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EXECUTIVE SUMMARY

Despite slowdown, retail market remains tight
Houston’s overall retail vacancy rate rose to 5.6% in Q3 2017, a rise of 30 basis points quarter-over-quarter from 5.3%, and an 80-basis-point increase year-over-year. Net absorption slowed at positive 164,907 sq. ft. as of the quarter’s end, following the previous quarter’s 823,538 sq. ft., and down significantly from 2.0 million sq. ft. year-over-year. In addition, Houston citywide leasing activity is at 1.6 million sq. ft., down from the previous quarter’s 1.9 million sq. ft. The retail market saw overall average asking rates dip $0.07 per sq. ft. quarter-over-quarter to finish at $16.49 per sq. ft. on a triple-net basis. A year ago, average rates were at $15.85, representing a 4.0% increase.

Hurricane Harvey alters economic activity
The Houston economy sustained moderate growth, but at a slower pace through August. The business-cycle index and employment data were softer, and the energy industry provided less of a helping hand to Houston over the summer. Striking at the end of August, Hurricane Harvey was not included in the jobs data for August, however, a breakdown by the Dallas Fed suggests that while Harvey’s impact will be felt deeply, Houston and the Texas Gulf Coast are expected to recover quickly. Houston’s unemployment rate was 5.0% in August, up from a revised 4.6% in July. The August unemployment rate for Texas was 4.2% and 4.4% for the U.S. After the storm, the shutdown of refinery capacity drove the price of West Texas Intermediate crude oil (WTI) down, and also pushed motor fuel prices up. WTI has traded between $45 and $55 over the majority of the past year, while the weekly retail price of regular gasoline rose 36 cents per gallon in Houston. Overall, while the outlook for the immediate future is unsure, prospects for the next few years remain positive.

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Houston Retail Market Indicators Table CRE


MARKET OVERVIEW

Post Oak Blvd. redevelopment headlines handful of significant retail construction projects
The amount of square feet under construction decreased for the fifth consecutive quarter, as supply and demand continue to attune to the market. Houston absorbed 165,000 sq. ft. in Q3 2017, a reduction of over 650,000 sq. ft. since Q2 2017; however, there’s only so much space to be absorbed, with occupancy at a robust 94.4%. In fact, retail space has remained at or above 94% occupancy since the first quarter of 2014. While supply has been outpacing demand for the last four quarters, the slowdown in construction activity is an indication of controlled growth. Post Oak Blvd. is being transformed into a major thoroughfare in the Uptown area to keep up with a rapidly changing district. The transformation is scheduled to be completed by the end of 2018, creating a pedestrian-oriented corridor in an effort to redevelop the entire length of Post Oak Boulevard from Richmond Avenue to I-610 West. The development includes a heavily-landscaped, grand boulevard lined with shops, restaurants and residential buildings. Sidewalks are being widened, extensive lighting installed and nearly 1,000 trees will create a green canopy over the street. In addition, the plan also calls for a dedicated bus lane in the median of Post Oak that will include eight unique bus stops along the length of the street, in hopes of making getting around Uptown easier. As for other construction, two of the largest retail properties underway are Waller Town Center, located at U.S. 290 and Walter Tomball Road, a 400,000-sq.-ft. center scheduled to deliver in the first quarter of 2018; and the Target Shopping Center at Grand Parkway and West Airport, a 264,000-sq.-ft. building located in Richmond within the far Southwest submarket with a completion date projected for the fourth quarter of 2017.

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Proposal possibilities
With the deadline nearing for cities to submit proposals to Amazon to lock in the company’s $5 billion second headquarters, Rice University is supporting Houston’s bid for its East River development. Rice controls a prime revitalization site in the center of Houston—the Sears store, built in 1939 at 4201 Main, close to U.S. Highway 59. The enormous headquarters is planned to be home to 50,000 employees with 8 million sq. ft. of office space upon completion. It is anticipated that Amazon will announce the victor in 2018.

The soon-to-be closed Greenspoint Mall is said to have received a proposal to turn the northern portion of the property into a driving range encircled by three golf holes. The location, at the northeast intersection of Beltway 8 and I-45, has only a limited amount of land available, and as such the condensed course is being marketed as the ability to complete a round of golf in 60 minutes. Studio Paulbaut has come up with the concept, appropriately named Golf60, as further described on their website: “Golf60 intends to revolutionize the golf game to benefit its players as well as its business.”

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Investment sales and leasing activity optimistic
Real Capital Analytics data reports year-to-date retail sales volume in the Houston area at $1.177 billion, resulting in a year-over-year change of -1.7%. The buyer composition is made up of 55% private, 24% institutional, and 20% REIT/Listed. A positive sign for the Houston area retail market is the PGIM Real Estate acquisition of La Centerra at Cinco Ranch, a 413,000-sq.-ft. retail center from Amstar JV Vista Group. The Katy property was built in 2007 and is located in Fort Bend County at State Highway 99/Grand Parkway and Cinco Ranch Blvd. The property was 97% occupied with tenants such as Vista Management, Gymboree, Eddie Bauer, Jeans Couture, and Cold Stone Creamery at the time of sale.

Leasing activity slowed during the third quarter with a total of 1.6 million sq. ft. leased in the overall Houston market. The amount of square feet leased by submarket remained comparatively even with the Northwest submarket leading the way with 18%; the Southwest next in line at 17%, and the West in third place at 16% with a combined total representing over 50% of all leasing activity. These amounts are down from 2.1 million sq. ft. at this time last year. On a percentage basis, transactions declined quarter-over-quarter by 16%, while the year-over-year drop was at 24%. All said, there was still movement, as Ashley Furniture sealed a deal leasing 30,031 sq. ft. at Garth and Hunt roads in Baytown, and Fly Zone inking a contract for 27,731 sq. ft. at 7885 Cypress Creek Parkway in the Willowbrook submarket.

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Tight market driving rents up
The tight retail market pushed up the Houston metro asking rents to $16.56 per sq. ft. last quarter, an all-time record high. This quarter, prices on average dropped slightly to $16.49, still significantly above the five-year average of $15.16 per sq. ft. While retail availability is especially limited across the Houston area, it is particularly tight in the Galleria/Uptown area, with a total inventory of approximately 5 million sq. ft. and only 65,000 sq. ft., or 1.3% space available. The much larger Heights/River Oaks/West University areas, inside the loop, represent almost 20 million sq. ft. of rentable retail space with close to 800,000 sq. ft. or 5.0% of inventory available. Continuing a historical trend, the 5-year average of available sq. ft. in these areas are at 1.4% and 4.4%, respectively. Currently, the Galleria/Uptown area has average NNN rents sitting at $25.00 per sq. ft., and the Heights/River Oaks/West University areas are soliciting retail space in the $30.00 range.

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Leta Wauson
Director of Research
leta.wauson@naipartners.com
tel 713 275 9618

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