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Houston Retail Commercial Real Estate Market Data and Economic Information - San Jacinto Mall in Baytown Redevelopment by Fidelis

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Net absorption in the Houston retail market increased to almost 1.2 million sq. ft. in the second quarter compared to the previous quarter at 647,000 sq. ft., a 76.5% increase, while leasing activity included 1.5 million sq. ft. of signed deals. The retail market saw overall average asking rates rise yet again by $0.40 per sq. ft. quarter-over-quarter to finish at $18.07.


EXECUTIVE SUMMARY

Houston’s retail market continues to charge forward

Net absorption in the Houston retail market increased to almost 1.2 million sq. ft. in the second quarter compared to the previous quarter at 647,000 sq. ft., a 76.5% increase, while leasing activity included 1.5 million sq. ft. of signed deals. The retail market saw overall average asking rates rise yet again by $0.40 per sq. ft. quarter-over-quarter to finish at $18.07—surpassing last quarter’s all-time high—on a triple-net basis. A year ago, average rates were at $16.73, representing an 8.0% increase.

Healthy near-term outlook for the Houston region

Employment increased to a 3.3% annual growth rate (25,800 jobs) over the three months ending in May, up from 2.0% growth for the three months in February. The leisure and hospitality sector added the most jobs (7,900), while the mining sector logged the fastest growth rate at 12.9%. Most of the remaining gains came from professional and business services (6,100; primarily from professional, scientific and technical jobs). The May Houston unemployment rate held steady at April’s record low of 3.5%. Texas overall also had an unemployment rate of 3.5% in May, while the U.S. rate was 3.6%. The Federal Reserve Bank of Dallas reported that West Texas Intermediate (WTI) crude oil fell nearly $10 per barrel from April to June as signs of rising inventories and concerns about the pace of global demand growth weighed on the price.  The U.S. rig count slipped to an average of nearly 970 rigs in June, a drop of 108 rigs from the three-year high of 1,077 in December. Variations in monthly drilling activity tend to follow changes in monthly oil prices with a lag of about three months.

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

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


MARKET OVERVIEW

Balanced year-to-date supply and demand

The Houston retail market has absorbed 1.8 million sq. ft. and delivered 1.8 million sq. ft. halfway through 2019. Of the new construction delivered so far this year, 66.2% has been leased, and of the over 4 million sq. ft. still in the pipeline, 60.0% has already been spoken for. Strong population growth, above-average job growth, and a gradually recovering energy industry represent Houston’s solid fundamentals. The new rooftops and jobs have driven demand for retail, which has led to an occupancy rate at or above 94.5% for 17 consecutive quarters—or Q2 2015.

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

Redevelopment of San Jacinto Mall in Baytown

Real Capital Analytics data reports quarterly retail sales volume for Q2 2019 in the Greater Houston area at $215.0 million, compared to second quarter 2018 at $456.5 million, resulting in a year-over-year quarterly volume change of -52.9%. The primary capital composition for buyers in the second quarter of 2019 was made up of 82.3% private investors, and 15.4% institutional investors. For sellers, the majority was 86.8% private investors, and 5.2% REIT/Listed. Fidelis Realty Partners has started the redevelopment of the San Jacinto Mall, a 1.1 million-sq.-ft. shopping center that opened in 1981. To begin the initial phase of redevelopment, the previous anchor store which had once been home to Sears, was demolished. Fidelis acquired the mall in 2015 from Triyar Retail Group and plans to revamp the mall into a 1 million-sq.-ft., open-air center that will be named San Jacinto Marketplace.

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

The new Toys R Us

Leasing activity totaled 1.5 million sq. ft. in Q2 2019, slightly less quarter-over-quarter, and down 26.5% from this time last year. A few of the metro’s largest leases signed during Q2 2019 include the 47,768-sq.-ft. lease signed by Hobby Lobby at Fairway Centre in Pasadena; Arland’s Market inked a deal for 28,000 sq. ft. at Four Corners Shopping Center in Freeport; and the 24,000 sq. ft. tenancy at Fondren Square in Southwest Houston by American Freight Furniture and Mattress. In addition, The Galleria in Houston was selected as one of the first two new Toys R Us stores to open in November. The successor to Toys R Us, Tru Kids, plans to open the other store in New Jersey. The reimaging of Toys R Us comes at a time when retailers are agreeing to smaller store footprints to lower overhead costs and contend with the growing recognition of online shopping. The new locations will be smaller and redesigned to be more interactive, reminding us that physical retail isn’t dead and that old brands can be revamped.

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

Port Houston driving force in the region’s economy

Highlighted year-to-date performance through May from Port Houston include total tonnage for Houston’s public facilities increasing 7% for the year; container volume continuing its strong performance, topping last year by 12%; and exports of all resins showing growth of 38%, including a 68% increase in polyethylene resin exports. Port Houston continues efforts to obtain federal authorization to widen and deepen the Houston Ship Channel. In June, the Army Corps toured the Houston Ship Channel witnessing first hand vessel activity of the nation’s busiest waterway. The Port Commission approved $300,000 in additional funding for the Houston Ship Channel Expansion Channel Improvement Project Feasibility Study, including a recommendation for fully widening the entire Galveston Bay reach, to allow future vessel generations to transit the channel freely.

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

Rents continue to skyrocket in tight market

The tight retail market continued to push the Houston metro average annual asking rents up, reaching $18.07 per sq. ft. to end the second quarter of 2019 at a record high. Prices have climbed 20.7% from the average asking rent of five years ago ($14.97 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 28.5 million sq. ft., a vacancy rate of 4.5% and the average asking triple net rent at $27.10 per sq. ft. Within the Inner Loop is the concentrated Galleria area representing 4.5 million sq. ft. of high-end retail space with only 70,000 sq. ft., or 1.5% of inventory available, and an average asking triple-net rent around $42.00 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 rising. The highest-quality space, with the best location, and ease of accessibility will demand the highest rents.

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

Retail and rooftops

June home sales could not match the momentous levels of this time last year, in June of 2018. According to the Houston Association of REALTORS®), single-family home sales were down 3.4%. However, on a year-to-date basis, sales are still outpacing 2018’s record volume. The median price of a single-family home reached an all-time high, climbing 2.9% to $252,000. The average price rose to the highest level ever for the month of June, up 2.0% to $321,973. Shoppers looking for a home in the greater Houston area have many options available, as housing inventory reached a 4.4-month’s supply in June—returning to levels last seen before Hurricane Harvey devastated the market in August 2017. This time last year, the supply stood at 4.1 months.

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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