Why Texas Retail CRE is a Smart Investment in 2023

BY BRANDI SMITH

Retail commercial real estate in Texas has been a top performer over the years, with an influx of population growth, high job growth and businessfriendly policies. Dallas, Austin and Houston have been experiencing robust economic growth, which has fueled an increase in demand for retail real estate. These cities have become the focus of major retailers and investors due to their favorable business environment, diverse population and strong demographics.

According to a report by JLL, the Texas retail market is thriving, with strong demand from investors and retailers alike. The report shows that the retail market in Texas saw an 8.4 percent increase in investment sales volume in 2020, with a total of $4.2 billion invested in the state's retail properties.

That doesn’t mean it’s been an easy road. The past few years have generated obstacles – some predicted, some unforeseen – for retail and its investors.

One of the most significant challenges facing retail investors is the rise of e-commerce, which has accelerated due to the pandemic. Online shopping has impacted brick-and-mortar retailers, leading to store closures and bankruptcies for companies that aren’t able to adapt.

The pandemic has also caused disruptions in supply chains, making it challenging for retailers to keep up with inventory demands. As a result, some retailers have been reluctant to sign new leases or renew existing ones, leading to an increase in vacancies in some markets.

Another challenge facing retail investors is the uncertainty around the future of work. As remote work becomes more prevalent, the demand for office space may decrease, leading to a domino-effect decrease in foot traffic to retail properties in urban areas.

Dr. Daniel Oney, Research Director at The Texas A&M University Texas Real Estate Research Center, expects high interest rates will continue to be a hindrance. Still, he believes Texas markets will perform better than the rest of the nation, including the retail sector, which has been in a state of recovery over the past few years. The primary reason is population growth.

“The growth that these markets have been seeing has mostly been growth out of their suburbs. In Dallas-Fort Worth, it’s Collin and Denton counties. In Houston, it’s the north and south side of the market. Austins’ growing in most directions,” Dr. Oney elaborated. “That population growth, along with the job growth and the income growth that comes with it, is what’s holding up these retail markets.”

According to the research center’s 2023 outlook, “Texas employment growth on a year-over-year basis continues to outpace expectations and long-term trends across industries and in the big four Metropolitan Statistical Areas (MSAs).” And as a result, all three major Texas markets have seen significant construction activity. In addition, there has been a resurgence in interest in reinvesting in shopping malls, with many being converted to new retail models, as REDnews has documented in previous articles.

“People are out, they're out shopping. It's not just online. They're interested in getting back into stores,” said Dr. Oney.

While interest rates may slow things down, Dr. Oney believes that these markets should still perform well unless there is a significant recession. This suggests that investors should keep a close eye on the Texas markets, particularly in the retail sector, as they may offer some unique opportunities for those looking to invest in commercial real estate.