Is Retail Texas’ Strongest Commercial Real Estate Category?

By: Kaitie Moore Underwood | REALTOR®, Blue Collar Commercial Group

The major Texas metropolitan areas of Austin, Dallas-Fort Worth, Houston, and San Antonio share a remarkable achievement: their retail markets are outpacing other commercial real estate categories in terms of supply and demand balance. Despite enduring significant challenges like e-commerce disruptions, the 2008 Financial Crisis, and the pandemic-induced shutdowns of 2020, these markets have learned to adapt and bounce back creatively.

Retail closures and higher vacancy rates were initially consequences of these challenges, but these setbacks led to valuable insights. By embracing the lessons learned from these disruptions, retail operators, commercial brokers, and landlords managed to pivot and achieve balance between supply and demand in Texas’ major metro retail markets.

Comparing retail vacancy rates to other commercial real estate types, such as industrial, office, and multifamily spaces, retail consistently posted lower vacancy rates in Austin, Dallas-Fort Worth, Houston, and San Antonio, even surpassing the robust industrial sector.

Decades of challenges led to retail right-sizing in the major Texas markets, with occupancy rates reaching record highs due to a strategic approach. Conservative volumes of new retail deliveries coupled with the adaptation of brick-and-mortar retailers through personalization and innovations like digital marketing and curbside pickup contributed to this success.

In Austin, the retail market boasts an impressive 96.6% occupancy rate, accompanied by measured new deliveries in 2023. Dallas-Fort Worth’s occupancy rate stands at around 94.5%, and only a limited 700,000 square feet of new retail space is projected to open in 2023. Houston maintains a healthy 95.1% occupancy rate, with modest supply growth. Similarly, San Antonio’s retail market maintains a 94.5% occupancy rate, and new deliveries are expected to be relatively low for 2023.

The stability of these markets is attributed to a healthy leasing velocity of existing spaces, diverse demand from various retail concepts, and a limited trend of new retail construction. The conservative development climate that began in 2018 has elevated existing space to a premium, stabilizing rental rates and promoting rent increases for prime locations.

Despite the evolution of the retail sector, the adage “Retail follows rooftops” remains true. With Texas maintaining a robust residential market and substantial job growth, the future of retail as a strong performer in commercial real estate is promising.

As an investment property, retail stands out due to its intensive management requirements, tenant relations, and marketing efforts. The past 18 months have seen increased interest in retail as an investment, particularly in grocery-anchored and essential retail properties. Texas’ strong economic performance, population growth, positive retail sales, and the equilibrium between supply and demand make retail centers with essential tenancy highly attractive to investors.

Currently, well-located open-air centers with essential tenants are generating significant interest from potential buyers, reflecting a vibrant investment climate. The increasing number of bids for such properties underscores the thriving nature of the Texas retail market, an accomplishment achieved through strategic adaptation and resilience in the face of challenges.

(Source: Herb Weitzman- Executive Chairman, Weitzman. REBusinessOnline)