Feature Photo (above): Construction workers on the site of what will be the Frisco Farmers Market. Image: Google Streets – February 2018
by Edmond Ortiz
Economic media reports about brick and mortar retail have been trending negative for some time, but all is not doom and gloom for retail construction.
True it is that Toys “R” Us follows a long list of national chain stores that have gone of business, and others continue to struggle, often blaming changing consumer habits for their woes.
There are others reasons, however, for what’s been going wrong in retail. And there are also signs that retail construction is on the rebound.
Before looking at the most recent trends, let’s get some historical context. Commercial real estate construction occurred on a much larger scale in the years prior to the recession.
From 2000-2009, Texas’ top four metropolitan markets built 265 million square feet of retail space, according to a 2018 NAIOP (Commercial Real Estate Development Association) report. Since 2010, these same markets–Dallas-Fort Worth, Houston, San Antonio, Austin–built 91 million square feet.
According to Weitzman’s 2018 Mid-Year Retail Report for Texas, three of the four markets are building at lower levels this year than in 2017.
Texas 2018 Retail Outlook vs. 2017 Actual (based on scheduled openings):
- Austin: 700,000 SF (640,000 SF in 2017)
- Dallas-Fort Worth: 3.5 million SF (4.1 million SF in 2017)
- Houston: 2.3 million SF (2.8 million SF in 2017)
- San Antonio: >300,000 SF (360,000 SF in 2017)
CoStar Group, a real estate analytics service, emphasized that these declines have occurred even as population in the four markets grew by an average 20 percent and buying power was up by more than 35 percent.
Ian Pierce, Weitzman vice president of communications. Courtesy: Weitzman.
CoStar said that, with few exceptions, developers and owners have shifted away from malls or super-regional projects such as The Forum at Olympia Parkway on the Interstate 35 San Antonio-Austin corridor, and are paying more attention to consumer shopping behavior.
Remember those retail centers with two similar power-retail anchors, such as Best Buy and Circuit City, asks Ian Pierce, vice president of communications for Weitzman. Well, Circuit City is gone, but the remaining players can maintain market share with a sound integration of the available shopping methods, whether in-store, online or by mobile devices, “and a focus on their existing store count and new stores at slam-dunk locations.”
Developers are more interested now in smaller outdoor retail centers or mixed-use projects that pair retail/restaurant with office space and/or residential, and they’re getting more creative in redeveloping existing spaces.
Pierce told VBX that one of the positive industry trends is demand-based rather than spec-based construction. The general contractors don’t orchestrate the build until most of the project has been pre-leased.
“So new space adds to occupancy, not vacancy,” Pierce said. “All of our markets are reporting healthy occupancy rates above 90 percent that are at or near their highest ever recorded.”
Expanding retailers are constantly considering current vacancies as an option for new Texas stores.
“This is a key reason that our markets are reporting such strong occupancy and that owners and developers are largely confident that the vacancies left behind by Toys “R” Us will find strong new tenancy sooner than later,” Pierce said.
Daniel Taylor, CBRE managing director for retail in their Texas-Oklahoma Division, said Texas’ four major markets are more than 90 percent leased.
“It’s a great time. It shows that retail markets are healthy,” Taylor told VBX. “Texas is a bright shining star in the national retail news.”
Those massive retail parks in the suburbs may have been all the rage in the 1990s and 2000s, but developers are looking back to the inner cities and jumping aboard gentrification trends that are bringing smaller retail and mixed-use centers to older urban neighborhoods.
“The tide went out to the suburbs in the last decade, and now the tide is coming back in,” Taylor said.
Daniel Taylor, managing retail director at CBRE Group. Courtesy: CBRE.
Asked about Amazon, that colossus of e-commerce, and other online retailers, Taylor and Pierce indicated there isn’t much concern. They’ve already done their worst.
“For the traditional centers, the tenant mix today is typically focused on food, fitness, services, entertainment, medical-dental and the like, which are all Internet resistant categories,” Pierce said.
While commercial construction remains well below the numbers seen pre-recession, growth in this section has been steady. And the NAIOP report ranks Texas a leading state for new or redeveloped retail, office and warehouse space.
Factoring in soft and hard costs, site development and tenant improvements, commercial builders accounted for $24.3 billion in direct construction spending statewide in 2017. Including economic multipliers, that represents a $58.9 billion impact.
The report also found that Texas commercial development supports nearly 380,000 jobs.
As for all the hand-wringing over e-commerce versus brick-and-mortar, Taylor offered this perspective.
“With the total amount of retail dollars spent nationally last year, e-commerce really only accounts for 9 percent of it. If you’re a brick-and-mortar retail with a strong online presence–well, a sale is a sale. You’ll take it.”
U.S. Construction Spending in Three Sectors (Billions of Dollars)
- Retail: 2016 = $78.9 / 2017 = $84.2
- Recreation: 2016 = $22.9 / 2017 = $$23.3
- Office: 2016 = $71.5 / 2017 = $69.1
Source: Economic Impacts of Commercial Real Estate, 2018 by NAIOP Research Foundation
Edmond Ortiz is a San Antonio-based freelance reporter and editor. He has worked for the San Antonio Express-News and Prime Time Newspapers. He is a contributor to Virtual Builders Exchange and the Rivard Report. His Twitter handle is @satscribe.