Page Contents
Retail | 2022 Market Overview
The United States’ retail market saw healthy expansion in 2022, with sales volume reaching $102 billion and over 80,000 transactions closing, pushing investors to continue planting capital in this sector. The historical average for retail sales across the country is $54.3 billion and the record-high is 111.4 billion. 2022 saw a near-record high value due to the cost of goods going up, rent increases, and developers expanding. In the third quarter of 2022, $23 billion of retail properties traded hands, which is approximately 4.5 percent higher than the year prior. As inflation continues to rise, landlords are asking more for rents, increasing year-over-year rent costs by 3.9 percent, the fastest increase in one singular year in over a decade. On top of that, average triple net asking rents are sitting at $24 per square foot, a new high. New retail construction is limited which has transitioned to more adaptive reuse occurring in the sector, which a majority of construction being single-tenant build-to-suit. Overall, the retail market is healthy, despite rising inflation and economic uncertainty.
Market Outlook
The future of the retail sector in commercial real estate is anticipated to thrive in certain areas, such as grocers, discount stores, restaurants, big-box retailers, and strip centers. However, as inflation rises, investors are pivoting how they are planting capital in retail and where they are choosing to do so.
Top-performing retail markets include Los Angeles, Nashville, Fort Lauderdale, Austin, Atlanta, and Phoenix. Overall, commercial retail transaction volume reached $3.5 billion for transactions $2.5 million and above in 2022, according to RCA, with 82,964 total transactions.
The future of the retail sector in commercial real estate is anticipated to thrive in certain areas, such as grocers, discount stores, restaurants, big-box retailers, and strip centers.
Rents/Vacancy
Retail rent growth has been strong nominally, up by 3.9 percent year-over-year. The South and Southwest regions have seen rents increase substantially, in some cases by 10 percent or more. According to CoStar, retail rents will grow by 3.3 percent in 2023, which is approximately 90 bps lower than the forecast for the end of 2022, which sits at 4.2 percent. Vacancy in the retail market is at 4.3 percent, reflecting availabilities in malls, which is higher than pre-pandemic levels at a 6.9 percent vacancy rate. Additionally, shopping centers rated three-star and below are struggling to find retailers to fill available space. However, investors have sparked interest in mixed-use facilities and neighborhood centers, which are at a historic low in vacancy nationwide. Well-located power centers anchored by top-performing retailers are an additional top-performer with over $8.5 billion trading hands in the first 10 months of the year. Markets seeing the most action include Las Vegas, San Diego, Denver, and Houston.
Construction
Retail construction has fundamentally balanced, decreasing development activity nationwide, with annual deliveries sitting at 46.2 million square feet, the lowest annual total on record. The concern of over-supply in the sector provoked investors to proceed with caution, focusing mainly on smaller freestanding properties, build-to-suit, and adaptive reuse. 85 percent of new retail deliveries were pre-leased this year, which is a direct reflection of investor precaution. New retail construction decreases can be attributed to longer timelines stemming from supply chain shortages. There is currently 64.2 million square feet of retail space underway across the country, with most new developments being in Florida and Texas submarkets including, Fort Lauderdale, Tampa, Dallas, and Austin.
Properties under construction mostly consist of freestanding general retail properties that are already preleased to national tenants.
Sales
Total retail property sales during the third quarter of 2022 totaled over $23 billion, according to CoStar. Retail sales have slowed down since May 2022, which can be attributed to rising interest rates across the country. General retail sales have declined 27 percent quarter-over-quarter in the third quarter of 2022, the lowest total recorded since Q1 2021. However, despite the decline in overall sales, properties such as neighborhood centers have been performing very well throughout the year, seeing $6.2 billion in sales in Q3 2022 alone, and $26.5 billion year-to-date. Pricing per square foot pushed even higher in the first half of 2022, at $237 per square foot, before falling to $220 in Q3 2022. Although there is a present decline, average transaction pricing remains eight percent higher on a year-over-year basis and 16 percent higher than pre-pandemic levels.
Trends
Investors and developers are accepting the uncertainty of rising interest rates, causing them to pivot and rework properties under construction. For example, a hot trend in CRE is mixed-use retail spaces located on the ground floor of multifamily buildings. The new wave of consumers prioritizes experiences, like going to the gym, going shopping, and trying new restaurants. They do not want to live in secluded apartment buildings, which is why many new developments are placing retail spaces within their buildings to bring in the new-age consumer. Another retail trend anticipated in 2023 is more discount retailers popping up around the country, as the price of necessity items increase, buyers seek a more affordable alternative.
Texas Retail Market Recap
The retail sector faced headwinds as new challenges came with the global pandemic. Just as specific commercial real estate industries thrived coming out of COVID-19, so did certain markets. Located within the booming Sunbelt region, Texas has welcomed corporate relocations, new residents, and growing employment opportunities. Even during the economic disruption, Texas employment and population growth did not stagnate, allowing developers to continue pushing forward. The state holds some of the strongest retail markets in the nation, as investors continue to target Texas for its low business costs, pro-business policies, tax-friendly climate, high quality of life, and plentiful land for growth. The state’s economic development prioritizes citizens’ benefits when businesses relocate to its cities, bringing in more jobs and a more extensive tax base. Additionally, Texas city governments work with companies to speed up entitlements and zoning approvals to bring growing businesses that contribute to the economy.
Overall, the state of Texas has reported pent-up demand, resulting in elevated leasing activity, net absorption, and rent growth. The four largest metros in the Lone Star State, Austin, Dallas-Fort Worth (DFW), Houston, and San Antonio, hold more than two-thirds of the state’s population and see gradual compressions in retail vacancies. Occupancies in major markets Houston, Austin, San Antonio, and DFW are above 94 percent. San Antonio has the most undersized construction pipeline, with 706,021 square feet in development, followed by Austin, with 1,432,338 square feet underway. In comparison, Houston and DFW both encompass more than three million square feet in the pipeline. Substantial population and economic growth in each market will keep the retail segment on a firm footing.
Two projects in Texas, one in Dallas and the other in Houston, received CoStar Impact Awards for their successful conversion from Sears department stores into new uses. The former Sears in South Dallas will soon host two outpatient medical facilities for a total of 150,000 square feet. Though Dallas is home to dozens of hospitals, this will be one of the two hospitals located south of Interstate 30 and be accompanied by apartments, offices, and entertainment. The other location in Houston was redeveloped into The Ion, a $120 million, 226,000 square-foot “innovative hub” with office space, prototyping labs, and other amenities. Tenants include Chevron Technology Ventures and Microsoft.
Interested in buying, selling or investing in retail property in Texas? Visit Lumicre’s Retail and Alternative Investments Group page for Texas retail brokerage sales advisory.