real estate

Not Just Residential: Commercial Real Estate Is Booming, Too

Demand is driving up costs from rent to construction.

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The real estate market is hot in North Texas.

But it's not just housing – experts say the frenzy we’re seeing in homebuying is happening in commercial real estate, too.

The demand is driving up costs from rent to construction.

“Prices are now at all-time highs,” said Chris Dharod, president of Dallas-based SSCP Management. “There’s a lot of money from other cities coming here because they want to own DFW real estate. For a long time, people wanted to buy California real estate. It’s now Texas real estate that they want to own."

His company owns several shopping centers, apartment buildings and other real estate holdings, so Dharod has been able to observe the ever-changing market as the pandemic has unfolded over the last 18 months.

He said before COVID-19 disrupted the economy, the market was much more predictable and stable.

"At the start of the pandemic, a lot of businesses sort of slowed down and completely froze any growth that they were going through. They stopped building restaurants, they stopped moving offices, and building offices," he said. “Since then, companies in most industries have picked back up and prices are now at all-time highs."

Now, commercial properties are selling well over asking price in many cases.

“Prices are way up and it’s pretty surprising how expensive real estate has gotten, especially in a market like DFW," said Dharod. “There’s real estate right now where a buyer is putting down a significant amount of the purchase price on day one. I never saw that before the pandemic started."

Certain segments of commercial real estate such as warehouse/industrial are booming right now, as e-commerce and online shopping has skyrocketed during the pandemic.

According to the Dallas Morning News, local developer Holt Lunsford Commercial just sold five industrial park properties around the Dallas-Fort Worth area to one realty group based in Boston.

Businesses are snatching up warehouse space and some are having to wait one to two years to get it in parts of North Texas.

With inflation driving up the costs of commodities and demand sending property values through the roof, local business owners are having to get creative to stay afloat.

"Demand is up and buyers have to be much more aggressive to be able to acquire the property they’re looking to acquire," said Dharod. “We’re lucky we’re in such a hot market in DFW where there is a lot of growth, there’s a lot of very well capitalized and qualified developers who are taking properties and taking them to a different level."

Dharod said single-pad retail sites are getting incredibly expensive and hard to find. Raw land and tear-downs are also in hot demand. On the other end, demand for shopping center space is comparable to two years ago.

When it comes to office space, Dharod said demand in DFW hasn't changed much from before the pandemic. However, some spaces are charging more for rent on lease renewals.

"I think companies are going to use office space a little differently than they used to. There may be more flex space where folks can work from home one, two or three days a week and they’re only in the office once in a while," he said.

Overall, rising costs and high demand are passing the burden down to businesses who are leasing spaces, buying property, or just trying to cover general business operating costs that continue to increase.

“A lot of these real estate owners are preparing for inflation. The other thing that’s happened is I think that there’s a number of businesses that have a lot of money,” Dharod further explained. "They’re ready to spend that money and grow their businesses. So when you put those two factors together – businesses that have money to spend and real estate owners who know they can ask for more in rent when demand is up, that’s what creating an increase in rents and in real estate prices."

The National Association of Realtors created a list of the top 10 commercial office markets of 2021. Half the markets are in Texas and Florida.

Dharod said high demand will be here to stay for a while.

"I think the big thing is the last 18 months we’ve had a ton of change and I think that level of how quickly things are changing is going to continue for the foreseeable future," he said. “We’re going to see companies that are going to need to continue to adapt very quickly to survive over the next 12 to 18 months."

Adapting to Survive

The inflation, which is expected to last well into 2022, is making it more expensive than ever to run a business.

It’s especially tough for those in the restaurant industry, which are bracing for difficult days ahead.

The latest data from the Texas Restaurant Association showed some eye-opening results of a survey of businesses across the state:

  • 96% are paying more for food
  • 64% are paying more for occupancy or rent
  • 91% have much higher labor costs

No business seems to be immune to the struggle, which something that Maple Leaf Diner in Dallas can attest to.

“It’s been a wild ride of constant changes to ensure survival at this point,” said owner Mike Delaurier, who has grown the popular eatery for the last six years at its location on Preston Road.

After a rough 2020, this year has brought back the crowds of brunch customers and regular traffic the diner was used to seeing.

"I think it’s good, it’s definitely coming back. Which is helpful because of the costs coming up," said Delaurier. “Without all of these huge amounts of people, it would be probably disastrous if our volume was a lot lower."

Mike Delaurier, owner of Maple Leaf Diner in Dallas.

Those increasing costs to run the restaurant, such as food and supplies, are yet another curveball in what has been a challenging 18 months.

“Our shortening that we used to fry our foods, I used to pay $17 for a jug. It’s 42 now. So we’re not talking small increases. It’s over double price and that’s just for the product to fry my foods, that’s not the actual food,” he said. “Food costs are just getting astronomical. Not only the cost, but it’s hard to get things. We spent probably an extra 10 hours this week driving around the city trying to get our products that we needed to serve.”

Recently, the TRA shared the latest information about wholesale food costs:

  • One year ago, a beef tenderloin cost a restaurant $100; today it’s $200.
  • Cooking oil was $20 for five gallons, but now it’s $40.
  • Chicken, which is very hard to come by, has gone from $3 a pound to $6 a pound.
  • Flour is up 30%.
  • Pork is up 27%.
  • Eggs are now up 40%.

“Making matters worse, the Delta variant depressed sales considerably in dining rooms. 91% of our operators have confirmed that they saw a decrease in traffic for dine-in," said Emily Williams Knight, president and CEO of the TRA, during a press conference this month.

The cost of food and ingredients is adding more stress to the plates of local businesses.

Delaurier said he’s pivoted as much as he can to make up for pandemic losses.

“This whole pandemic is basically a battle of attrition. It’s being able to deal with the things that come with you and pivot," he said.

Some businesses have even had to adjust the cost of their products or menus to cover the increasing costs.

"For me, a diner means value and not super expensive. So I’m really battling with those charges to try to keep those prices low without affecting quality. Because that’s a big thing for me," said Delaurier. "I know there’s some places that change different things, change different items and products to make it inexpensive, but for me, I stand by the quality."

Luckily, Delaurier was able to negotiate his lease renewal for a good rent rate when it was up in 2020. But other businesses might not be as lucky now as rent increases enter the double digits this year compared to last and costs continue to stay at record levels.

Either way, the TRA said businesses are banking on the upcoming holiday season to bring in more revenue and hopefully a little more relief.

"The holiday season is a critical season even in a good year for most restaurants, so our number one message to the public today is to please, please dine out," Knight said. "Please buy a gift card from a restaurant.”

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