Although retail has been one of the asset classes most impacted by the pandemic, the sector is beginning to recover in many cities. As astute commercial real estate investors know, one of the best times to buy is when nobody else is looking. In top retail markets like Atlanta and Phoenix, billions of dollars have changed hands, with retail transaction volumes up significantly since the pandemic began.
Different types of retail assets perform at various levels of success depending on each market’s unique conditions. For example, shopping center performance will depend on type and location, with some retail markets performing relatively well as the pandemic lingers on.
This article will explore some of the top cities to buy retail property in 2022.
Top Markets to Buy Retail in 2022
Emerging Trends in Real Estate 2022 is published annually by PwC and the Urban Land Institute. The report reflects over 2,000 CRE professionals’ outlooks on real estate investment trends, property sectors, and metropolitan areas. According to the report, the “death of retail” has been greatly exaggerated, with the sector faring much better than expected.
While there still may be more store closures ahead, landlords now have the opportunity to replace less relevant businesses with newer brands and better tenants. As one industry consultant observed, “I’ve probably never felt so positive in a long period.”
Atlanta continues to outperform similar markets, with all types of retail property in Atlanta seeing stronger investor interest as the year comes to a close. Through mid-year, retail investment sales in Atlanta surpassed $1 billion. Sales volume has increased by nearly 92% since Q1 2019, with the average sales price per square foot increasing 6.8% quarter over quarter.
Over 920,000 square feet of retail space in Atlanta has been absorbed through the middle of 2021, with neighborhood and grocery-anchored shopping centers outperforming other retail asset types. Average asking rents increased by 2.32% quarter over quarter, with strip centers and power centers posting the highest NNN rents overall, at $15.78 per square foot and $17.69 per square foot, respectively.
2. Dallas/Fort Worth
Retail in the DFW Metroplex recently reported 1.4 million square feet of positive net absorption, the first quarter of positive net absorption since the pandemic began.
Retail in the DFW Metroplex is seeing one of the strongest rebounds amongst all major metro areas, with buyers looking for retail property for sale in Dallas/Fort Worth, generating an uptick in deal flow.
Occupancy levels are at 92.6%, driven by the hot housing market and net population growth in Dallas/Fort Worth that led the nation during the pandemic. Retail submarkets in DFW with the highest amount of year-to-date net absorption include Far North Dallas, Near North Dallas, and Suburban Fort Worth.
Nearly 2.3 million square feet of retail space in Dallas/Fort Worth is currently under construction, with just over 880,000 square feet completed through the middle of 2021.
Population growth and a low unemployment rate is increasing the demand for retail space in Houston. The metro area population has grown by 1.9% and unemployment is down to just 5.4%. According to Colliers, Houston’s retail market is one of the most active sectors in the U.S., with demand for suitable retail space starting to outpace supply.
The Houston metro area saw 671,400 square feet of positive net absorption of retail space in the most recent quarter, driving overall vacancy down to 5.7%. Leasing activity increased by 37% quarter-over-quarter, recording 1.5 million square feet of new leases in Q3 2021. Overall asking rents for Class A retail space in Houston range between $25 and $45 per square foot per year, and nearly 1.5 million square feet of new retail space is under construction to meet growing demand in the years ahead.
The retail market in Phoenix continues to recover, with leasing volumes up 7.4%, and asking rents up 2.1%. This change is driven in part by the net in-migration and job growth in the metropolitan area, as well as by the highest median household income growth in the West.
About 5 million square feet of retail space has been leased in Phoenix through Q3 2021, driven by tenants in the grocery, home improvement, and furniture sectors. Net absorption is currently at 0.8%, double the net absorption rate pre-pandemic . Asking rents for retail space in Phoenix average $15.81 per square foot and have increased by 15.6% since the start of 2015.
Twenty-five properties totaling 600,000 square feet are under construction in the Phoenix retail development pipeline. Since 2020, $4 billion in retail transactions have changed hands, increasing retail pricing 24.5% year-over-year.
