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Houston Retail Commercial Real Estate Market Data and Economic Information - Lifetime Fitness Baybrook Mall

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EXECUTIVE SUMMARY

Houston’s retail market 94.6% occupied

Houston’s overall retail vacancy rate ended 2018 at 5.4%, unchanged for the last three quarters. Net absorption dropped to about 700,000 sq. ft. in the fourth quarter compared to the previous quarter’s two-year high of 1.5 million sq. ft. In addition, metro Houston leasing activity is at 1.5 million sq. ft., almost unchanged from the previous quarter, and down 37% from a year ago at 2.4 million sq. ft. The retail market saw overall average asking rates rise yet again by $0.41 per sq. ft. quarter-over-quarter to finish at $17.50—surpassing last quarters all-time high—on a triple-net basis. A year ago, average rates were at $16.39, representing a 6.8% increase.

Houston has, for the most part, survived the oil downturn

The Greater Houston area created 108,300 jobs, a 3.5% increase, in the 12 months ending December 2018, according to the Texas Workforce Commission’s preliminary data. The five sectors adding the most jobs in 2018 were construction (19,400); administrative and support services (16,800); durable goods manufacturing (15,500); professional, scientific and technical services (11,200); and health care (11,100). The sub-sectors losing the most jobs in 2018 were clothing stores (-2,000), building materials stores (-2,000), restaurants and bars (-900), insurance carriers (-800), telecommunications (-800), and oil and gas extraction (-800). Houston nonfarm payroll employment is at a record high 3,181,700. Allowing for revisions, this number should exceed 3.2 million by mid-year 2019, according to the Greater
Houston Partnership.

Despite doubts during Houston’s continuing recovery from Hurricane Harvey, 2018 proved to be a record year for Houston home sales. According to the Houston Association of Realtors’, single family home sales rose 3.8% to 82,177 while sales of all property types totaled 98,323, a 3.7% increase over 2017’s record volume. Total dollar volume for full-year 2018 jumped 21.5% to a record-breaking $28 billion.

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

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


MARKET OVERVIEW

Supply and demand remained aligned in 2018

Houston has absorbed 4.1 million sq. ft., and delivered 4.7 million sq. ft. in 2018, down from 2017 at 4.5 million sq. ft. and 6.5 million 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 the last three quarters of 2018—indicating a slightly slower tenant demand for new space—construction activity leveled off, averaging 4.3 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 3.9 million, down slightly from 4.1 million sq. ft. quarter-over-quarter, and 4.3 million sq. ft. year-over-year. New development has gradually been decreasing on a quarterly basis since the third quarter of 2016, when it reached 5.5 million sq. ft., a level not seen since 2008. In addition, retail space has remained at or above 94% occupancy since the fourth quarter of 2013.

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

PlazAmericas largest section sold

Real Capital Analytics data reports year-to-date retail sales volume for 2018 in the Greater Houston area at $2.9 billion. The fourth quarter sales volume was $533.5 million compared to fourth quarter 2017 at $452.5 million, resulting in a year-over-year quarterly volume change of 17.9%. The primary capital composition for buyers in 2018 was made up of 45.9% private investors, and 45.1% cross-border investors. For sellers, the majority was 48.0% REIT/listed investors, and 38.7% private. In December RAIT Financial Trust sold the largest section of PlazAmericas mall in Houston for an undisclosed price. Baker Katz acquired the mall’s largest section at 7500 Bellaire Boulevard, which totals 638,605 sq. ft. and was approximately 70% occupied at the time of the sale. According to 2018 Harris County Appraisal District records, the property was valued at more than $12.2 million. The mall was built in 1961, known then as Sharpstown Mall. The attached anchor department stores and the ten-story high-rise office building, which are separately owned, were not included in the sale.

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

Houston Retail Commercial Real Estate Market Data and Economic Information - Sales Volume graph

Leasing activity remains stable

Leasing activity totaled 1.5 million sq. ft. in Q4 2018, almost unchanged quarter-over-quarter, although down 37% from this time last year. A few of the metro’s largest leases signed during 2018 include the 120,000-sq.-ft. lease signed by Life Time Fitness at Baybrook Mall in the Southeast submarket; the 108,632-sq.-ft. deal signed by At Home at 3000 Kirby Dr. in the Far South submarket; and the 89,869-sq.-ft. lease signed by H-E-B at 2121 FM 2920 Rd. in the Far North submarket. There was some unease in Houston’s retail sector with many high-profile store location closings such as Randall’s, Mattress Firm, Sears, and Toys R Us. But as the saying goes, retail follows rooftops and according to the Greater Houston Partnership, from 2010 to 2017, Houston’s population increased by 16.4%, which is the fastest rate of growth among the nation’s 10 biggest metropolitan areas.

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

Port Houston surpassing the goal line

United States-bound retail container imports hit a new record in October, according to the Port Tracker report issued by the National Retail Federation. The amount of merchandise imported provides a rough barometer of retailers’ expectations. Volumes have been coming in at higher-than-usual levels in recent months, with retailers importing merchandise ahead of schedule. The past six years have represented the most significant growth period in Port Houston’s history: from 1.4 million twenty-foot-equivalent container units (TEU) to a projected 2.7 million TEU annually for the calendar year 2018 (nearly doubling in six years). In addition, more than 13 million TEU passed across Port Houston docks since 2014, and for the first time ever, container terminals reached and surpassed the 2 million TEU mark in a single year and are positioned to top the 3 million mark—perhaps as early as 2020. Port Houston Q4 2018 YTD Operating Statistics reported that container volume is solid outpacing last year by 10%; steel is up 21%; and overall tonnage is up 8%.

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

Rents continue to rise in tight market

The tight retail market continued to push the Houston metro average annual asking rents up, reaching $17.50 per sq. ft. to start 2019 at a record high. As of the end of the 2018, prices have climbed 22.0% from the average asking rent of five years ago ($14.34 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 4.8% and the average asking triple net rent at $25.29 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 climbing. The highest-quality space, with the best location, and ease of accessibility will generate the highest rents.

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


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

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