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Rumors of the death of brick-and-mortar stores have been greatly exaggerated
Houston retail asking rent at all-time high
Houston’s overall retail vacancy rate decreased to 5.4% in Q1 2018, a drop of 10 basis points quarter-over-quarter from 5.5%, though a 40-basis-point increase year-over-year. Net absorption decreased to 1.3 million sq. ft. as of the quarter’s end, following the previous quarter’s 1.6 million sq. ft., and almost 50% higher than the 856,000 sq. ft. year-over-year. In addition, metro Houston leasing activity is at 1.5 million sq. ft., down 35% from the previous quarter’s 2.3 million sq. ft. The retail market saw overall average asking rates rise $0.27 per sq. ft. quarter-over-quarter to finish at $16.90—an all-time high—on a triple-net basis. A year ago, average rates were at $16.24, representing a 4.1% increase.
Houston economic indicators are positive
As the Houston retail markets fundamentals remain strong, current economic indicators are largely optimistic, suggesting healthy economic output and future growth. Job growth, energy-related activities, and import/export trade have recorded positive results during the first quarter of the year. Houston jobs grew at a convincing annualized pace of 4.7% over the two months ending in February (23,400 jobs), with the largest increase in professional and business services (11,000 jobs). The price of West Texas Intermediate has averaged just under $63 during 2018, and the U.S. rig count was at 993 as of March 30, up 169 rigs, or 20.5%, from 824 the same week in March 2017.
Supply and demand aligned in 2018
Houston absorbed 1.3 million sq. ft. in Q1 2018, down slightly from the previous quarter’s 1.6 million sq. ft. However, even with the quarterly difference in space, either added or being removed from the market, the fundamentals are very strong, with occupancy at 94.6%. While deliveries had been outpacing absorption during the first three quarters of 2017—indicating a slower tenant demand for new space—construction activity leveled off, averaging 4.3 million sq. ft. during the same period signaling controlled growth. This controlled approach will support steady retail growth going forward in a challenging overall retail market. The amount of square feet currently under construction is at 4.4 million sq. ft., up slightly from 4.3 million sq. ft. quarter-over-quarter, although down from 5.1 million sq. ft. year-over-year. New development has gradually been decreasing on a quarterly basis since the first half of 2016 when it reached a five-year high of 5.4 million sq. ft. Starting out 2018, supply and demand were more aligned at 1.0 million sq. ft. and 1.3 million sq. ft., respectively. In fact, retail space has remained at or above 94% occupancy since the fourth quarter of 2013.
Port Houston reports solid first quarter results
A shift in global shipping patterns that has routed more traffic through the recently widened Panama Canal, combined with rise in consumer confidence and spending, have sent retail imports climbing in Houston, reported The National Retail Federation. Year-to-date total tonnage for Port Houston through March is at 9.7 million, reflecting a 2% increase compared to the same period last year. Results showed that bulk material and steel were the primary drivers for the growth, and that all sectors of business through Port Houston facilities were seeing positive activity. Cargo showed year-to-date increases across all major lines. Steel tonnage overall increased 14% with 875 thousand tons and steel imports had grown by 11%. Container volume grew 2% with 617 thousand TEUs tallied year-to-date, and bulk cargo recorded 2.6 million tons reflecting a 14% year-to-date growth. In addition, Port Houston in 2017 was the fastest-growing of the top 10 container ports in the United States, based on PIERS data.
Real Capital Analytics data reports retail sales volume year-to-date through March 2018 in the Houston area at $262 million, resulting in a year-over-year change of -20.6%. The buyer composition is made up of primarily private investors at 81%; user/other buyers account for 10%; and cross-border investors make up 7%. A recent top investment transaction in the Houston area retail market is the Forwood SB LLC acquisition of Woodforest Shopping Center at 435 Uvalde Road, a 113,831-sq.-ft. retail center from Componet Capital Group. The property was occupied with tenants such as Advanced Auto Parts, U-Haul Neighborhood Dealer, Pizza Patron, and Metro PCS at the time of sale.
Leasing activity slowed
Leasing activity slowed during the first quarter, with a total of 1.5 million sq. ft. leased in the Houston market—down from 2.3 million sq. ft. at this time last quarter. The amount of square feet leased by submarket remained comparatively even, with the Southwest submarket leading the way with 20%; the Northwest and North submarkets tied next in line at 18%; and the Southeast and West also tied in third place at 14%. On a percentage basis, the number of transactions dropped quarter-over-quarter by 23.5%, while the year-over-year drop was at 15.4%. All told, the largest lease signings occurring in 2018 included Yi Ci Mart at Highland Knolls Shopping Center in Katy sealing a deal leasing 62,389 sq. ft.; the 25,000-sq.-ft. lease signed by Total Wine in Colony Square Shopping Center at 16510-16762 Southwest Freeway in Sugar Land; and the 20,000-sq.-ft. contract inked by Planet Fitness in Bayway Village Center in Webster.
Tight market driving rents up
The tight retail market continued to push the Houston metro asking rents up, reaching $16.90 per sq. ft. to start 2018 at a record high. At the end of the first quarter, prices have climbed 20.1% above the price five years ago of $14.07 per sq. ft. While retail availability is especially limited across the Houston area, it is particularly tight within the Inner Loop area, with a total inventory of approximately 28 million sq. ft. with a vacancy rate of 4.4% and the average asking triple net rent at $25.77 per sq. ft. The concentrated Galleria/Uptown area represents almost 5 million sq. ft. of rentable retail space with only 51,000 sq. ft., or 1.0% of inventory available, and a historical 5-year average asking triple-net rent in the $30.00 range.
Director of Research
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