CRE Professionals' Paradise: Comparing California and Texas
As I'm sitting at Love Field heading back to California, I can't help but think about the misconceptions surrounding the similarities and differences in the retail property markets of California and Texas. Many people, whether they're Californians or Texans, don't fully appreciate the unique dynamics and sheer scale of each other's real estate landscapes. To shed light on this, I'm launching a three-part series comparing the commercial real estate markets in these two powerhouse states, starting with a quick look at the retail sector.
California Retail Property Market Overview
Inventory and Building Count
California's retail market has shown steady growth over the past five years. In Q1 2019, California had approximately 1.76 billion square feet of retail space across 172,500 buildings. Fast forward to Q3 2024, and the state boasts around 1.78 billion square feet spread across 174,676 buildings. This growth, although moderate, highlights a consistent expansion in the market.
Vacancy Rates
The vacancy rate in California's retail market has seen a slight increase, rising from 4.3% in Q1 2019 to 5.1% in Q3 2024. This uptick suggests that while demand for retail space remains strong, the supply has outpaced demand slightly. The increase in vacant square footage from 75.7 million to 91.2 million indicates that new developments have added more space than the market could immediately absorb.
Rent Trends
Rental rates in California have continued to rise, reflecting the state's robust demand and limited supply in prime locations. In Q1 2019, the average direct rent for all service types was $25.60 per square foot. By Q3 2024, this figure had increased to $27.94 per square foot. This upward trend in rental rates underscores the premium nature of California's retail market, where retailers are willing to pay more for prime locations.
Texas Retail Property Market Overview
Inventory and Building Count
Texas's retail market has experienced more rapid growth compared to California. In Q1 2019, Texas had approximately 1.68 billion square feet of retail space across 135,000 buildings. By Q3 2024, the inventory had grown to 1.71 billion square feet across 141,741 buildings. This substantial increase in both square footage and the number of buildings highlights Texas's dynamic and expanding market.
Vacancy Rates
Despite the rapid growth in inventory, Texas has maintained a relatively stable vacancy rate. In Q1 2019, the vacancy rate was 4.0%, which slightly increased to 4.2% by Q3 2024. This stability suggests that new developments have been well absorbed by the market, reflecting balanced supply and demand dynamics.
Rent Trends
Texas offers more affordable retail rents compared to California, making it an attractive market for new businesses. In Q1 2019, the average direct rent for all service types was $17.50 per square foot. By Q3 2024, this had increased to $19.08 per square foot. The steady rise in rental rates indicates growing demand while still being considerably lower than California, enhancing Texas's appeal for cost-effective retail space.
Comparative Analysis: Changes from Q1 2019 to Q3 2024
Market Size and Inventory Growth
California:
Q1 2019: 1.76 billion square feet, 172,500 buildings
Q3 2024: 1.78 billion square feet, 174,676 buildings
Growth: A steady increase of about 20 million square feet and 2,176 buildings
Texas:
Q1 2019: 1.68 billion square feet, 135,000 buildings
Q3 2024: 1.71 billion square feet, 141,741 buildings
Growth: A significant increase of about 30 million square feet and 6,741 buildings
Vacancy Rate Trends
California:
Q1 2019: 4.3%
Q3 2024: 5.1%
Trend: An increase reflecting more supply relative to demand
Texas:
Q1 2019: 4.0%
Q3 2024: 4.2%
Trend: Slight increase, indicating stable absorption of new space
Rent Trends
California:
Q1 2019: $25.60 per square foot
Q3 2024: $27.94 per square foot
Trend: A rise of $2.34 per square foot, reflecting high demand and limited supply
Texas:
Q1 2019: $17.50 per square foot
Q3 2024: $19.08 per square foot
Trend: A rise of $1.58 per square foot, highlighting growing demand while remaining affordable
Insights and Implications
California:
Growth Patterns: Steady growth driven by high demand and limited availability in urban centers.
Vacancy Trends: Increasing vacancy rates suggest a slight oversupply relative to immediate demand.
Rent Trends: Rising rents reflect the premium nature of California’s retail market.
Texas:
Growth Patterns: Rapid growth supported by expansive land availability and a business-friendly environment.
Vacancy Trends: Stable vacancy rates indicate effective absorption of new retail space.
Rent Trends: Increasing rents, but still significantly lower than California, enhance Texas’s attractiveness for new developments.
Conclusion
The retail property markets in California and Texas are both substantial and influential, yet they present distinct characteristics shaped by their unique economic and regulatory environments. California’s market is defined by steady growth, driven by high demand in densely populated urban areas, leading to higher rents and vacancy rates. The state offers significant opportunities in high-value, high-demand locations, reflecting its status as a premium market where retailers are willing to pay a premium for prime spaces.
Texas, on the other hand, has experienced rapid growth in both inventory and building count, supported by its pro-business environment and expansive land availability. This has resulted in a more stable vacancy rate and moderate rent increases, making Texas an attractive option for retailers and businesses seeking cost-effective expansion opportunities. The affordability of retail rents, combined with a robust rate of new development, underscores Texas's appeal as a dynamic and growing market.
So, who is the winner? Well, while California currently holds a slight edge in terms of total retail space and number of buildings, Texas's rapid growth and development pace is noteworthy. Ultimately, I think the winners are the CRE professionals that can work in these states with their vast and active markets!
Thank you for reading this quick analysis. I hope you were able to take something away from it. Stay tuned for the next parts of this series. Next up… Industrial.
References
CoStar Group