPhone, Computer, and a Netflix account. While many were concerned about the eviction moratoriums, that doomsday picture seemed to only play out in the low-B,C, and D product types that market very cheap rents and thus cater to a tenant profile that is, most likely, employed in the job sectors that were hardest hit in this pandemic. NMHC is showing 90%+ in rent collections for the month of October.
On development side there is a major shift for all product types, from dense localities, with rich amenities, and great walkability to spread out, suburban, affordability. If demand for that product will continue, even with the advent of a vaccine/treatment on the horizon is anybody’s guess. However, potential work arrangements continuing with a combination of WFH (That’s Work From Home) and in-office time may continue to feed that trend as people may not need to be conveniently located to their places of work. Then there is the factor of increasing construction costs for wood-frame construction, which dominates low and mid-rise construction (which dominates suburban apartment consturction), which begs the question of affordability for new, suburban product, especially, as rents show a decline in urban locations and with more building types being converted into apartments, how new suburban ground-up development competes will be interesting to watch.
One angle is a trend that has been in the wings for a while, but is now catching wind, especially in DFW, is developing detatched single family rental residences. Whether this is just a trend, or a whole new development style in and of itself, remains to be seen. However, it seems to be the best of both worlds of homeownership (or living, really), but none of the hasstle of homeownership (…or living, really). Giving residents a sense of pride in their living arrangements, more space, bed/bath more accommodating to families — which could justify higher rents. However, as low as interest rates are and prices headed in a favorable direction, many who wouldn’t may consider buying over renting.
OFFICE
While many sectors on this newsletter seem to be getting back on track, booming, or adapting, the office sector seems to still be stuck in obscurity. Most everybody seems unsure about what the pandemic will mean for the office sector. Will tenants need more space for social distancing requirements? Will they work with what they have and have teams rotate days as a way to control densities? (If this is the case, having 30%-40% of the employee base at the office at any one time seems to be the magic number). Or will tenants pull the plug on a traditional office altogether?
Personally, I don’t think the office will go away. However, the road ahead will be a tough one to row. We simply can’t ignore examples like this, this, this, and this. The biggest takeaway is that many industries referenced in those articles are not leaving out of necessity. COVID exposed to certain tenants, like banks and law offices — who have most likely seen an increase in business, a more efficient way to do business. It has yet be known if this is a red herring (anecdotal distraction) or a canary (impending doom).
It isn’t all bad news for the Office sector. According surveys, most companies’ employee base enjoys a mix of work from home and in office time, “Gensler’s [Work From Home] research…only 12% of people want to continue to work from home full-time after the pandemic subsides. Most want to go back to the office full-time, or are looking for a balance between the two. The amount varies by industry. On average, most employees want to work from home two-to-three days or less.” And in a Colliers International Survey, Only 12% of respondents said they would like to work four days or more from home post-lockdown, with 49% saying they would like to limit WFH to a maximum of two days a week when the pandemic has subsided, the survey found.
While Steve Brown thinks Office rents are headed lower because of the pandemic, and part of that may be true, I believe that is only in the short-term. On top of the surveys that are certainly playing out in Dallas, is, again, simply the number of people and companies that are coming here, that will most likely incorporate a combination of WFH and time in office, that can’t be ignored. So while on a national level that may be the case, it may not translate a carbon copy of itself in DFW.
RETAIL
If it is no surprise that Industrial thrived during this time, than it is no surprise that retail has been hit hardest. Many retailers are looking to the holidays as their catch all to carry them through until a vaccine/treatment gets delivered, but the chances of consumers changing behavior from one season to the next seems slim. However, it will be tough to disrupt the need to go to a restaurant for a meal or spend time with family and friend on experiences, experiential retail seems here to stay.
However, none of this has stopped retail from shifting like the earth’s crust under our feet and taking on an entirely different identity. That which seemed to make retail meet its maker, may end up being its next big opportunity. With last-mile delivery and presenting a whole new array of challenges, but also the avialibility of last-mile distribution is slim to none in most major cities. As mentioned above, with deal flow, cap rates, and returns being more and more compressed in the industrial sector, will that cause industrial operators and buyers to look at other possibilities to fill the void? Seems plausible. Most major retail shopping centers, like regional malls, are in great transit locations with dense populations and, potentially, soon to be available at a steep enough discount to justify the cost of retrofitting the finish out. JC Penny is a prime example. JC Penny was worth very little as a department store as few to no buyers emerging, but from a real estate standpoint JC Penny had a ton of value. Now what these two real estate operators will do, one being a large mall operator and the other being well versed in an array of real estate sectors, has yet to be known, but well worth the wait to watch and see.
See You Next Month,
Mitchell
Mitchell Presas is a real estate broker in DFW specializing in Industrial, Multifamily, and Land. He helps clients bring the highest level of exposure to every active buyer on the market for their product and identify off-market acquisition opportunities. Schedule a call with him at mitchell@bielpartners.com or (469) 256–8673.
