How Retail Became Texas’ Strongest Commercial Real Estate Category

By Herb Weitzman, executive chairman, Weitzman

The major Texas metro areas of Austin, Dallas-Fort Worth, Houston and San Antonio all share one thing in common: Their retail markets are posting balances of supply and demand that outpace every other major commercial real estate category.

This milestone was not achieved without overcoming significant obstacles. The major Texas retail markets have survived decades of back-to-back challenges, including major market disruptors like e-commerce, the 2008 Financial Crisis that knocked out several major chains and 2020’s pandemic-induced shutdowns.

Herb Weitzman, Weitzman
Herb Weitzman, Weitzman

Each of these significant disruptions and challenges first resulted in store closings and higher vacancy rates. But retail operators as well as commercial brokers and landlords all learned from the setbacks by embracing the lessons of these disruptions to understand how to creatively bounce back stronger.

As a result of the market’s careful pivoting, the retail markets in Texas’ major metros have right-sized and are reporting a yearslong trend of balance in supply and demand.

To illustrate this point, we used the mid-year reports from CoStar Group on the non-retail CRE types.

We compared retail vacancy rates in the four Texas markets to CoStar’s mid-year rates for the industrial, office and multifamily spaces in each of those markets. In each market, retail posted lower vacancy rates, even when compared to the robust industrial sector.

From ‘Armageddon To ‘Right-Sized’
This retail market health has been a long time coming. Overbuilding in the 1980s and, to some extent, the 1990s and into the 2000s meant that supply often outpaced demand, resulting in a norm of vacancy rates of 10 percent or more.

But now retail has right-sized, with occupancy rates in our markets now at or near record highs. This right-sizing has resulted due to a yearslong trend of conservative volumes of new retail deliveries combined with healthy demand from brick-and-mortar retailers that have evolved with personalization and innovations like digital marketing and curbside pickup.

Let’s look at the midyear 2023 standings of our four major Texas markets to understand how an industry that a few years back was told to prepare for ‘Armageddon’ is today as strong as it’s ever been.

Austin
The state capital’s retail market continues to maintain an extremely healthy occupancy level of 96.6 percent, based on a market inventory of approximately 52 million square feet. (Note: Weitzman reviews multi-tenant retail properties with 25,000 square feet or more.)

For the calendar year 2023, new deliveries are on track to total approximately 921,000 square feet. If all of the space opens as planned during 2023, the total would represent the highest level since the market added 1.1 million square feet in 2016 — the last time the market’s deliveries reached or exceeded the 1-million-square-foot mark. Nonetheless, deliveries remain firmly on the conservative side.

Dallas-Fort Worth
The metroplex market shows an occupancy rate of approximately 94.5 percent of its 200-million-square-foot inventory, the highest for this market since 1990. For 2023, we’re projecting that only about 700,000 square feet of new retail space will open during the year, which is close to a record low.

Houston
Houston’s retail market currently has a healthy 95.1 percent occupancy rate, based on Weitzman’s review of retail market inventory of approximately 165.2 million square feet of space. Supply is set to grow by a little more than 1 million square feet this year, a low total for a tight market in a strong economy.

San Antonio
San Antonio’s retail market most recently posted a healthy balance of supply and demand with overall occupancy maintaining its level of 94.5 percent, based on a retail inventory of approximately 48.6 million square feet.

For 2023, the market is on track to see new deliveries total approximately 335,000 square feet, which would be the lowest construction total since 2019, despite the market performing better now in terms of supply and demand.

Reasons for Stability
Healthy leasing velocity of existing space and demand from concepts ranging from restaurants to discount retailers to fitness users continues to backfill market vacancies and lift overall occupancy.

Existing space remains at a premium in part due to the yearslong trend of limited new retail construction that is primarily anchor- or user-driven. Little, if any, speculative product is being added in new projects.

The Texas markets also continue to benefit from the extremely conservative development climate that began in 2018. The limited deliveries continue to elevate existing space to a premium, which is not only keeping rental rates stable but also resulting in noteworthy rent increases for the best-located spaces.

But no matter how much the sector evolves and transforms, one truism still holds: Retail follows rooftops. And since Texas is one of the strongest residential markets in the country, we expect to see the market remain a strong, if not the strongest, performer in commercial real estate for the foreseeable future.

And based on job growth numbers from the Texas Workforce Commission, the housing boom has no end in sight, the state is outpacing the nation with an astonishing 650,000 (!) net new jobs during calendar-year 2022 and more than 540,000 new positions between June 2022 and June 2023.

Investment Impacts
Retail is definitely in its own category as an investment property. It’s an asset-management-intensive product in terms of management, tenant relations, marketing and all the other elements that go into owning and operating a successful center.

Over the past 18 months, our markets have seen increased institutional and individual interest in retail as an investment. The demand for the most part is focused on grocery-anchored and “essential” retail.

What is driving this increased interest is, of course, the fact that our markets are performing better than they have in decades in terms of equilibrium between supply and demand. Add to that equation the fact that the Texas economy is the envy of the nation, the population growth continues in each of our metros and retail sales remain positive, and you have all the makings of an attractive investment.

Right now, each well-located, open-air center with essential tenancy that comes to market is liable to generate a dozen or so bids from potential buyers, based on what we currently see in the market. That’s roughly double the number of bids such properties might have generated four or five years ago.

Sign up to receive the best Underground art & real estate news in your inbox everyday.

We don’t spam! Read our privacy policy for more info.

This post was originally published on this site