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Retail fundamentals showing resilience
Houston’s overall retail vacancy rate fell to 5.5% in Q4 2017, a drop of 10 basis points quarter-over-quarter from 5.6%, though a 60-basis-point increase year-over-year. Net absorption regained strength at positive 1.61 million sq. ft. as of the quarter’s end, following the previous quarter’s 228,033 sq. ft., and on par with 1.65 million sq. ft. year-over-year. In addition, metro Houston leasing activity is at 1.87 million sq. ft., up from the previous quarter’s 1.71 million sq. ft. The retail market saw overall average asking rates rise $0.22 per sq. ft. quarter-over-quarter to finish at $16.75 per sq. ft. on a triple-net basis. A year ago, average rates were at $15.83, representing a 5.8% increase.
Outlook for Houston remains positive
The Houston economy continued to improve nearing the end of 2017. The business-cycle index is trending upwards and employment data exceeded pre-hurricane readings. Houston’s not seasonally adjusted unemployment rate was 4.3% in November, up from 4.1% in October. The November increase was driven in part by an increase in the labor force likely related to Hurricane Harvey. Fuel prices in the region jumped relative to West Texas Intermediate in September but have varied as storm-related misrepresentations lessened. Retail gasoline prices dropped back to near pre-Harvey levels from the beginning of September to the end of October and have been moderately flat since. Overall, while the outlook for the immediate future is circumspect, forecasts for the next few years remain optimistic.
Retail construction will maintain current pace in 2018
Houston absorbed 1.6 million sq. ft. in Q4 2017, its strongest quarter since Q4 2016, and a healthy turnaround from the previous quarter’s 228,033 sq. ft.—the lowest level per quarter in five years. However, even with the quarterly fluctuation in space, either added or being removed from the market, the fundamentals are very robust, with occupancy at 94.5%. While deliveries had recently been outpacing absorption—indicating a lull in tenant demand for new space—construction activity has begun to slow, a sign of controlled growth. This disciplined approach will help stabilize retail going forward in a less-than-perfect overall commercial real estate market. The amount of square feet under construction is at 3.1 million sq. ft., down from 3.8 million sq. ft. quarter-over-quarter, and 4.4 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 10-year high of 5.5 million sq. ft. Closing out 2017, supply and demand became more aligned at 1.3 million sq. ft. and 1.6 million sq. ft., respectively. In fact, retail space has remained at or above 94% occupancy since the first quarter of 2014.
Retail imports surged in Houston
A change in global shipping patterns that has routed more traffic through the recently widened Panama Canal, coupled with rise in consumer confidence and spending, have sent retail imports climbing in Houston, reported The National Retail Federation. In addition, Port Houston stated that it handled a record 2.4 million containers last year, up 14% from 2016, due to strong growth in container cargo throughout the year. This trend is also reflected throughout other U.S. ports, followed by a year of job gains across the state and the country.
Food hall trend gaining speed in Houston
Lyric Market, the most recent food hall coming to Houston, is scheduled to open this fall at 411 Smith St. on the corner of Louisiana, Preston and Smith streets. The location in the Theater District will be within a few blocks of three other food hall concepts in downtown; The Conservatory Underground Beer Garden & Food Hall, at 1010 Prairie St., which opened in 2016; Finn Hall, which is opening spring 2018 in The Jones on Main; and Bravery Chef Hall, at 409 Travis St. inside Aris Market Square, which is expected to open this summer. In addition, there are rumors of a group planning to utilize the concept at the former Barbara Jordan Post Office at 401 Franklin. The food hall trend has been slow to arrive in Houston, whereas New York City is said to have more than 20 as of last summer. Texas holds claim to several sprawling eateries such as Legacy Food Hall in the Dallas suburb of Plano in the new Legacy West development; Fareground in Downtown Austin in the lobby of the One Congress Plaza high-rise; and The Bottling Department in the Pearl District in San Antonio.
Investment sales and leasing activity positive
Real Capital Analytics data reports retail sales volume during 2017 in the Houston area at $1.7 billion, resulting in a year-over-year change of 11.8%. The buyer composition is made up of 52% private, 26% institutional, 12% REIT/listed, and 9% cross-border. A positive sign for the Houston area retail market is the recent LaSalle acquisition of Greenway Commons at 3838 Richmond Ave., a 253,223-sq.-ft. retail center from Blackstone JV DDR. The property was built in 2008 and was 100% occupied with tenants such as Costco, LA Fitness, Iberia Bank, Buffalo Wild Wings, and Panda Express at the time of sale.
Leasing activity ticked up during the fourth quarter with a total of 1.8 million sq. ft. leased in the Houston market. The amount of square feet leased by submarket remained comparatively even with the Northwest submarket leading the way with 22%; the North next in line at 20%, and the Southeast in third place at 16% with a combined total representing close to 60% of all leasing activity. These amounts are down from 2.3 million sq. ft. at this time last year. On a percentage basis, transactions increased quarter-over-quarter by 9.6%, while the year-over-year drop was at 18.4%. All told, the largest lease signings occurring in 2017 included Ashley Furniture Homestore at Brazos Mall sealing a deal leasing 58,800 sq. ft.; the 41,900-sq. ft. lease signed by Auto Boutique of Texas at 16800 Feather Craft Lane in the NASA/Clear Lake submarket; and the 40,000-sq. ft. contract inked by Altitude Trampoline Park at Spring Cypress Center.
Tight market driving rents up
The tight retail market continued to push the Houston metro asking rents up, reaching $16.75 per sq. ft. to close out 2017 at a record high. At the end of the fourth quarter, prices have climbed 9% above the five-year average of $15.37 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 4.2% and the average asking triple net rent at $25.81 per sq. ft., also a record high. The concentrated Galleria/Uptown area represents almost 4 million sq. ft. of rentable retail space with only 55,000 sq. ft., or 1.4% of inventory available, and a historical 5-year average rent in the $30.00 range.
Director of Research
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