Retail is big in Texas.
The four metros in the Texas Triangle — Austin, Dallas-Fort Worth, Houston and San Antonio — accounted for 20 percent of the nation’s net retail absorption last year. The average retail vacancy rate in Texas has dropped to 4.7 percent after adding 34 million square feet of net space during that period, chain era The report said.
Citing Marcus & Millichap’s second-quarter retail real estate report, the outlet said the state’s retail market growth isn’t expected to slow down anytime soon, considering the Texas Triangle is expected to add 1.4 million residents over the next five years.
As retail companies attract investors, major players in Texas have taken notice. Crow Holdings launched a $2.8 billion fund in May to invest in “small, convenience-sized, open-air food and service malls.”
CEO Michael Levy said the company took note when the coronavirus pandemic did less damage to the brick-and-mortar retail space than expected real deal in an interview last month.
“Everyone hates retail, right? It’s been the scapegoat for real estate for a long time, and now offices are,” Levy said. “When your asset class is out of favor, go back to contrarian investing.”
Some large investors are avoiding retail centers because of limited returns and the complexity of dealing with multiple tenants, he said. But for Crow, the typical neighborhood mall with tenants like Starbucks, Jersey Mike’s, and Home Depot-owned laundromats has become a long-term value-add business thanks to its continued growth numbers.
“We found that from an institutional asset management standpoint, we were able to increase rents based on occupancy,” Levy said. Example: If a national retail or restaurant chain has a track record of paying $28 per square foot on time for the past seven years, the rent can increase to $32 per square foot when it comes time to re-sign the lease. Crow Holdings is likely the largest owner of this retail asset class in the country, Levy said.
“We are now some of the larger landlords for these operators, and we just know what they can pay and are willing to pay. So we’ve been able to drive double-digit rent growth even when the space is full,” he said. “The added value is not in the development, but in the lease extension.”
Austin led the state in retail rent prices at $25 per square foot, followed by Houston at $20 per square foot. Average prices in both Dallas-Fort Worth and San Antonio are around $19 per square foot, according to Marcus & Millichap.
Austin also has the highest vacancy rate in the state at 3.5%, compared with 4% in San Antonio, 5.2% at DFW and 5.7% in Houston. Austin is expected to deliver nearly 2 million square feet of retail buildings by the end of the year, while Houston and DFW should deliver nearly 3.5 million square feet each.
For DFW, the numbers are especially huge as 2022 retail deliveries hit a record low with 538,000 square feet of new space added. Most new construction will be grocery store tenants as they consistently generate the greatest demand due to foot traffic.