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Houston Retail Commercial Real Estate Market Quarterly Report with Economic Data and Information - port containers and retail shopping

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EXECUTIVE SUMMARY

No slowdown in Houston’s rising retail asking rents

Houston’s overall retail vacancy rate decreased slightly to 5.4% in Q3 2018, unchanged quarter-over-quarter, and year-over-year. Net absorption skyrocketed by over 225% to 1.4 million sq. ft. as of the quarter’s end, following the previous quarter’s 440,000 sq. ft., and 75% higher than year-over-year’s 820,000 sq. ft. In addition, metro Houston leasing activity is at 1.5 million sq. ft., down marginally from the previous quarter, and down 16% from a year ago at 1.8 million sq. ft. The retail market saw overall average asking rates rise yet again by $0.23 per sq. ft. quarter-over-quarter to finish at $17.15—surpassing last quarters all-time high—on a triple-net basis. A year ago, average rates were at $16.29, representing a 5.3% increase.

Houston’s economy continues to grow at a healthy pace

Employment indicators increased year over year as Houston employment grew 3.1% in August. Construction was the growth leader, adding 20,800 jobs, followed by professional and business services gaining the second-largest number of jobs at 16,800. The unemployment rate in the metro fell slightly to 4.2% in August, the lowest seasonally adjusted unemployment rate for Houston since February 2008. In addition, on a dollar-per-gallon basis, Brent crude oil has been rising over the past several weeks. Motor fuels are traded on a global market and lean towards the price of international oil benchmark Brent crude. On-highway diesel prices in the Gulf Coast have been rising, while gasoline prices fell from $2.60 in mid-August to $2.51 in mid-September even with strong weekly U.S. consumption numbers and increasing crude prices.

Houston Retail Commercial Real Estate Market Quarterly Report with Economic Data and Information - Supply and Demand graph

Houston Retail Commercial Real Estate Market Quarterly Report with Economic Data and Information - Market Indicators table


MARKET OVERVIEW

Supply and demand remain aligned in the second half of 2018

Houston has absorbed 1.4 million sq. ft., and delivered 1.5 million sq. ft. in the third quarter of 2018, up from Q2 at 440,000 sq. ft. and 820,000 sq. ft. year-over-year. However, even with the difference in space, either added or being removed from the market, the fundamentals are very strong, with occupancy at 94.6%. 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 4.3 million sq. ft., down somewhat from 5.0 million sq. ft. quarter-over-quarter, and comparable to 4.6 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.

Houston Retail Commercial Real Estate Market Quarterly Report with Economic Data and Information - Sales Volume

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

Port Houston jumps to top 5 U.S. container ports

Port Houston is No.1 in the U.S. in foreign tonnage and is now in the Top 5 for containers alongside Los Angeles, New York, Savannah and Long Beach, according to JOC Piers data covering the second quarter of 2018. Port Houston is outpacing trade for the U.S. as a whole in 2018, led by strong imports. During the first six months of 2018, Port Houston imports from the Trans-Pacific region increased by 24%, a significant jump compared to overall U.S. Trans-Pacific imports, which increased by 5%. In addition, Port Houston reported finishing the month of August with overall tonnage for the year at close to 28 million tons, reflecting an 8% increase over last year. Steel tonnage remained steady reporting 29% growth for the same time period. Container volume remained solid, although this time last year port operations were closed for a week in August due to the effect of Hurricane Harvey. However, year-to-date activity continues to be strong with a port-wide increase of 11% overall in TEU (twenty-foot equivalent unit), with loaded container units up 10% compared to last year.

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

Former Ventech changes hands

Real Capital Analytics data reports retail sales volume year-to-date through September 2018 in the Houston area at $2,109,003,179, resulting in a year-over-year increase of 63.5%. The buyer composition is made up of primarily cross-border investors at 48%; private buyers represent 41%; institutional buyers account for 7%; and REIT/listed plus user/other investors make up 4%. A recent significant investment transaction in the Houston area retail market is the Pasadena Mall 3D LLC acquisition of 100 Pasadena Blvd., the 125,696-sq.-ft. former Ventech property.

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

Leasing activity remains balanced

Leasing activity totaled 1.5 million sq. ft. in Q3 2018, virtually unchanged quarter-over-quarter, and down slightly from this time last year. The availability rate, the amount inventory that is being marketed for lease was 6.9%, down from last quarter at 7.0% and 7.4% from last year. The difference between this figure and the vacancy rate reflects expected future move-outs. occurring in 2018 included: the 62,189-square-foot-lease signed by Easy Mart at 1525 S Mason Rd; the 53,300-square-foot-deal signed by Joe V’s Smart Shop at 4200 Pasadena Blvd; and the 25,000-square-foot-lease signed by Conn’s Home Plus at 11222 Fountain Lake Dr.

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

Rents continue to rise in tight market

The tight retail market continued to push the Houston metro asking rents up, reaching $17.15 per sq. ft. to start Q4 2018 at a record high. At the end of the third quarter, prices have climbed 20.4% above the price five years ago of $14.25 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 4.4% and the average asking triple net rent at $25.77 per sq. ft.

Houston Retail Commercial Real Estate Market Quarterly Report with Economic Data and Information - Asking Rent graph


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

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