Dallas Unanchored Strip Centers

The Dallas area : The narrative surrounding brick-and-mortar retail can be bleak, filled with images of vacant malls and struggling national chains. However, a closer look at the Dallas-Fort Worth metroplex reveals a surprising story: unanchored strip centers, those humble clusters of shops often lacking a major tenant, are not only surviving but thriving. This resilience invites a deeper examination, uncovering a compelling investment opportunity for those seeking stability and diversification in a dynamic market.

For years, the conversation has focused on the struggles of traditional shopping malls. But data from CoStar Group paints a different picture for Dallas. The metroplex boasts a recordbreaking 95% occupancy rate for retail space in 2023, with unanchored strip centers leading the charge. This low vacancy translates to strong bargaining power for landlords and the potential for rising rental rates – a significant advantage in today's real estate market where rental growth in other property types is stagnating.

This success goes beyond high occupancy rates. Green Street, a leading commercial real estate research firm, highlights a "right-sizing" trend in Dallas retail. Investors and tenants are strategically shifting away from sprawling malls towards smaller, community-focused centers.

These centers typically range in size from 7,500 to 50,000 square feet and cater to the evolving needs of Dallas residents who increasingly value convenient, walkable shopping experiences. These centers provide a curated mix of service-oriented businesses, local shops, and fitness concepts, fostering a well-rounded shopping experience that attracts a broader customer base.

Market cycles are a constant concern for investors. However, data from CBRE paints a reassuring picture for Dallas unanchored strip centers. While demand for space remains high, new construction isn't outpacing absorption. Existing assets are frequently available at prices well below replacement cost, limiting the incentive to develop new properties. This balanced market, characterized by limited speculative development, helps maintain the low vacancy rate and minimizes downward pressure on rental rates.

Experts like SRS Real Estate Partners, a national retail brokerage firm, point to the unique opportunity presented by these unanchored properties. Traditionally, investors have sought retail centers anchored by national credit tenants. However, Dallas-based SRS is bullish on the potential of unanchored centers filled with local tenants and small businesses. They reason that these centers offer several advantages, including lower rents and greater flexibility for tenants, fostering a more vibrant and resilient shopping experience.

Beyond the positive market dynamics, the strength of the investment thesis for Dallas unanchored strip centers lies in their tenant mix. Unlike their mall counterparts, these centers are not solely reliant on large national chains, many of whom are vulnerable to the evergrowing threat of e-commerce. Instead, they are purposefully curated with a focus on internetresistant businesses. This includes service-oriented businesses like hair salons, dry cleaners, and local restaurants.

These tenants not only provide essential services to the surrounding community but are also less susceptible to online competition. Additionally, the presence of local shops and fitness concepts further strengthens the appeal of these centers, creating a onestop destination for residents and fostering a strong sense of community. Despite strong fundamentals, market cap rates for these properties are among the highest of any property type, providing a steady high-yield stream of rental income with a lower risk profile compared to traditional retail investments.

The retail environment isn't the only factor at play. Dallas itself boasts strong underlying demographics that favor unanchored strip centers. According to the U.S. Census Bureau, the Dallas-Fort Worth metroplex has experienced a population boom, growing by an impressive ~20% between 2010 and 2020. This trend is expected to continue, with some projectionssuggesting a population exceeding 8.5 million by 2028. This growing population translates to a larger customer base for strip centers, ensuring their long-term viability.

Further, the Dallas economy is experiencing steady growth. The Bureau of Labor Statistics reports that the Dallas-Fort Worth area added 139,700 jobs between 2022 and 2023, the largest net employment increase of any US metro, with an unemployment rate consistently below the national average. This translates to increased consumer spending, further fueling the demand for convenient retail options offered by strip centers.

The success story of Dallas unanchored strip centers reminds us that sometimes the most overlooked assets present opportunities lying just below the surface. By digging deeper and looking beyond the initial narrative, investors can uncover surprising pockets of strength and potential for outperformance. In the ever-evolving retail landscape, Dallas unanchored strip centers offer a strategic investment opportunity, providing stability, diversification, and the potential for attractive returns, all backed by strong underlying demographic trends in a thriving metropolis.