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Net absorption in the Houston retail market went into the red for the first time in over a decade at -872,000 sq. ft. in the second quarter—down from 1.4 million sq. ft. in Q2 2019.


EXECUTIVE SUMMARY

Occupancy drops to 93.8%

Net absorption in the Houston retail market went into the red for the first time in over a decade at -872,000 sq. ft. in the second quarter—down from 1.4 million sq. ft. in Q2 2019. Leasing activity—which is comprised of both new leases and renewals— included 1.1 million sq. ft. of signed deals, down 40.6% from this time last year. The overall occupancy rate decreased by 50 basis points quarter-overquarter, and 60 basis points year-over-year at 93.8%. The retail market saw overall average asking rates increase by $0.35 per sq. ft. quarter-over-quarter to finish at $18.11 on a triple-net basis. A year ago, average rates were at $17.33, representing a 4.5% increase.

 

Houston economic indicators

The Federal Reserve Bank of Dallas reported that pandemic-induced declines in economic activity for Houston slowed in May as the economy reopened, and some signs of recovery began. Leading and coincident indexes logged modest improvements, but Houston’s energy sector continued to shed jobs ahead of record-setting lows for drilling activity in the U.S. in June. Unfortunately, June also saw a return to sharp growth in COVID-19 hospitalizations. This increase has put a damper on the recovery as policy efforts to contain the virus and voluntary social distancing likely contributed to a reduction in area mobility and engagement.


BROKER’S PERSPECTIVE

 

From the landlord side we are seeing fairly normal activity in the way of tenant interest throughout various markets from a variety of different users. As national big-box anchor tenants are shuttering, we are seeing a healthy level of activity from other users that are re-purposing these larger vacancies; the majority of these being entry-to-market discount soft good users, building supply, and or different fitness concepts that see the untapped potential here in Houston market. From the tenant side I am seeing that the overall deal flow is taking longer from initial interest to lease execution. It’s been this way for the past 18 months, and I am unable to my finger on it. There has been a significant increase with construction costs, and I believe landlords are starting to take notice of this trend, offering more aggressive tenant improvement packages, increased build-out time, and additional abated rent to help offset some of these fixed costs that the tenants can’t avoid!

 

Shaffer Braun

Shaffer Braun

Associate

NAI Partners

 


MARKET OVERVIEW

 

Supply and demand

The Houston retail market realized negative net absorption for the first time since 2009 at -872,000 sq. ft., while delivering 761,000 sq. ft. during April, May and June of 2020. Of the 2.5 million sq. ft. of new construction delivered so far in 2020, 71% has been leased, and of the 2.7 million sq. ft. still in the pipeline, 61% 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 had driven demand for retail, which 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 Q2 2020 in the Greater Houston area at $177.2 million, down compared to this time last year at $282.4 million sq. ft. The primary capital composition for buyers in 2020 was made up of 69.3% private and 24.2% institutional investors. For sellers, the majority was 67.6% private and 25.9% user/other investors.

 

Leasing activity

The volume of square footage signed during the second quarter—which is comprised of both new leases and renewals—was at 1.1 million sq. ft., down from the previous quarter’s 1.6 million sq. ft., and 1.9 million sq. ft. this time last year. One-fourth of the leasing activity took place in the Northwest submarket, followed by the West submarket at 21%. The largest deal signed in the second quarter was Floor & Décor’s 91,110-sq.-ft. retail lease at 20738-20740 Gulf Freeway in Webster. The tenant has agreed to take occupancy within the 353,270-sq.-ft. Clear Lake Center in the fourth quarter of 2020. Other tenants in the retail power center include at home, American Freight, and Tuesday Morning.

 

Port Houston managing through pandemic

The Journal of Commerce reported that the coronavirus (COVID-19) and the United States-China trade war are having negative effects on U.S. containerized imports and exports. Many ports are registering year-to-date declines in both categories in early 2020, meanwhile expecting a cautious rebound from importers in the second half. Most recent, the Gulf ports increased their market share by 1.9% points to 10.8% of U.S. containerized imports and exports. Port Houston, which has benefited the past year from a surge in resins exports, outperformed other top 10 ports with a 14.1% increase in outbound container volume. In the past few years, resins manufacturers have invested billions of dollars to expand production of resins and other plastics in the U.S. Gulf Coast region. Natural gas is still plentiful and inexpensive, with billions of dollars of investment in these facilities to continue producing plastic, according to Port Houston. U.S. resin exports through the busiest Gulf Coast gateway jumped 30% year-over-year in the first quarter, according to PIERS.

 

Average asking rents

The Houston retail overall triple-net average rates are at $18.11 per sq. ft., an increase of $0.78 from $17.33 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.. The Inner Loop ($27.60 PSF) and West ($21.16 PSF) submarkets currently have the highest annual overall average rate, followed by the Southwest ($18.04 PSF) and Northwest ($17.93 PSF). With the rising costs to developers that are bringing new projects with high quality space to the market, rental rates could remain elevated.

 

Pent-up demand resulting from COVID-19 boosts home sales

According to the Houston Association of Realtors, a burst of homes going under contract in May after COVID- 19-related stay-at-home orders expired led to a surge of closings in June, driving home sales volumes back up to levels considered more normal for summertime in Houston—and even beyond 2019’s record pace. Single-family homes sold in June compared to a year earlier translated to a 15.7% jump—a strong rebound from two straight months of declines brought on by coronavirus and ongoing strains in the energy industry. The coronavirus seems to have driven consumer interest in real estate through virtual open houses and virtual showings, while providing an additional incentive to buy through all-time low interest rates.


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

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