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Houston Retail Commercial Real Estate Market Data and Economic Information - Shopping bags and retail center

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Supply has outpaced demand for retail space in Houston during the last four quarters, although as construction continues to moderate, the tide should turn. Net absorption increased to 785,000 sq. ft. in the first quarter compared to the previous quarter at 545,000 sq. ft. while leasing activity involved 1.5 million sq. ft. The retail market saw overall average asking rates rise yet again by $0.58 per sq. ft. quarter-over-quarter to finish at $17.90—surpassing last quarter’s all-time high—on a triple-net basis. A year ago, average rates were at $16.47, representing an 8.7% increase.


EXECUTIVE SUMMARY

Houston’s retail market 94.5% occupied

Supply has outpaced demand for retail space in Houston during the last four quarters, although as construction continues to moderate, the tide should turn. Net absorption increased to 785,000 sq. ft. in the first quarter compared to the previous quarter at 545,000 sq. ft. while leasing activity involved 1.5 million sq. ft. The retail market saw overall average asking rates rise yet again by $0.58 per sq. ft. quarter-over-quarter to finish at $17.90—surpassing last quarter’s all-time high—on a triple-net basis. A year ago, average rates were at $16.47, representing an 8.7% increase.

Outlook for Houston remains positive

Metro Houston created 72,600 jobs, a 2.4% increase, in the 12 months ending February 2019, compared to 56,400 jobs created in the 12 months ending February 2018, a 1.9% increase, according to the Texas Workforce Commission. The three sectors adding the most jobs over the past 12 months were durable goods manufacturing (15,200); professional, scientific and technical services (12,800); and health care (10,300). The unemployment rate in Houston was 4.1% in February, compared to the rates in both Texas and the United States at 3.8%. On the home front, lower interest rates pushed indecisive homebuyers into the purchasing mood as single-family home sales rose nearly 5% in March compared to a year earlier. According to the latest monthly report from the Houston Association of Realtors, sales of single-family homes increased 4.9% in March, with 7,072 homes sold versus 6,740 in March of 2018. Home sales ticked up slightly in February following three consecutive months of declines.

Houston Retail Commercial Real Estate Market Data and Economic Information - Supply and Demand graph

Houston Retail Commercial Real Estate Market Data and Economic Information - Market Indicators table


MARKET OVERVIEW

Supply outpacing demand in 2019

Houston has absorbed 785,000 sq. ft., and delivered 1.1 million sq. ft. in Q1 2019, down from this time in 2018 at 1.2 million sq. ft. of absorption and 1.1 million sq. ft. of new construction delivered. However, even with the difference in space, either added or being removed from the market, the fundamentals are very strong, with occupancy at 94.5%. While deliveries have been outpacing absorption during the last four quarters—indicating a slightly slower tenant demand for new space—construction activity leveled off, averaging 4.0 million sq. ft. during the same period, signaling controlled growth. This controlled approach will support steady retail growth going forward in a challenging national retail market. Of the new supply delivered to the market 828,000 sq. ft. (69.4%) is already spoken for. There is an additional 4.0 million sq. ft. under construction, with 1.6 million sq. ft. (41.2%) is available for lease—to help meet future demand.

Houston Retail Commercial Real Estate Market Data and Economic Information - Historical Sales Volume Graph

Phillips 66 purchases Kaleidoscope Shopping Center

Real Capital Analytics data reports the rolling four-quarter sales volume as of March 31, 2019 at $3.3 billion.  During this period, the energy company Phillips 66 bought a retail strip center built in 1984 located next to its 1.1 million-sq.-ft. headquarters in the Westchase District. Plans for the 58,691-sq.-ft. retail strip center have not been disclosed, though potential redevelopment and expansion is a possibility considering the proximity to Phillips 66 nearby campus. The property, Kaleidoscope Shopping Center at 10614 Westheimer was 100% leased at the time of sale by KSN Enterprises Inc. Key tenants included 365 Fitness Houston, Oswell Financial, and Allstate Insurance.

Houston Retail Commercial Real Estate Market Data and Economic Information - Vacancy and Availability graph

Leaner Sears post-bankruptcy

Leasing activity totaled 1.5 million sq. ft. in Q1 2019, down 21% quarter-over-quarter, and 37% less than this time last year. A few of the metro’s largest leases signed during 2019 include the 137,990-sq.-ft. lease signed by new owner ESL Investments of the Sears store in Deerbrook Mall. Although Sears is operating today, the company filed for bankruptcy in 2018 after years of declining sales. In February 2019, a court ruled that Sears’ chairman could buy the company out of bankruptcy, saving it from liquidation and promising a new, leaner version of the business. Also signed was a deal for 58,000 sq. ft. at 604 Highway 332 in Lake Jackson Creek; and Burlington Coat Factory in Baybrook Village in Webster inked a deal for 46,011 sq. ft. The Houston retail market has remained at or above 94.5% occupancy since Q1 2015 or four years. Given the many store closures in Houston and across the U.S., the minimal changes in vacancy rates show how the retail sector has been forced to become more innovative to remain competitive.

Houston Retail Commercial Real Estate Market Data and Economic Information - Net Absorption graph

Port Houston – busiest shipping hub on the Gulf of Mexico

In a March press release from Port Houston, preliminary results of the Houston Ship Channel Economic Impact Study report that the economic impact to the Houston Ship Channel region is $339 billion in state economic value, up 28% from four years ago. In addition, more than 1.35 million jobs statewide are impacted by Port Houston, a 15% increase from four years ago. Port Houston February overall cargo performance reported total tonnage of 6.5 million tons, and 413,000 TEUs, both up 6% for the year. Retail imports have surged in Houston, kept afloat by economic gains and a shift in global shipping patterns as more ships use the widened Panama Canal.

Houston Retail Commercial Real Estate Market Data and Economic Information - Under Construction graph

Rents continue to soar in tight market

The tight retail market continued to push the Houston metro average annual asking rents up, reaching $17.90 per sq. ft. to end the first quarter of 2019 at a record high. Prices have climbed 23.9% from the average asking rent of five years ago ($14.45 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., a vacancy rate of 4.9% and the average asking triple net rent at $26.59 per sq. ft. Within the Inner Loop is the concentrated Galleria area representing 4.6 million sq. ft. of high-end retail space with only 47,000 sq. ft., or 1.0% of inventory available, and an average asking triple-net rent around $39.38 per sq. ft. Although concessions such as free rent and tenant improvement allowances make posted rents less meaningful as a market indicator, the price of Houston’s retail space is climbing. The highest-quality space, with the best location, and ease of accessibility will command the highest rents.

Houston Retail Commercial Real Estate Market Data and Economic Information - Completions Year to Date

Houston Retail Commercial Real Estate Market Data and Economic Information - Asking Rent graph


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

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