Real Estate Forum - October 2011

NEWS FRONT
Highway Widening Could Spur Interest in Colleyville

COLLEYVILLE, TX—Anyone driving through this town of 22,550 people would believe it to be little more than a bedroom community in northeast Tarrant County, 12 miles north of Dallas-Fort Worth International Airport. But thanks to the impending widening of State Highway 26, Colleyville could lose its sleepy status in the next few years.

According to economic development director Marty Wieder, the city surveyed its citizens less than two years ago. “The bottom line was, while the citizens are pleased with the quality of life in this community, they’d like to see us do more when it comes to restaurants and retail,” he explains. The end result has been a plan encompassing economic development, marketing and diversification of revenue sources.

All of that hinges on SH- 26’s widening. The good news for Colleyville is that, after years of will-it, won’t-it speculation, funding has been approved and work is scheduled to begin in early 2012. The plan is to expand SH- 26 into a six-lane, divided highway, and at least one commercial real estate executive is happy about that.

“The main commercial core is Highway 26, and there’s always been uncertainty from investors, developers and users over what the future of that highway would be,” says Jimmy Archie, managing director of Dallas-based Realty Capital. Archie’s company is developing a variety of projects in Colleyville, including Meadows Creek Plaza, which includes approximately 25,000 square feet of office.

Though Colleyville isn’t an area with an abundance of land, opportunities can be found in redeveloping existing properties. In one situation, Realty Capital bought an old dentist office and sports bar on SH- 26 that Archie describes as “an eyesore,” tore it down and redeveloped it into a mixed-use project with 30 condo units and more than 12,000 square feet of retail. This got rid of the eyesore and gave Realty Capital a project with decent cash flow.

Wieder suggests that, as construction begins on SH- 26, there will be more redevelopment opportunities along what he dubbed “the commercial spine of the city.” With the main road finally set to get bigger, Wieder is optimistic about where Colleyville might end up.—Amy Wolff Sorter

Phoenix Retail Market Looks Forward

Phoenix retail big-box vacancy appears to be turning in the right direction. National and local bankruptcies hit the Phoenix market particularly hard, but several trends are already beginning to have a positive impact, giving rise to guarded optimism in the marketplace. With major challenges behind, Phoenix retail is working its way out of the box.

Following the financial meltdown in 2008, the national bankruptcies of Circuit City, Linens ‘N Things and Mervyn’s Department Stores contributed heavily to Phoenix’s big-box vacancy. The bankruptcy filing and restructuring of hometown grocer Basha’s/Food City and the more recent collapse of Borders Books added to the supply of available space. This resulted in a dramatic increase in inventory from seven million square feet in 2008 to nearly nine million square feet today.

Yet the rate of store closures and bankruptcy filings appears to be slowing. With virtually no speculative development in the pipeline, the market’s underlying fundamentals are turning the corner toward stabilization. New retailers are entering the region for the first time in several years. WinCo Foods and Hobby Lobby have acquired former Costco, Wal-Mart and Mervyn’s locations, many of which have been vacant for years because of their large footprints and the difficulty and expense of demolishing and renovating the spaces.

Additionally, numerous retail buildings are being repurposed for non-retail uses such as universities, charter schools and medical complexes, to name a few. These non-traditional retail users have used this downturn to grow their businesses, helping to reverse vacancy rates.

The relentless downward pressure on rental rates—in most

By Dave Cheatham

cases between 30% and 40%—has allowed national retailers to
grow market share and local retailers to drastically improve the
quality of their real estate locations at rents unachievable before
2009. Phoenix-based Mega Furniture has acquired numerous
sites in high-exposure regional locations. Mega co-owner Saleem
Aly says, “Landlords have become much more aggressive in
finalizing transactions with quality retailers.”
Finally, one of the unique things taking place in several cities
is the demolition of large boxes and re-zoning to accommodate
multifamily residential. The owners of Lake County Village, a
47-acre shopping center near Baseline and Rural Roads in
Tempe, AZ have re-zoned and demolished a majority of the
property for a future apartment community.

For the past few years, the product type of choice for REITs and institutional investors has shifted to neighborhood grocery-anchored shopping centers. Ironically in Phoenix, this investment class has been the hardest hit. Of the 255 big-box vacancies, 62% are located in these neighborhood shopping centers. They are concentrated primarily in the retail submarkets of Phoenix and Mesa.

Looking forward, the most challenging segment will be the mid-size boxes, from 30,000 to 60,000 square feet, located in neighborhood centers. These locations will continue to struggle due to the consolidation of the supermarket industry. While some of these spaces will be absorbed by value retailers, dollar stores, health clubs and others, the supply of vacant space will continue to exceed demand and keep leasing rates relatively low by historical standards.

Dave Cheatham is managing principal of Velocity Retail Group in Phoenix. He may be contacted at dave.cheatham@velocityretail.com. Darren Pitts, EVP and principal, contributed to this column. He may be contacted at darren.pitts@ velocityretail.com. The views expressed here are the authors’ own.