5. San Antonio
Retail sales transaction volume in San Antonio is surging, with investment sales volume up 1,815% year-over-year, as of Q2 2021. Eight properties traded hands for a total of $249 million in the first half of 101`, with a buyer composition of 73% REIN/listed investors and 21% private.
There are currently 141,279,338 square feet of retail inventory in San Antonio, with another 1 million square feet under construction. Over 583,000 square feet of retail space was leased in Q3 2021, driving market vacancy down to 4.9% and asking rents up by 3.0% year-over-year, to $19.70 per square foot.
The Comal County and Far West retail submarkets in San Antonio have the highest average asking rents, at $21.37 and $21.32 per square foot triple net, respectively, followed by the Central Business District at $20.48 per square foot.
The Austin metro area recovered all jobs lost during the pandemic, driving retail occupancy up to 95.9%. Through Q3 2021, net absorption of Austin retail space had already outpaced last year’s net absorption.
Austin is home to 97,472,270 square feet of retail space, with asking NNN rents currently at $21.31 per square foot. Demand is outpacing supply, with 618,769 square feet of inventory absorbed in Q3 2021 and 1.2 million square feet year-to-date.
Although asking rents for Denver retail space have slightly declined, year-to-date net absorption has skyrocketed to 293,000 square feet, more than double the total from the same time last year. Sales transaction volume reached $320.2 million in Q3 2021, more than double the volume in Q3 2020, driven in part by the metro’s strong fundamentals.
Asking rents for retail space in Denver are $20.33 per square foot per year triple net, with direct vacancy declining to 7.3%. Retail inventory in the metropolitan area totals 82,721,845 square feet, with another 539,000 square feet under construction. The largest retail submarkets are Northwest, South, and West Denver.
8. Portland, OR
The Portland retail market continues to recover, with asking rents holding steady and vacancy rates declining to 3.8% in Q3 2021, a decrease of 30 basis points compared to the previous quarter.
Average asking rent for retail in Portland is $20.06 per square foot, with net absorption a positive 279,409 square feet in the current quarter versus a negative net absorption of 242,200 in Q2 2020. Submarkets with the top lease transactions include Lake Oswego/West Linn, Mall 205, and the Central Business District.
9. San Diego
Average triple-net asking rents for retail space in San Diego are $2.37 per square foot, an increase of 4.32% year-over-year, with net absorption at 509,762 in Q3 2021. Although vacancy rates have increased, retail investment in San Diego remains robust. Cap rates for retail property are 4.9% versus 5.3% the same quarter last year. Mission Valley, Kearny Mesa, Escondido, and San Marcos are the most active retail submarkets for sales transactions.
Niche & Boutique Retail Markets to Consider
Niche and boutique markets are smaller cities that aren’t as large or economically diverse as other markets. As a result, investors looking for retail properties with strong ROI often overlook them.
Smaller markets with lively downtowns, cultural diversity, and amenities with a lower cost of living and cost of doing business include:
- Des Moines
- Portland, Maine
Things to Think About Before Investing in Retail
Emerging Trends in Real Estate 2022 notes that geographic, demographic, and consumer shifts will continue over the next decade. There are several things investors should consider when analyzing the top cities to buy retail property in 2022:
- Retail property owners must be able to right-size and reinvent to meet the future needs of consumers and tenants.
- People will still purchase the majority of their goods and services in stores, with the best retail property offering the opportunity for consumers to shop and socialize safely.
- Shrinking ranks of good tenants are driving down occupancy and rents, creating unique opportunities for buying-and-holding good retail property over the long term.
Although the pandemic has created challenges for consumers and retailers alike, retail stores still matter. As people and businesses resume their everyday routines, the demand for retail is bound to rise, creating the opportunity for investors who buy retail in 2022 to thrive in the not too distant future.