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Houston Retail demand continues to outpace supply. Crunch Fitness


EXECUTIVE SUMMARY

OCCUPANCY REMAINS AT 93.8% Houston retail overall occupancy remained at 93.8%, quarter-over-quarter and year-over-year. Net absorption in the Houston retail market stood at 744,000 sq. ft. as of Q2 2021, down from Q1 2021’s 1.1 million sq. ft. and up from Q2 2020’s negative 39,000 sq. ft. tally. Q2 2020 was the only quarter of negative net absorption in the past 12 years, or 48 quarters. Leasing activity—which is comprised of both new leases and renewals—included 1.6 million sq. ft. of signed deals during the second quarter, an equal amount to Q1 2021, and from this time last year. The retail market saw overall average asking rates increase by $0.14 per sq. ft. quarter-over-quarter to finish at $18.73 on a triple-net basis. A year ago, average rates were at $18.03, representing a 3.9% increase.

HOUSTON ECONOMIC INDICATORS The Federal Reserve Bank of Dallas reported that economic indicators were mixed for Houston in May and June as jobs data portrayed an uneven picture of improvement in health, construction, and small businesses in general. Representing restaurant demand, the leisure and hospitality industry has added an estimated 46,600 jobs since April 2020, which is short of prepandemic levels by a net 29,960 jobs. Restaurant demand based on seated dining in Houston was up nearly 17% in June from 2019 levels, and demand in the state was up more than 30%. Comments from surveys and industry leaders suggest that these numbers could be higher, but the availability of labor and challenges with supply chains and pricing are forcing some firms to limit their capacity and offerings.


MARKET OVERVIEW

DEMAND OUTPACING SUPPLY The aggregate effect of the net occupancy increase was 744,000 sq. ft. of absorption for the quarter, lowering the vacancy rate to 6.2%, while delivering 658,000 sq. ft. during the same time period. The Houston retail market has realized quarterly negative net absorption only once in the past 12 years—during Q2 2020, at negative 39,000 sq. ft. Of the 1.7 million sq. ft. of new construction delivered so far in 2021, 65% has been leased, and of the 2.3 million sq. ft. still in the pipeline, 63% has been spoken for. Existing-home sales has seen a major jump, shifting from a decline of 5.6% to growth of 6.3% and boosting the aggregate index. The strong performance was due in part to the recovery from Winter Storm Uri but also to the steady reopening of the broader economy as the pandemic recedes.

INVESTMENT SALES TRENDS Real Capital Analytics data reports quarterly retail sales volume for Q2 2021 in the Greater Houston area at $273.5 million, up compared to this time last year at $182.6 million. The primary capital composition for buyers so far in 2021 was made up of 77.0% private and 16.9% institutional investors. For sellers, the majority was 67.6% private and 15.6% user/ other investors. Among recent noteworthy transactions include a local developer doing business as LJ Parkway LLC selling Riverstone Plaza, a 28,000-sq.-ft. retail center. Built in 2018 at 4821 LJ Pkwy., the property was 81% leased at the time of sale with tenants V Lotus Bistro, Ritz Nails, V & V Salon & Spa, Guru Cool Learning, and 88 Bistro.

STEADY LEASING ACTIVITY OVER PAST 12 MONTHS The volume of square footage signed during the second quarter—which is comprised of both new leases and renewals—was at 1.6 million sq. ft., equal to Q1 2021, and this time last year. The largest amount of square feet leased took place in the Northwest submarket at 22%, followed by the North submarket at 17%. Significant transactions signed in the second quarter include a 30,539-sq.-ft. lease for Planet Fitness in Deerbrook Crossing in the Lake Houston submarket; a new 29,199-sq.-ft. lease for Ace Hardware in Kings Crossing in the Kingwood submarket; and a new 25,275-sq.-ft. deal signed with dd’s Discounts in Northbrook Shopping Center in the Near Northwest Oaks submarket.

PORT HOUSTON RECORDS DOUBLE-DIGIT TEU INCREASES Twenty-foot equivalent units (TEUs) in May showed a 30% increase, with 288,127 TEUs compared to last year for the same month. In addition, year-to-date, Port Houston container terminals have recorded an increase of 8% over last year. This comes after a record-breaking 2020 for TEUs through Port Houston, surpassing the 3 million TEU mark for the first time. General cargo also saw gains in May, with steel imports, auto imports, and bagged goods imports up compared to this time last year. Notably, commodities like lumber, machinery, plywood, and bagged foods increased, indicating a comeback of industries hard hit by the pandemic. Continued growth in cargo into Port Houston is expected.

BUYERS CONTINUE TO SNAP UP HOMES AT RECORD PRICES According to the Houston Association of Realtors, real estate reached record territory in June with consumers continuing to take advantage of historically low interest rates as they purchased homes from among a limited supply. Single-family home sales were up 13.6% compared to last June, with 10,638 units sold versus 9,362 a year earlier—marking the market’s thirteenth consecutive positive month of sales. On a year-to-date basis, home sales remain 25.9% ahead of 2020’s record pace.

INNER LOOP REACHES AN ALL-TIME HIGH ASKING RENTS The Houston retail overall triple-net average rates are at $18.73 per sq. ft., an increase of $0.70 from $18.03 a year ago. Rent growth has varied across Houston’s submarkets, and with the additional space that has recently become available in Houston, tenants seemed to 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 reached an all-time high of $30.09 per sq. ft. with a vacancy rate of 5.2%, followed by the West at $20.30 per sq. ft. with a vacancy rate of 6.0%. The overall Houston retail vacancy rate is 6.2%.


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

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