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Net absorption in the Houston retail market went into the red for a second straight quarter at -516,000 sq. ft. in Q3 2020—down significantly from 1.4 million sq. ft. in Q3 2019.


EXECUTIVE SUMMARY

Occupancy drops to 93.6%
Net absorption in the Houston retail market went into the red for a second straight quarter at -516,000 sq. ft. in Q3 2020—down significantly from 1.4 million sq. ft. in Q3 2019. Leasing activity—which is comprised of both new leases and renewals—included 1.3 million sq. ft. of signed deals, down 35% from this time last year. The overall occupancy rate decreased by 30 basis points quarter-over-quarter, and 80 basis points year-over-year at 93.6%. The retail market saw overall average asking rates increase by $0.21 per sq. ft. quarter-over-quarter to finish at $18.29 on a triple-net basis. A year ago, average rates were at $17.52, representing a 4.4% increase.

Houston economic indicators
The Federal Reserve Bank of Dallas reported that indexes of economic activity for Houston continued to show growth over the second half of the summer thanks to a boost from the services sector. However, the pace of the recovery in the region has slowed, due mostly to ongoing weakness in the energy sector that is weighing down Houston’s recovery relative to Texas and the nation. Taken together, data suggests that while Houston’s recovery is likely to continue, it will trail the state. Houston payrolls lost 353,600 jobs between February and April 2020 as pandemic lockdowns reduced economic activity. The most recent data show that the total number of jobs recovered since April increased from 106,600 in July to 117,100 in August. That puts Houston’s recovery at 33% of jobs lost. By comparison, 42% of Texas job losses and 48% of U.S. jobs lost due to the pandemic had been recouped by August.


BROKER’S PERSPECTIVE

Throughout much of Q2 and Q3, we saw several businesses shutter in the aftermath of the onset of the COVID-19 pandemic. The local businesses and smaller retailers that were hit the hardest were only able to weather the closure mandates for only so long—even with the PPP funding lifeline. Businesses that were limping along pre-COVID were propped up with the additional funding, but as time has progressed, these funds have gone dry. We are just now beginning to see the ripple effect of the pandemic and are seeing several spaces coming back to the market. I expect to see this wave continue through the end of the fourth quarter, and even into early 2021.

With that said, strong population growth, above-average job growth, and a gradually recovering energy industry have all underscored Houston’s solid fundamentals.

Additionally, national retailers have been more fortunate in some regards than smaller businesses, with several being able to ride out the storm—though not all have been immune to filing for bankruptcy or restructuring. Many of these tenants have paused their growth and are waiting, ultimately, to see how the beginning of 2021 will unfold prior to resuming activity.

Shaffer Braun

Shaffer Braun
Vice President
NAI Partners


MARKET OVERVIEW

Supply and demand
The Houston retail market realized negative net absorption for the second time since 2009 during Q2 2020 and Q3 2020. The aggregate effect of the net occupancy decline was 516,000 sq. ft. of negative absorption for the quarter, raising the vacancy rate to 6.4%, while delivering 653,000 sq. ft. during July, August and September of 2020. Of the 3.2 million sq. ft. of new construction delivered so far in 2020, 68% has been leased, and of the 2.4 million sq. ft. still in the pipeline, 63% 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 Q3 2020 in the Greater Houston area at $96.9 million, down compared to this time last year at $386.6 million sq. ft. The primary capital composition for buyers in 2020 was made up of 66.3% private and 19.1% institutional investors. For sellers, the majority was 65.2% private and 23.1% user/other investors. Skanska recently acquired a key retail center at the southwest corner of Westheimer Road and Montrose Boulevard in the Inner Loop River Oaks submarket. Westmont Shopping Center, a 124,000-sq.-ft. retail plaza on 2.86 acres sold for $27 million. Madison Marquette owned the property which was home to Half-Price Books, Mattress Firm, Spec’s Wine and Sprints, and Mattress Pro. Skanska plans to convert the Montrose area plaza into a mix of retail and multifamily space.

Leasing activity
The volume of square footage signed during the third quarter—which is comprised of both new leases and renewals—was at 1.3 million sq. ft., up slightly from the previous quarter’s 1.2 million sq. ft., although down from 2.0 million sq. ft. this time last year. Almost one-fourth of the leasing activity took place in the Southwest submarket, followed by the Northwest submarket at 19%. The largest deal signed in the third quarter was a 72,786-sq.-ft. retail lease at 7355 Highway 6 South in Mercado 6 Marketplace. According to CoStar data, the undisclosed tenant’s sign date was in September 2020 with plans to start occupancy in February 2021.

Port Houston monthly container volumes rise
Port Houston reported that container activity in September surpassed the record level of TEUs for the same month last year, despite the negative impacts of the COVID-19 pandemic, which has slowed global commerce this year. This is the first turn toward growth since the effects of the pandemic in March. Port Houston handled 1% more TEUs in September 2020 compared to September 2019. For all of 2020, container activity already eclipsed the 2 million TEU mark, just 3% less than the same period last year. The Port is optimistic that a rebound in container volumes is underway and that it will continue for the remainder of the year and into 2021.

Average asking rents
The Houston retail overall triple-net average rates are at $18.29 per sq. ft., an increase of $0.77 from $17.52 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 ($27.86 PSF) and West ($20.77 PSF) submarkets currently have the highest annual overall average rate, followed by the Southwest ($18.75 PSF) and South ($18.35 PSF). With the rising costs to developers that are bringing new projects with high quality space to the market, rental rates could remain elevated.

September home sales defied expectations
According to the Houston Association of Realtors, Houston’s red-hot summer of home sales expanded into September as consumers continued to take advantage of historically low mortgage interest rates amid a pandemic. Heightened sales, combined with a steady decline in the number of homes entering the market in recent months, has sent inventory to its lowest level in almost six years, making a sales slowdown inevitable as would-be buyers are left with a narrower selection of homes. In September, 9,101 single-family homes sold compared to 7,050 a year earlier, a 29.1% increase marking the fourth straight month of positive sales.


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

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