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Net absorption in the Houston retail market increased to almost 1.5 million sq. ft. in the fourth quarter—up 4.3% from the previous quarter—while leasing activity included 1.6 million sq. ft. of signed deals. The overall occupancy rate dropped slightly by 10 basis points quarter-over-quarter, although remained unchanged year-over-year at 94.4%.


EXECUTIVE SUMMARY

Steady occupancy in Houston retail market

Net absorption in the Houston retail market increased to almost 1.5 million sq. ft. in the fourth quarter—up 4.3% from the previous quarter—while leasing activity included 1.6 million sq. ft. of signed deals. The overall occupancy rate dropped slightly by 10 basis points quarter-over-quarter, although remained unchanged year-over-year at 94.4%. The retail market saw overall average asking rates rise yet again by $0.09 per sq. ft. quarter-over-quarter to finish at $18.16—surpassing last quarter’s all-time high—on a triple-net basis. A year ago, average rates were at $16.94, representing a 7.2% increase.

Job growth remains healthy

The Houston metro created 85,500 jobs, a 2.7% increase, in the 12 months ending November 2019 according to the Texas Workforce Commission—a number that may change when benchmark revisions are released later in the year. By industry, Professional and Business Services had the largest year-over-year increase with 26,400 jobs, followed by 13,000 jobs in Education and Health Services, and then Mining, Logging and Construction at 10,800 jobs. Houston’s unemployment rate was 3.6% in November, down from 3.8% in November of last year. For comparison, the Texas and U.S. rates were both 3.3%. The rates are not seasonally adjusted. The U.S. Energy Information Administration reported that the closing spot price for a barrel of West Texas Intermediate was $61.14 per barrel as of December 31, 2019, up from $45.15 the same time last year. Baker Hughes reported the U.S. rig count at 805 as of December 27, 2019, down -279 from a year ago.


MARKET OVERVIEW

Steady occupancy in Houston retail market

Net absorption in the Houston retail market increased to almost 1.5 million sq. ft. in the fourth quarter—up 4.3% from the previous quarter—while leasing activity included 1.6 million sq. ft. of signed deals. The overall occupancy rate dropped slightly by 10 basis points quarter-over-quarter, although remained unchanged year-over-year at 94.4%. The retail market saw overall average asking rates rise yet again by $0.09 per sq. ft. quarter-over-quarter to finish at $18.16—surpassing last quarter’s alltime high—on a triple-net basis. A year ago, average rates were at $16.94, representing a 7.2% increase.

Job growth remains healthy

The Houston metro created 85,500 jobs, a 2.7% increase, in the 12 months ending November 2019 according to the Texas Workforce Commission—a number that may change when benchmark revisions are released later in the year. By industry, Professional and Business Services had the largest year-over-year increase with 26,400 jobs, followed by 13,000 jobs in Education and Health Services, and then Mining, Logging and Construction at 10,800 jobs. Houston’s unemployment rate was 3.6% in November, down from 3.8% in November of last year. For comparison, the Texas and U.S. rates were both 3.3%. The rates are not seasonally adjusted. The U.S. Energy Information Administration reported that the closing spot price for a barrel of West Texas Intermediate was $61.14 per barrel as of December 31, 2019, up from $45.15 the same time last year. Baker Hughes reported the U.S. rig count at 805 as of December 27, 2019, down -279 from a year ago.

Supply and demand remain balanced

The Houston retail market absorbed a total of 4.8 million sq. ft. and delivered 5.1 million sq. ft. during 2019. Of the new construction delivered in 2019, 77% has been leased, and of the over 3.6 million sq. ft. still in the pipeline, 67% has already been spoken for. Strong population growth, above-average job growth, and a gradually recovering energy industry underscore 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 the last five years.

Investment Sales

Real Capital Analytics data reports quarterly retail sales volume for the fourth quarter 2019 in the Greater Houston area at $268.8 million, compared to the third quarter 2019 at $300.1 million, resulting in a slight quarter-over-quarter volume change of -10.4%. The primary capital composition for buyers in the fourth quarter of 2019 was made up primarily of private investors at 83.5%, followed by institutional investors at 6.9%. For sellers, the majority of investors were private at 79.0%, trailed by institutional investors at 9.5%. In November, Cypress Pointe was acquired by Tarantino Properties. The 173,044-sq. ft. Kroger-anchored shopping center at 360 Cypress Creek Pkwy. was 99% leased at the time of sale by Weingarten Realty Investors. The shopping center sold for $27.5 million or $159 per sq. ft. Tenants include Goodwill Select Discount Store, dd’s Discounts, Ross Dress for Less, and Five Below.

Mega retail showroom coming to North Houston

American Furniture Warehouse purchased 30 acres at I-45 and River Plantation Dr. in Conroe, about 40 miles north of downtown Houston for a 443,375-sq.-ft. mega store. The store will include 150,000 sq. ft. of showroom space and 293,375 sq. ft. of warehouse/ merchandise storage space. A date for groundbreaking has not been released. The company opened its first Houston-area location on Labor Day weekend 2019 in a 355,000-sq.-ft. building in Webster, around 25 miles southeast of downtown. It is also currently building a 500,000-sq.-ft. facility in Katy, which is slated to open in April 2020.

A strong end of year for Port Houston

Port Houston is the fastest-growing container port in North America. Port Houston reported that container volume is expected to reach an all-time high of nearly three million TEU for 2019. Port Houston also ranks No.1 in North America for general cargo, handling breakbulk, special project, and steel, and is expected to record four million tons of volume in 2019. In December, the Port Commission awarded the Houston Ship Channel $6.3 million to go towards infrastructure and communications in addition to an award of $5.75 million to construct two radio towers. Port Houston’s top priority remains assisting in acquiring federal authorization to expand the Houston Ship Channel. The Port Commission authorized an additional $400,000 in funding to support a design review of the channel project expansion program. These funds are in addition to a record of $23 million already invested in this effort.

Rents continue to rise in tight market

The tight retail market continued to push the Houston metro average annual asking rents up, reaching $18.16 per sq. ft. to end the fourth quarter of 2019 at a record high. Prices have climbed 21.5% from the average asking rent of five years ago ($14.95 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 29.3 million sq. ft., a vacancy rate of 4.4% and the average asking triple net rent at $26.75 per sq. ft. The concentrated Galleria/ Uptown area represents 4.5 million sq. ft. of high-end retail space with only 70,000 sq. ft., or 1.5% of vacant inventory, and an average asking triple-net rent around $40.00 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 record levels in 2019

According to the Houston Association of Realtors, low mortgage interest rates, healthy employment growth and a stable supply of homes helped the Houston real estate market achieve record levels in 2019. Singlefamily home sales for the full year exceeded 2018’s record volume by nearly 5%. 2019 single-family home sales rose 4.8%, while sales of all property types totaled a 4.3% increase over 2018’s record volume. This marks the first time that total property sales have ever broken the 100,000 level. Total dollar volume for 2019 climbed 6.7% to a record-breaking $30 billion. Records were set throughout the year, with July registering Houston’s greatest one-month sales volume of all time – 8,918 single-family units sold. A record high average price of $322,143 was reached in May while a record high median price of $252,700 was achieved in June.


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

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