Houston’s overall retail vacancy rate rose from 4.9% to 5.1% in Q1 2017; however, this mark still represented a 20-basis-point decline year-over-year. Net absorption stood at positive 667,078 sq. ft. as of the quarter’s end, following the previous quarter’s 1.4 million sq. ft., and up from 519,088 sq. ft. year-over-year. In addition, Houston citywide leasing activity is at about 1.4 million sq. ft., down from the previous quarter’s 1.8 million sq. ft. In spite of this, the retail market saw overall average asking rates climb $0.61 per sq. ft. quarter-over-quarter to finish at $16.45 per sq. ft. on a triple-net basis recovery at the end of Q1 2017. This 4% quarter-over-quarter increase is typical of the rate of rental growth that we would generally see over a full year.
As increasing population continues to parallel retail demand; Houston added 125,005 residents, a 1.9% increase, in the 12 months ending July 1, 2016, according to the U.S. Census Bureau, the second largest gain of any U.S. metro. The healthy population growth of the past year supports a Houston motto that the region finds a way to grow, even when faced with low oil prices. The metro created 16,700 jobs in February, with the Leisure and Hospitality sector gaining 4,400 of those positions. In addition, the Houston Purchasing Managers Index has indicated expansion for six consecutive months, and the U.S. active rig count has more than doubled since reaching its bottom in May 2016.
Occupancy Remains Above 94%
Houston absorbed 667,000 sq. ft. in Q1 2017, the lowest gain per quarter since Q1 2016; however, the retail market’s fundamentals are very robust, with occupancy at 94.8%. Even during the oil downturn, the need for retail space has increased in combination with Houston-area home sales climbing dramatically. In fact, retail space has remained at or above 94% occupancy since the first 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. This disciplined approach will help stabilize retail going forward in a less-than-flawless overall commercial real estate market.
Tight Market Driving Up Rents
As of Q1 2017, the tight retail market is driving up average Houston MSA asking rents to $16.45 per sq. ft., up from $15.84 per sq. ft. at the end of the fourth quarter of 2016. While retail availability is extremely constrained across the metro, it is particularly 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 below the five-year average of about 3.1 million sq. ft., with 2.7 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 Galleria/Uptown area has average rents sitting at just above $28.00 per sq. ft., and less than 100,000 sq. ft. available from an existing inventory of almost 5 million sq. ft.
Supply and Demand Evening Out
Construction activity slowed for the third consecutive quarter, as supply and demand began to realign. While there is visible retail development activity, it remains largely led by grocers with mixed-use construction located in the far suburbs, representing about 1.2 million sq. ft. of the 2.7 million sq. ft. of total construction. In a major announcement, Target is opening its first completely redesigned store in Richmond, Texas, this October. The new concept will house two distinct shopping areas, each with a separate entrance. One side will be organized like a department store, while the other will offer quick services and grab-and-go items such as groceries and alcohol. The 124,000-sq.-ft. property will be the first of 500 restyled locations over the next three years.
Director of Research
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