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Houston Retail Commercial Real Estate Market Quarterly Report Economic Data and Information - Sugarland Colony Mall

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Cha-ching! Houston retail asking rent continues to rise in tight market

EXECUTIVE SUMMARY

Houston retail asking rent continues to climb

Houston’s overall retail vacancy rate increased slightly to 5.5% in Q2 2018, an increase of 10 basis points quarter-over-quarter from 5.4%, and a 30-basis-point increase year-over-year. Net absorption decreased by 67.8% to 400,000 sq. ft. as of the quarter’s end, following the previous quarter’s 1.2 million sq. ft., and lower than year-over-year’s 950,000 sq. ft. In addition, metro Houston leasing activity is at 1.5 million sq. ft., unchanged from the previous quarter, and down 28.4% from a year ago at 2.1 million sq. ft. The retail market saw overall average asking rates rise again by $0.23 per sq. ft. quarter-over-quarter to finish at $17.03—an all-time high—on a triple-net basis. A year ago, average rates were at $16.38, representing a 4.0% increase.

Houston economic indicators are positive

In May, a landmark 3.1 million workers were on payrolls throughout the region, according to the Texas Workforce Commission. For the 12 months ending May 2018, metro Houston created 79,200 jobs, for a 2.6% increase. Employment services, construction and manufacturing led job growth with the three sectors accounting for 45.6% of the jobs created. Houston’s unadjusted unemployment rate was 4.2% in May, unchanged from 4.2% in April and down from 4.8% in May 2017. In addition, the price of West Texas Intermediate crude rose from the low $60s per barrel in the early months of 2018 to an average of $70 in May, while growth in the U.S. rig count has picked up, reaching a near-three-year high in early June with 1,062 rigs.

Houston Retail Commercial Real Estate Market Quarterly Report Economic Data and Information graphic 1

Houston Retail Commercial Real Estate Market Quarterly Report Economic Data and Information graphic 2


MARKET OVERVIEW

Supply and demand aligned in the first half of 2018

Houston has absorbed 1.6 million sq. ft., and delivered 2.0 million sq. ft. in the first half of 2018, down from H1 2017 at 2.0 million sq. ft. and 3.5 million sq. ft., respectively. 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 had been outpacing absorption during all four quarters of 2017—indicating a slower tenant demand for new space—construction activity leveled off, averaging 4.5 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. The amount of square feet currently under construction is at 4.5 million sq. ft., up slightly from 4.3 million sq. ft. quarter-over-quarter, although down from 5.3 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. In addition, retail space has remained at or above 94% occupancy since the fourth quarter of 2013.

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May sets highest record in Port Houston’s history

The rise in consumer confidence and spending, have sent retail imports climbing in Houston. Evidence of this is reflected as business continues to be strong for Port Houston with several records broken during May. The highest record in container volume in Port Houston’s history was set with more than 245,000 TEUs (twenty-foot equivalent containers) passing through the facilities. This latest highest total for containers reflects a 7.0% increase over the previous record set in March, with 617,000 TEUs recorded. Total container volume through May is more than 1.1 million TEUs, which shows an increase of 6% over the same period in 2017. In addition, import steel continues to show solid growth, with Port Houston general cargo terminals handling more than 500,000 tons of steel in May, the highest total since April 2015.

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West Houston marketplace changes hands

Real Capital Analytics data reports retail sales volume year-to-date through June 2018 in the Houston area at $696 million, resulting in a year-over-year change of -14.6%. The buyer composition is made up of primarily private investors at 72%; institutional buyers account for 16%; and user/other investors make up 8%. A recent significant investment transaction in the Houston area retail market is the SKJ Westheimer acquisition of Westheimer Marketplace at 12555 Westheimer Road, a 141,498-sq.-ft. retail center from NewQuest Properties. The property was 94% occupied with tenants such as PetsMart, 24-Hour Fitness, and Goodwill Industries at the time of sale.

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Leasing activity remains balanced

Leasing activity totaled 1.5 million sq. ft. in Q2 2018, virtually unchanged quarter-over-quarter, and down 28.4% from this time last year. The availability rate, the amount inventory that is being marketed for lease was 7.1%, unchanged from last quarter and from last year. The difference between this figure and the vacancy rate reflects expected future move-outs. The amount of square feet leased by submarket remained comparatively even, with the North submarket leading the way with 19%; the Northwest next at 18%, and the Southeast and Southwest submarkets tied in third place at 15%. On a percentage basis, the number of transactions dropped quarter-over-quarter by 12.0%, while the year-over-year drop was at 22.6%. 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 53,300-sq.-ft. contract inked by Joe V’s Smart Shop in Deer Park Triangle; and the 25,000-sq.-ft. lease signed by Total Wine in Colony Square Shopping Center at 16510-16762 Southwest Freeway in Sugar Land.

Houston Retail Commercial Real Estate Market Quarterly Report Economic Data and Information graphic 6

Houston Retail Commercial Real Estate Market Quarterly Report Economic Data and Information graphic 7

Rents continue to rise in tight market

The tight retail market continued to push the Houston metro asking rents up, reaching $17.03 per sq. ft. to start H2 2018 at a record high. At the end of the second quarter, prices have climbed 20.0% above the price five years ago of $14.19 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 4.2% and the average asking triple net rent at $25.47 per sq. ft. The concentrated Galleria/Uptown area represents 5 million sq. ft. of rentable retail space with only 85,000 sq. ft., or 1.7% of inventory available for lease, and a historical 5-year average asking triple-net rent in the $38.00 range.

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

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