Amid population and job growth, retailers see the Lone Star State an ideal territory for expansion. But tight conditions and high construction costs are creating challenges.
The economic growth engine that is Texas continues to drive retail demand. With many major markets near full occupancy in urban and mature suburban neighborhoods, developers who launched grocery-anchored and other projects in the Dallas-Fort Worth (DFW) Metroplex as well as in and around Austin and Houston are well-positioned to take advantage of the fast-growing regions.
That’s especially true as the increasing cost of land, financing, labor and construction materials has cooled new construction, which will aggravate the tight conditions for some time. Like other areas of the U.S., that represents quite a turnaround from the earliest days of the pandemic.
“The fundamentals associated with all of the major Texas cities are making retail a very attractive proposition,” says G. Matthew Silvers, a vice president in the Austin office of Project Management Advisors (PMA), a development management firm. “During COVID, retail took it on the chin. But certainly now location-based entertainment and destination retail are having their moment.”
Lucy Billingsley, a partner with Billingsley Company, a developer of mixed-use communities north of the DFW Metroplex, agrees. The company is focused on a number of fast-growing suburbs and typically complements its office and housing developments with restaurants and services.
In addition to other endeavors, Billingsley is close to completing Beacon Square, an 83-acre community in Plano that includes office, apartments and about 23,000 square feet of retail that could grow to double that size, she says. It also is adding 15,000 square feet to the Sound, a retail, entertainment and restaurant district at its 1,000-acre Cypress Waters office and residential endeavor in northwest of Dallas. It is eyeing Denton for its next project.
“The retail environment has been fantastic — occupancy is right at the top and there are not a whole lot of new projects coming online due to the tough financing environment,” she states. “But retailers are coming in from across the country because our economic growth is so dynamic.”
A consistent stream of relocations among corporations as well as families and individuals looking for a business friendly and affordable environment continues to drive growth in the state. In 2022 alone, nearly a half-million people moved to Texas, increasing its population to more than 30 million, according to the U.S. Census Bureau. That’s second only to California. And unlike Florida, another fast-growing state benefitting primarily from domestic migration, Texas’ growth stems from increases across all components of population change — domestic migration, international migration and organic growth.
Meanwhile, the state continues to lead the nation in job creation. In the 12 months ended September 30, employment in the Lone Star State increased by 435,800 positions, a 3.2 percent annual growth rate that outpaced the nation by 1.1 percentage points, according to the Texas Workforce Commission. Among other industries, the state is furthering its efforts to become a life science hub. In November, for example, voters approved a measure to exempt manufacturers of medical and biomedical products from personal property taxes.
Those attributes, along with the elimination of old and obsolete or underperforming retail space during the pandemic, have precipitated average vacancy rates of 4.2 percent in Austin and 6.2 percent in Houston and the DFW Metroplex, according to Cushman & Wakefield’s third quarter 2023 retail report. San Antonio’s average vacancy was 5.1 percent. The national average is 5.4 percent, the brokerage reports.
Texas markets have accounted for 29 percent of new U.S. retail space deliveries through three quarters in 2023, with Houston and Austin ranked first and second in the nation, respectively, and Dallas fifth and San Antonio eighth, according to CBRE’s latest quarterly retail figures report. Despite those completions, new and expanding retailers in some markets are struggling to find space, observers say.
“Quite honestly our challenge is that demand has been very strong all year, and we just don’t have the availability or vacancy, and it’s the same situation for our competitors,” says Lacee Jacobs, a senior managing director for retail leasing with Parkway in Houston. The investment, operations and management firm recently merged with Houston developer Midway. “We’ve heard from a lot of tenant reps that their (property) tour books are getting shorter and shorter,” she adds.
Service Shift Gears
Parkway focuses primarily on Class A urban mixed-use retail, and among other projects, the firm is completing early phases of retail space at East River, a development launched by Midway that includes shops, restaurants and services along with offices and apartments north of downtown Houston on the Buffalo Bayou. Ultimately, the project could offer as much as 100,000 square feet of retail, Jacobs says.
Not only did Parkway see strong demand from restaurants and entertainment users, but services such as boutique fitness firms, dentists and optometrists showed interest early on, which speaks to the limited space opportunities, she suggests. “Those types of services usually come in later — they’re rarely tenants that pre-lease,” Jacobs points out. “But I think there has been a lot of pent-up demand for those services post-COVID.”
Charles Scoville, chief operating officer of grocery-anchored center developer Read King in Houston, has seen similar activity. Urgent care users, national dental clinics and major nail salons have become some of the first tenants to sign up at its Market at Katy Park, a roughly 152,000-square-foot center anchored by HEB west of Houston. The area has transitioned from a town known for its starter homes to one inundated with master planned communities, Scoville says.
The addition of those types of tenants early on also epitomizes the more general changes taking place in community and grocery-anchored centers. “We’re not selling as much stuff,” he observes, “the hardware stores and card shops — even the phone sellers — are becoming fewer. Instead, we’re selling food at fast casual restaurants, personal services like massage and medical and dental, and fitness. They all enjoyed good bumps after COVID, but there’s eventually going to be a limit to that.”
