McAllen’s Retail Rents Hold Flat as Occupancy Reaches Record Mark
Despite the fact that demand for retail space in McAllen is at an all-time high, average asking rents are not rising at rates that preclude new users from entering and expanding within the market.
According to the McAllen Chamber of Commerce, the retail occupancy rate currently stands at just under 95 percent. The user base is balanced between big box home furnishing and service tenants, neighborhood retailers providing essential services, entertainment concepts and both national and regional food and beverage users.
As one might imagine in a market with 95 percent occupancy, there is considerable new development underway. And while rents, which currently max out at about $24 per square foot for new Class A product, have displayed a steady ascent, they also stand at levels that allow for both users and landlords to comfortably turn profits.
Most retail real estate professionals in McAllen live in fear of being overbuilt. And indeed, there is new product of all varieties — freestanding, strip centers, power centers — coming out of the ground. A prominent example of new retail development lies in Shops at 29, a power center anchored by Dave & Buster’s and leased to other large-format users like Burlington and Ulta Beauty.
But again, demand trumps all. In this market, it’s not uncommon to see a retail project that is 50 percent preleased when it is 50 percent complete and fully leased in advance of the opening. New deliveries have created a slight flight to quality and caused occupancies in Class B and C spaces to dwindle, but not to the point of raising concern.
In addition, rents are not expected to make huge leaps in 2019. Most local professionals expect rent bumps this year to offset any increases in the consumer price index (CPI), but that’s about it.
Rather than fret over this trend, however, retail landlords in McAllen are finding creative ways of using it to their advantage in terms of attracting new users to the region. The presence of a competitive price point on a key overhead expense, combined with a strong labor force and an unprecedented surge of residential construction, is bringing many new retailers to McAllen.
Many of these users are also drawn to the market’s slow move toward youth and gentrification, as primarily embodied in the burgeoning medical community and educational and research institutions that support it.
The narrative in retail real estate over the past several years has been inexorably defined by e-commerce, store closures and a prevailing sense that malls, shopping centers and mixed-use properties need to have internet-resistant tenants. A quick walk through the downtown area shows that McAllen has undoubtedly embraced these trends.
A few years ago, McAllen had about 650 restaurants to its name; that figure is now closer to 1,300. National chains such as Johnny Rockets, McAlister’s Deli, Cowboy Chicken, Pei Wei, Bob’s Steak and Chop House, La Crawfish, Nothing Bundt Cakes, Salt Grass and Zoës Kitchen are among the growing concepts that have recently opened restaurants in McAllen.
In addition, concepts like Salt | New American Table, House Wine & Bistro, Santa Fe Steak House & Cantina, The Patio on Guerra, Costa Messa and Palenque Grill Mexican Food can be found on the list of local favorites.
The opening of a Topgolf and the aforementioned Dave & Buster’s, as well as the spectacular four-story, 1,800-seat performing arts center, have also contributed to the market’s entertainment appeal. The venue, which debuted on Nov. 18, 2016, draws musicals like Jersey Boys and Chicago, plus performers like Paul Anka, Three Dog Night, The Beach Boys and Tony Bennett.
Further, retailers at Simon Property Group’s La Plaza Mall, a longtime destination for shoppers on both sides of the border, are seeing record sales close to $1,000 per foot. This growth follows the completion of a renovation that local sources estimate cost about $250 million. The project expanded the mall by 250,000 square feet, delivered two new parking garages and paved the way for first-to-market users — Yard House, Kendra Scott, Coach, L’Occitane, Michael Kors, Texas de Brazil, Buddy V’s, Carlo’s Bake Shop and H&M —to open their doors to McAllen residents.
As previously noted, the growth of McAllen’s medical community and its associated educational and research facilities has brought scads of young consumers with high-paying jobs to the market.
Texas A&M University, which now has a full-time higher education campus and a health science center in McAllen, has been at the forefront of this combined contribution from the medical and educational spaces. The College of Healthcare Professions (CHCP) and the UTRGV School of Medicine, which opened its doors in August 2016, feature a 15,000-square-foot smart hospital complex and a virtual anatomy and histology laboratory. Both teaching facilities supply the medical community with skilled practitioners to fill the growing labor demands.
In addition, McAllen has experienced its single-biggest boom of multifamily development over the past four years, adding nearly 2,000 new units to its supply of apartments. Development of single-family homes within master-planned settings that include retail uses is also occurring in McAllen.
Perhaps the most visible example of this pattern is the Tres Lagos development on the city’s northwest side. The project, which is being developed within a tax increment reinvestment zone in partnership with Hidalgo County, will ultimately feature 5,000 single-family homes, 200 acres of parks, fields and public space and 1.5 million square feet of retail space.
— By Charles Marino, principal, First American Realty Co. This article first appeared in the May 2019 issue of Texas Real Estate Business magazine.