Once marked by oversupply concerns, the U.S. retail market is now in a vastly different position. Tight inventory, rising tenant demand, and limited construction have made finding first-generation retail space—a space that has never been leased before—a significant challenge. Nowhere is this shift more apparent than in Texas, which has emerged as the dominant hub for new, high-quality retail space.
From Oversupply to Scarcity: A Changing Retail Landscape
The story of retail real estate has undergone a profound transformation over the last two decades. From 2000 to 2009, the United States experienced a construction boom, with developers delivering approximately 300 million square feet of retail space annually. Nearly 40% of that supply was first-generation space, offering retailers plenty of options to establish a footprint.
However, the Great Recession of 2008 shattered this momentum. Economic uncertainty and changing consumer behavior, particularly the rise of e-commerce, forced developers and lenders to pull back. Between 2010 and 2020, annual retail completions dropped to 128 million square feet—nearly half of the prior decade's levels—with first-generation space accounting for less than 30% of that total.
Fast forward to today, and construction levels have fallen even further. Since 2020, just 81 million square feet of new retail space has been completed annually, largely driven by build-to-suit projects where space is pre-leased to tenants. This leaves little to no availability for retailers seeking modern, unoccupied locations.
The combination of tight supply and post-pandemic consumer spending has created intense competition for high-quality retail space. National retailers like McDonald's are feeling the pressure. “There is a dearth of retail space in the market,” said Tabassum Zalotrawala, Senior Vice President and Chief Development Officer at McDonald's, at a recent ICSC event. “We’ve got to become innovative in finding new locations.”
Texas: A Hotbed of Retail Development
While national retail construction struggles to regain its footing, Texas stands as a bright spot. The state has consistently led the nation in population growth, job creation, and economic expansion—factors that drive retail demand. Four of the top 10 markets for available first-generation retail space are located in Texas, with Houston leading the charge.
Since the start of 2020, Houston has delivered nearly 25 million square feet of new retail space, more than any other market in the United States. Of that total, just 2.5 million square feet remain available, underscoring both the strong demand and the pace at which new space is being absorbed.
“Houston continues to rank among the highest in the nation for population growth,” notes Per Itziar Aguirre, CoStar's Director of Market Analytics for Houston. “Over the past three years, it has added almost 400,000 new residents. Developers are paying attention and following that strong rooftop growth, especially north and west of the city, where the bulk of Houston's population gains are occurring.”
Other Texas cities, including Dallas-Fort Worth, Austin, and San Antonio, are also seeing substantial retail development to meet the needs of their expanding populations. Together, these markets account for nearly a third of the nation’s available first-generation retail space.
Why Texas? Population Growth and Economic Momentum
Texas’ dominance in retail development can largely be attributed to its explosive population growth. As individuals and businesses migrate from other states, particularly California, the Lone Star State continues to attract new residents at a record pace. In addition to population growth, the state’s pro-business environment and affordability make it an ideal place for corporate expansions, further fueling retail demand.
In markets like Houston and Dallas-Fort Worth, developers are following the rooftops. New housing developments in suburban areas are driving retail construction to serve growing communities. Grocery-anchored shopping centers, quick-service restaurants, and neighborhood services are particularly in demand.
Limited Risk of Overbuilding
Despite the pace of construction in Texas, concerns about oversupply remain minimal. Historically, oversupply has been a recurring theme in retail real estate, but today’s market dynamics are different. High construction costs, tighter financing conditions, and tenant pre-leasing requirements have acted as natural checks on speculative buildings.
Additionally, the demand for modern retail space far outstrips supply, even in growth markets like Texas. “Local participants note that the market still feels incredibly tight,” Aguirre explains. “Quality space in desirable locations remains hard to find, and relationships have never been more important.”
This scarcity is particularly acute for first-generation space, which is highly attractive to expanding national tenants. Modern layouts, energy-efficient designs, and prime locations make these properties ideal for retailers seeking to attract foot traffic and enhance their brand presence.
The Path Forward for Retail Investors
For investors and developers, the retail landscape presents both opportunities and challenges. In markets like Texas, the demand for high-quality space remains strong, but rising construction costs and land availability may require creative approaches.
Opportunities exist in suburban areas experiencing population booms, where demand for grocery-anchored centers, restaurants, and service-oriented retail will likely remain strong. Additionally, infill redevelopment projects in urban areas can address the scarcity of space while capitalizing on tenant demand for high-traffic locations.
Texas’ retail success highlights a broader trend: Retail real estate is evolving, but far from obsolete. Markets that combine population growth, economic momentum, and limited supply will continue to outperform, offering attractive opportunities for investors and developers alike.
As national retailers look to expand their footprints, Texas has positioned itself as the leader in first-generation retail space. With tight supply conditions likely to persist, relationships, creativity, and strategic site selection will be critical for those looking to capitalize on the retail market's transformation.
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