That’s one “yellow light” that Scoville is tracking. Another is the fact that some chains have told him they’re slowing expansions in 2024 and into 2025 due to high construction prices and interest rates. Depending on the project, Scoville estimates, construction prices alone are about double what they were pre-pandemic. A couple of would-be tenants have backed out of commitments recently, he adds.
“They didn’t anticipate construction prices being at the level they’re at today and didn’t have the capital to pay for it,” Scoville says. “And these are fairly sophisticated multi-unit operators, not start-ups.”
Demand for entertainment space remains strong, particularly from food-and-beverage groups focused on bowling, gaming, pickleball and other concepts. In Houston, Levcor recently started a green space expansion and an overhaul of its façade and common areas at its Marq’E entertainment center just west of the I-610 and I-10 interchange, says Sasha Levine, vice president of the development firm.
The company purchased the former enclosed shopping center in 2014 and is putting the finishing touches on a repositioning. A Regal Edwards cinema is finalizing a $20 million remodel, and Levcor has signed a number of tenants, most notably Sloomoo Institute, an experiential concept for kids as well as corporate retreats, and an Electric Gamebox virtual reality venture. Along with a comedy improv, LA Fitness and other entertainment, retail and restaurant tenants, the additions have raised occupancy to about 96 percent, Levine says.
“This project has really evolved into a regional entertainment destination,” she asserts. “After we acquired it, we converted it from an enclosed center that was more or less inward-facing to an open-air project that really took advantage of the visibility along I-10.”
While entertainment retailers are looking to make splash in bigger projects, urban-oriented retailers and restaurants are gravitating toward mixed-use locations that possess a sense of place, says PMA’s Silvers. Those include the Pearl in San Antonio, which continues to evolve with the addition of a 1,000-seat music venue and adjacent outdoor biergarten in early 2024. The Design District and Bishop Arts District in Dallas share similar characteristics, he notes.
In Austin, the East Austin neighborhood that runs along 6th Street east of downtown has become a desired location over the last few years. Mostly local restaurants, shops and entertainment venues pack the community, he says. “There’s really no national presence there, but I expect that to change,” Silvers predicts. “You’ll eventually see rents go up, and only the nationals will be able to afford it.”
That’s what has happened along South Congress Avenue, a longtime retail hub of local businesses that epitomized the longtime sentiment to “keep Austin weird.” But it isn’t as weird anymore, Silver says. Rental rates on South Congress have climbed to around $200 per square foot as national firms seeking space have taken over the corridor, confirms Will Majors, a senior vice president with CBRE’s advisory and transaction services practice in Austin. The average retail rental rate in Austin is $24 per square foot, according to CBRE’s third quarter research.
In November, high-end cosmetics retailer Lip Lab, owned by luxury goods conglomerate LVMH, announced it would open a 1,400 square foot store along the corridor, joining incoming beauty brand Face Foundrie and current tenants Hermes, Alo and Nike. The iconic costume rental shop Lucy in Disguise closed last year after struggling through the pandemic and battling supply chain issues. On, a Swiss sportswear company, is opening a store in the space.
“It’s very much a landlord’s market down there, and it’s a great example of how retail scarcity has driven rental rates through the roof,” Majors says. “A lot of landlords have a Rolodex of probably 10 to 15 tenants who have reached out to them and are waiting for a call.”
New supply may be lacking along built-out South Congress, but Trader Joe’s, Sprouts and HEB have been anchoring new suburban projects that include multifamily, he remarks. Lately, however, that activity has slowed. Communities around Austin in some cases are pursuing public-private partnerships to spark development. In Cedar Park northwest of the city, construction is underway on the Bell District that will include residential, retail and restaurants, offices, greenspace, and a new public library on 50 acres.
“There’s obviously a need for new retail as some of these suburban markets continue to blow up with growth, whether it’s Liberty Hill to the north or Buda and Kyle to the south,” Majors points out. “It’s just a question of whether developers can afford to build given construction costs and land costs. Those are the biggest challenges.”
While retailers and brokers outside of Texas usually home in on the major markets, the Rio Grande River valley happens to be a thriving retail scene in its own right, declares Levine. Levcor’s Pharr Town Center, a 470,000-square-foot shopping center that opened in 2017, includes a Main Event Entertainment center, Academy Sports + Outdoors, Cinemark, TJ Maxx and other concepts. Several of the tenants are some of the best performing units in their respective chains, she adds.
Nearby, Simon Property Group’s 1.3 million-square-foot La Plaza mall was nearly 100 percent leased at the beginning of the year, according to the company’s most recent financial information with occupancy data. Top Golf, Costco Wholesale, and a host of other retailers and restaurants are also in the area.
The South Texas region attracts three distinct customer bases, Levine explains: Local residents, midwestern snowbirds who take advantage of more than 20 golf courses in the area, and Mexican citizens from Monterrey — largely regarded as one of Mexico’s wealthiest cities — who legally cross the McAllen/Hidalgo International Bridge to stay, shop and dine. The different cultural dining habits among the groups alone keep restaurants full at all hours of the day, she says.
“Texans in the commercial real estate business are very familiar with South Texas and the compelling sales volumes that are generated down there,” Levine adds. “But unless you’re familiar with the area, its reputation as a dynamic binational trade area is a well-kept secret. The consumer traffic coming across the bridge every day is astounding.”
— Joe Gose
This article originally appeared in the December 2023 issue of Shopping Center Business magazine.