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Net absorption in the Houston retail market stood at 671,000 sq. ft. in the first quarter—down significantly from 1.3 million sq. ft. in Q4 2019—while leasing activity included 1.6 million sq. ft. of signed deals.


EXECUTIVE SUMMARY

Occupancy at 94.4%

Net absorption in the Houston retail market stood at 671,000 sq. ft. in the first quarter—down significantly from 1.3 million sq. ft. in Q4 2019—while leasing activity included 1.6 million sq. ft. of signed deals. The overall occupancy rate dropped slightly by 20 basis points quarter-over-quarter, although remained unchanged year-over-year at 94.4%. The retail market saw overall average asking rates drop marginally by $0.08 per sq. ft. quarter-over-quarter to finish at $17.86 on a triple-net basis. A year ago, average rates were at $17.07, representing a 4.6% increase.

 

Houston economic indicators

Houston started 2020 with healthy job gains—led by leisure and hospitality, and health industries. Service-providing industries were accelerating, while goods-producing sectors had slight contractions, with modest to no growth in manufacturing. However, oil and stock markets have been whirling from the impacts of COVID-19 on world economies and a flood of crude from OPEC. These factors have cast a weighty shadow over the outlook for the region. On a year-over-year basis, Houston grew 2.3% (71,100 jobs). Houston’s unemployment rate was flat at 3.8% in February. For comparison, the February unemployment rate was 3.5% in Texas and 3.5% in the U.S. This data precedes the coronavirus (COVID-19) outbreak in the U.S.


MARKET OVERVIEW

 

Supply and demand

The Houston retail market absorbed 671,000 sq. ft. and delivered 1.4 million sq. ft. during Q1 2020. Of the new construction delivered so far in 2020, 74% has been leased, and of the over 3.1 million sq. ft. still in the pipeline, 69% has been spoken for. Strong population growth, above-average job growth, and a gradually recovering energy industry had all underscored Houston’s solid fundamentals. The new rooftops and jobs have driven demand for retail, which has led to an occupancy rate at or above 94.0% for the last five years, prior to the coronavirus (COVID-19) pandemic.

 

Investment Sales

Real Capital Analytics data reports quarterly retail sales volume for Q1 2020 in the Greater Houston area at $191.2 million, down compared to this time last year at $242.2 million. The primary capital composition for buyers in 2020 was made up of 71.4% private and 15.0% institutional investors. For sellers, the majority was 79.6% private and 11.2% REIT/listed investors.

 

Port Houston is open for business

Port Houston is part of a critical infrastructure industry as identified by the Department of Homeland Security and continues to operate to keep the supply chain moving and keep commerce flowing to support our region and the nation. Container activity at Port Houston, the largest container port on the United States Gulf Coast, began slowing in late March as expected as the coronavirus outbreak continued to threaten countries across the globe, including the U.S. Port Houston handled a total of 248,280 twenty-foot-equivalent units (TEUs) in March, a drop of 11% compared to March of 2019, when 280,721 TEUs were recorded. For the full year, Port Houston handled 773,087 TEUs through March, compared to 694,167 TEUs for the same period last year. That is an increase of 11% for the first quarter. The latest data from PIERS shows that while the U.S. container trade overall has contracted by more than 5% year-to-date, Port Houston has expanded by a similar amount. Nevertheless, in March Port Houston saw a total of seven sailings canceled by the carrier.

 

Average asking rents

The Houston retail overall triple-net average rates are at $17.86 per sq. ft., an increase of $0.79 from $17.07 a year ago. Rent growth has varied across Houston’s submarkets, and with additional space likely coming available in Houston, tenants may have more leverage than at any time in the last decade with regards to negotiating rental rates, terms, tenant improvements and concessions. Disruptions from COVID-19 will also have an impact on commercial real estate landlords and tenants as difficult decisions are made to adapt to these sudden changes. Many small tenants—particularly retail tenants—have seen revenue drop 50% to 100% in some cases and simply can’t pay their rent. For companies that qualify, the CARES Act recently passed by Congress provides at least two months’ rent and wage relief for companies of 500 employees or less; landlords—many of which are also struggling, as they receive multiple rent relief requests while still having to pay property expenses and mortgage payments— expect tenants who are able to do so to apply for these funds in order to pay rent.

 

Strong Houston home sales through mid-March

According to the Houston Association of Realtors, as COVID-19 ravaged the physical and business health of the nation, its impact on the Houston real estate market only began to set in during the last week of March, and therefore caused little disruption to the month’s overall performance. The full effect of the pandemic is expected to become more apparent when the April housing numbers are tallied. Even with some transactions interrupted before Governor Greg Abbott designated real estate as an “essential” service statewide as part of his March 31 stay-at-home order, Houston home sales were more than 11% ahead of the levels at this point in 2019. Consumers were still taking advantage of historically low mortgage interest rates through the first half of the month.


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

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