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Net absorption in the Houston retail market increased to almost 1.3 million sq. ft. in the third quarter compared to the previous quarter at 1.2 million sq. ft., a 3.5% increase, while leasing activity included 1.4 million sq. ft. of signed deals.


EXECUTIVE SUMMARY

Steady Houston retail market

Net absorption in the Houston retail market increased to almost 1.3 million sq. ft. in the third quarter compared to the previous quarter at 1.2 million sq. ft., a 3.5% increase, while leasing activity included 1.4 million sq. ft. of signed deals. The overall occupancy rate remained unchanged quarter-over-quarter at 94.4%, and down only 10 basis points from this time last year at 94.5%. The retail market saw overall average asking rates rise yet again by $0.39 per sq. ft. quarter-over-quarter to finish at $18.38—surpassing last quarter’s all-time high—on a triple-net basis. A year ago, average rates were at $16.90, representing an 8.8% increase.

Job growth remains healthy

The Houston metro created 81,900 jobs, a 2.7% increase, in the 12 months ending August 2019 according to the Texas Workforce Commission. The sectors adding the most jobs over the past 12 months were professional, scientific, and technical services (21,100); manufacturing (11,500); and other services (9,700). Houston’s unemployment rate was 3.9% in August, down from 4.4% in August of last year. The Texas rate in August was 3.6%, the U.S. rate 3.8%. The rates are not seasonally adjusted. The U.S. Energy Information Administration (EIA) reported that the closing spot price for a barrel of West Texas Intermediate (WTI) averaged $56.16 per barrel during the second week of September 2019, down 18.6% from $68.96 for the same period in 2018. Monthly WTI prices averaged $54.81 per barrel in August 2019. Looking ahead, the EIA forecasts WTI to average $62 per barrel in the second half of 2019 and $63 in 2020.


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

Balanced year-to-date supply and demand

The Houston retail market has absorbed 3.1 million sq. ft. and delivered 3.4 million sq. ft. year-to-date through Q3 2019. Of the new construction delivered so far this year, 70% has been leased, and of the over 3.5 million sq. ft. still in the pipeline, about half 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 94.0% for over the last five years.

Investment Sales

Real Capital Analytics data reports quarterly retail sales volume for the third quarter 2019 in the Greater Houston area at $280.4 million, compared to the second quarter 2019 at $289.0 million, resulting in a slight quarter-overquarter volume change of -3.0%. The primary capital composition for buyers in the third quarter of 2019 was made up primarily of private investors at 88.0%, followed by institutional investors at 8.4%. For sellers, the majority of investors were private at 75.0%, trailed by institutional investors at 9.9%. In July, Fondren Southwest Village was acquired by Wu Properties. The 305,000-sq. ft. retail center is located at 11092 Fondren Road and was 90% leased at the time of sale by Garrison Investment Group. The shopping center is grocery-anchored by Fiesta Mart along with tenants dd’s Discounts and Planet Fitness.

H-E-B celebrates its 114th anniversary this year

The Texas-based grocer currently has two construction projects in West Houston totaling $16 million. The first is an addition to its 4625 Windfern Road distribution center in Houston, estimated to cost $12.5 million. The second is for a store renovation at 11815 Westheimer Rd. in the Memorial neighborhood—a project estimated to cost $3.5 million. In addition, the recently opened H-E-B store at 3663 Washington Ave., the anchor of the soon-to-open Buffalo Heights mixed-use development, is 96,000 sq. ft., located at the intersection of Washington Avenue and South Heights Boulevard. The store is one of the first in Houston to offer two levels of grocery space. Another H-E-B expected to open in 2019 is the MacGregor Market store at the corner of State Highway 288 and North MacGregor Way. H-E-B, with sales of $26 billion, operates 400 stores in Texas and Mexico. Known for its innovation and community service, H-E-B celebrates its 114th anniversary this year.

Port Houston—The crown jewel of the Texas economy

The greater Port of Houston, which is comprised of about 200 facilities along the ship channel, has a national economic impact of nearly $802 billion annually and supports about 3.2 million jobs. In Texas alone, the economic value of the port is about $340 billion. Operationally, the facilities have handled close to 30 million tons of cargo through August, an increase of 7% over last year as both container volumes and steel have maintained their upward trends in 2019. The number of twenty-foot equivalent units or container TEUs handled through August totaled nearly two million, an increase of 11% compared to this time last year. Port officials expect to approach three million by the end of this year. The Port of Houston continues to be among the fastest-growing container ports in the country, fueled by an increasing number of import distribution centers in the Houston region and a robust manufacturing base in the State of Texas.

Rents continue to rise in tight market

The tight retail market continued to push the Houston metro average annual asking rents up, reaching $18.38 per sq. ft. to end the third quarter of 2019 at a record high. Prices have climbed 21.6% from the average asking rent of five years ago ($15.12 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 28.9 million sq. ft., a vacancy rate of 4.7% and the average asking triple net rent at $27.53 per sq. ft. The concentrated Galleria area represents 4.5 million sq. ft. of high-end retail space with only 35,000 sq. ft., or 0.8% of vacant inventory, and an average asking triple-net rent around $41.00 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 home sales registered the seventh positive month

According to the Houston Association of Realtors, September single-family home sales were up 9.5% year-over-year marking the second largest one-month sales volume of the year. On a year-to-date basis, sales are 3.8% ahead of 2018’s record volume. Strong inventory and low mortgage interest have generated a positive climate for home buyers and created one of the strongest beginnings of the fall season in Houston real estate history. The median price of a single-family home reached the highest level ever for a September, climbing 4.7% to $244,000. The average price also set a September record, rising 1.5% to $298,947.


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

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