After much of the national economy came to an abrupt halt at the beginning of the pandemic last year, Texan leaders were initiating plans to start reopening the state as early as May 2020. Then on March 2 of this year, Governor Greg Abbott signed a sweeping executive order that rolled back virtually all restrictions and superseded federal guidelines about business reopenings and best practices.
And while there was some ebb and flow to the ongoing challenges for retail throughout last summer and autumn, commercial real estate professionals in major Texas cities, including Austin, Dallas, and Houston, cite the state’s early reopening as one major reason why the retail landscape has been able to bounce back rather quickly.
But there’s more to the story as each city has different landscape and retail demands. Texas cities were affected just like others across the nation, but there’s a perfect storm of pent up consumer demand, investor interest, population growth and a general business-friendly sentiment that is brewing and lifting Texan retail to new heights.
Houston
After some bumps during the early months of the pandemic, the state’s largest city is back to business as usual, says Mark Raines and Simmi Jaggi, both managing directors with JLL in Houston.
“As things unfolded, it wasn’t good, but it wasn’t as bad as everyone thought it was going to be,” Raines says of the city’s initial reaction to the pandemic. “The state’s allowed everyone to reopen their doors and come back to maximum capacity and many employers have invited their employees back to the office, so everyone’s back to business whether it’s signing a lease or buying land.”
Raines adds that many investors are moving forward with plans that were put on hold during the pandemic and retail brokers are “as busy as we’ve ever been.”
While the pandemic had an impact on downtown restaurants and retail, there was an opposite effect on recreational-related businesses and home improvement retailers, say Raines and Jaggi.
“You look at Houston, I think everyone has a new pool,” Jaggi said, commenting on the huge demand and interest in both home improvement and having more recreational spaces due to the isolating effect of the pandemic.
And with so much demand for housing in the Houston area, there’s a big opportunity for investors to get on the ground floor with new subdivisions that are in various phases of planning and construction.
“The impact on retail will be positive in the sense that there are going to be a lot of new communities that have no retail serving them,” Jaggi says of the ongoing construction of homes throughout the Houston metro. “So there’ll be pent up demand for strip centers with hair and nail salons, gas stations, drug stores, and all of the other retail that is going to be needed.”
Jaggi cites the number of Californians moving to Texas as just one catalyst for growth. But it’s not just the people coming to Texas to California, there’s also institutional investors.
Robbie Kilcrease and Matthew Berry of CBRE also see the area making a big comeback and more investor dollars pouring into Houston.
“The last 30-60 days have been extremely busy,” says Berry of the state’s reopening, and the subsequent activity in the retail space. “We’re seeing pricing on the investment/sales side at better pricing than I’ve ever seen in my entire career, so capital is seeking out opportunities in the retail space and when they see assets that check the boxes, they are going after those opportunities.”
Professionals in the commercial space have been so busy in Houston, that Berry believes that 2021 “could be the largest transaction volume that we’ve seen historically.”
And while the pandemic generally had a greater impact on denser urban cores, it may be too early to count out downtown Houston, says Klicrease, as the pandemic has created new opportunities for investors.
“Obviously with the pandemic shutting down bars and restaurants, people couldn’t pay their rent, so we certainly saw occupancy drop inside the loop, but as time progressed, we saw the suburban markets start to flourish,” Kilcrease says of the regional impact of the pandemic. “And now we see people trying to get back to the infill markets inside the Beltway and basically pick up where they left off.”
Dallas
There are certainly some traits that the greater Dallas-Fort Worth area share with Houston, but not entirely cut from the same cloth, says Jennifer Pierson, managing partner with Strive.
“We don’t have a living population downtown, so it’s not like we had density where everyone freaked out and moved out to the suburbs to get breathing room during COVID,” says Pierson. That didn’t happen here.”
The Dallas area is incredibly spread out, Pierson notes, with seven and a half million residents living over 9,500 square miles. Because of the way the Dallas area has developed over the years, there wasn’t one pocket that saw a greater impact from pandemic closures than others, Pierson adds.
However, Dallas residents who started working from home sought to take advantage of it in a similar way as those in Houston.
“Here, because everyone could work remote, lake house sales spiked, boat sales spiked, I think everyone was saying, well if I can work anywhere and don’t have to go to the office, let’s enjoy where we are,” Pierson said of the trend.
But despite the permanent restaurant closures that did happen in the area, it’s safe to say that Dallas is already bouncing back and will continue to see more development and investment as the region grows.
“It’s almost like we’re the safe haven from COVID because we have so much urban sprawl and we’re the safe haven from a financial perspective because we have no state income tax and we’re a very business friendly city,” Pierson says. “So people are moving here in droves.”
And the numbers back it up, according to Herb Weitzman, executive chairman of Weitzman in Dallas.
“We’re seeing transaction volume increase nearly 40 percent compared to this time during 2020,” Weitzman said. “With the vaccine being rolled out, we expect that by the third or fourth quarter of 2021, our retail market will recover in terms of traffic levels as shoppers again feel safe at retail and entertainment destinations.”
While there were some big closures of anchor stores during the pandemic, over retail occupancy has remained not only stable, but relatively strong throughout this last year.
“The Dallas-Fort Worth retail market saw vacancy jump by 4 million square feet during the past year, based on a retail inventory of 200 million square feet,” Weitzman says. “But despite anchor closings, largely from department stores, and a number of smaller tenant failures, the market reported occupancy in the healthy range of 92 percent. This occupancy, even with the pandemic, is higher than the market experienced during the high-construction decade of the 1990s.”
The ‘90s were noted for being a period of economic stability and growth and also an era before e-commerce began making a major impact on brick and mortar sales. Even still, Weitzman notes that “during that entire decade, occupancy never reached the 90-percent level.”
Austin
The Texas capital city has been experiencing tremendous growth in the last decade, thanks largely in part to its reputation for its music and nightlife scene and tech interet spurred from the South by Southwest conference series.
And just like Houston and Dallas, commercial brokers have been busy in Austin as the pandemic’s grip has almost entirely loosened over the state’s economy, say John Heffington and Brad Bailey of CBRE.
“From the second half of last year, we started to rebound and then with the announcement of Tesla and other things going on, we’ve seen a huge influx of capital both from residential and businesses flock here and I would tell you in the last two months our office investment sales and tenant retail leasing teams are incredibly busy,” says Bailey. “I’m having to work 7 days a week to keep up and even then, I’m falling behind.”
Attitudes towards Austin haven’t changed because of the pandemic either. If anything, it’s even more crucial that national-level retailers and investors continue to push for a presence in the market.
“With a Texas expansion strategy, Austin usually came third after Houston, and Dallas,” says Heffinton. “But we’re finding now for many brands that Austin is the one they want to be at first, more to build brand equity than any other reason.”
But one of the challenges Austin retail will continue to face is the lack of inventory. Despite how much the city has grown in the last decade, it’s still a relatively small city compared to the sprawling metropolises of Dallas or Houston.
“Even though we’re comparatively looked at like a Houston or Dallas, we’re still a small market,” says Bailey. “You can drive our market and see all the good spots in 3-4 hours tops and be done, whereas you go to Houston or Dallas, you’re going a full day or day and a half looking at different things.”
Because there isn’t as much selection and higher competition for the best retail locations, this trend is pushing retail retail rates higher for the better quality assets, Bailey adds. And for larger, institutionally backed retailers, it complicates things further as some companies will aim to have a minimum of three or four locations when initiating an expansion strategy into Austin.
This story also appears in the May 2021 issue of REDnews.
