Retail market steady overall
Houston’s overall retail vacancy rate was 5.5% in Q2 2017, a rise of 30 basis points quarter-over-quarter from 5.2%, and a 40-basis-point increase year-over-year. Net absorption stood at positive 889,639 sq. ft. as of the quarter’s end, following the previous quarter’s 689,508 sq. ft., and down from 2.4 million sq. ft. year-over-year. In addition, Houston citywide leasing activity is at about 1.8 million sq. ft., up from the previous quarter’s 1.5 million sq. ft. The retail market saw overall average asking rates go up $0.02 per sq. ft. quarter-over-quarter to finish at $16.41 per sq. ft. on a triple-net basis at the end of Q2 2017. This represents a single calendar year increase of 5.1% in rental rates.
Economy continues to grow despite low oil prices
Overall, the outlook for Houston is hopeful about the future. May data was varied for the Houston metro area. The business-cycle index continued to indicate a modest expansion. Labor market data suggested job growth, improvement in the energy sector and low fuel prices helped consumers. Houston’s unemployment rate was 5.1% in May, down from 5.4% in April and below its year-to-date average of 5.5%. Other positive indicators are the Houston Purchasing Managers Index, which registered at 54.1 in May, signaling economic expansion in metro Houston for the eighth consecutive month, and the Baker Hughes U.S. Rig Count, which rose for the 23rd straight week totaling 941 rigs. Conversely, increasing costs and moderate oil prices may soften the course of the rig count. The recent forecast by the Energy Information Administration estimated oil (WTI) will average $51 in 2017 and $55 in 2018, while market experts state the industry needs $60 to $65 per barrel oil for sustained growth and success.
Supply and demand evening out
Construction activity slowed a bit for the fourth consecutive quarter, as supply and demand began to realign. Houston absorbed 889,639 sq. ft. in Q2 2017, a gain of over 200,000 sq. ft. since Q1 2017; underscoring that the retail market’s fundamentals are robust, with occupancy at 94.5%. In fact, retail space has remained at or above 94% occupancy since the second quarter 2014. While net absorption had recently been outpacing deliveries—indicating strong tenant demand for new space—construction activity has begun to slow, a sign of controlled growth. While grocery expansions are on the decline, there is visible retail development activity, with spec strip centers along with mixed-use projects leading the way. The Paragon Outlets and Target Shopping Center, both in the Richmond/Rosenberg area, continue construction with over 564,000 sq. ft. underway, in addition to The Market at Springwoods Village and Grand Marketplace I and II representing close to 300,000 sq. ft. combined in the Far North retail market. Tenants moving out of large blocks of space in 2017 impacting net absorption include Mercado Market Place moving out of 109,609 sq. ft. at 7355 Highway 6 S.; and Ron Carter Cadillac moving out of 41,900 sq. ft. at 16800 Feather Craft Ln. Tenants moving into large blocks of space have included Walmart moving into 186,902 sq. ft. at 22850 Morton Ranch Rd; Sam’s Club occupying 130,000 sq. ft. at Valley Ranch Town Center; and Target going into 126,000 sq. ft. at Grand Parkway Marketplace.
Location, location, location
Amazon is buying Whole Foods. The online giant announced in June it was purchasing the high-end grocer for $42 a share in an all-cash deal, valuing the company at $13.7 billion. This is Amazon’s largest acquisition, outpacing its purchases of Twitch for $970 million in 2014 and Zappos for $850 million in 2009. If Amazon can deliver fresh organic produce at a price that is better than the major grocery retailers, it will be a major challenge to the competition. The hardest piece of ecommerce is that last mile of distribution, as consumers expect a quicker window between ordering goods online and getting them delivered. With Whole Foods’ current locations and their inventory management expertise, it has what Amazon needs to optimize an ecommerce plan of action. The acquisition is a positive sign for select retail real estate values, reinforcing the price of superior versus substandard locations. In addition, the purchase could cause prices to fall and make healthy food more readily available. If Amazon begins mass distribution of Whole Foods’ higher-end brands, those premium brands could see a price drop.
Don’t let the “retail is dying” panic fool you
Leasing activity increased during the second quarter, with more than 1.7 million sq. ft. leased in the overall Houston market. The amount of space leased was up quarter-over-quarter, although year-over-year leasing activity is down from 2.8 million sq. ft. Significant tenants that signed lease agreements this year include the 40,000-sq.-ft. deal signed by Altitude Trampoline Park at Spring Cypress Center; the 36,566-sq.-ft. leased inked by Conn’s at 11222 Fountain Lake Drive; and the 30,000-sq.-ft. signed by Dirt Cheap at 2625 S Loop 35. Mod Pizza plans to open another six locations across the metro area by the end of 2017. In addition, Enterprise Rent-A-Car is opening 12 new Houston locations; Pet Supermarkets has opened three new stores and plans seven more throughout Houston; and the makeover at George Bush Airport adding 43 retail shops, 30 restaurants, and nine coffee shops has been completed.
Local transaction spotlight
The retail and restaurant development within the master-planned community of Grand Central Park, on the Boy Scouts’ former Camp Strake land north of Houston, has announced its first tenants. Branded as 336 Marketplace, the center will include a 125,000-sq.-ft. Kroger Signature store, a 42,000-sq.-ft. HomeGoods, a 25,000-sq.-ft. Ross and a 21,000-sq.-ft. Michaels. In total, the center will feature 700,000 sq. ft. of retail and restaurant space along the south side of Conroe’s Loop 336 near the west side of I-45. The Kroger is expected to open in early 2018, while HomeGoods, Ross and Michaels will open during first quarter 2018. Grand Central Park, the new master-planned community in Conroe, occupies 2,046-acres five miles north of The Woodlands along Interstate 45 and S. Loop 336, near the new ExxonMobil campus.
Tight market pushing rents up
As of Q2 2017, the tight retail market is driving up average Houston MSA asking rents to $16.41 per sq. ft., up from $16.39 per sq. ft. at the end of the first quarter of 2017. While retail availability is exceedingly constrained across the metro, it is specifically tight inside the Loop as well as the Galleria/Uptown area, continuing a historical trend. Space is in high demand across all submarkets, and the premier centers currently have little or no availability. However, even with this high demand, retail construction activity is above the five-year average of about 3.4 million sq. ft., with 4.0 million sq. ft. in the pipeline, and much of the anchor space segments having gone to owned pieces, rather than speculative. As a result, asking rents are exceeding historical highs, on average. Currently, the Inner Loop area has average rents sitting at $25.00 per sq. ft., and less than 1.5 million sq. ft. available from an existing inventory of almost 28 million sq. ft.