Houston Retail Market Report | Q1 2017

by CoyDavidson on May 18, 2017

Houston’s Retail Market Remains Healthy

Houston’s retail market moves into 2017 with a healthy outlook. Not much changed between quarters with vacancy rates ticking up only 20 basis points. Although Houston lost about 80,000 high income jobs between 2014 and 2016, retail market indicators show no signs of a struggling economy. Approximately 68% of the retail space under construction at the close of Q1 2017 is pre-leased. Despite the 1.5M SF of new inventory delivered in the first quarter, Houston’s average retail vacancy rate remains low at 5.6%.

Houston’s retail leasing activity, which includes renewals, decreased over the quarter from 1.6M SF in Q4 2016 to 1.1M SF in Q1 2017. Most of the high-end class A space located inside the city limits is 90-100% leased. It is hard to find good quality well located available space. Most of the space that is available is in projects under construction located in the suburbs near new master-planned residential development, and will most likely be leased and occupied by discount retailers, service businesses, restaurants, and entertainment concepts.

As large department stores continue to close down, these spaces are being considered for other uses such as entertainment venues that still add value to the shopping center. Another trend on the increase are mixed-use developments planned where retail and entertainment brands are built in a live, work, shop, and play environment. River Oaks District and City Centre are success “place making” projects that have broad appeal and seem to be insulated from online shopping. Developers are clamoring for urban sites to develop retail in walkable areas such as the Heights and Washington Ave where several new projects are under construction or in the planning stage. To offset declining in-store sales due to online shopping, HEB recently announced plans to add curb side delivery at most of their Houston stores.

According to the U.S. Bureau of Labor Statistics, the Houston metropolitan area created 19,300 jobs (not seasonally adjusted) between February 2016 and February 2017. Most of the job growth occurred in arts, entertainment & recreation, government, retail trade, and education.

VACANCY & AVAILABILITY

Houston’s average retail vacancy rate increased 20 basis points from 5.4% in Q4 2016 to 5.6% in Q1 2017. At the end of the first quarter, Houston had 15.8M SF of vacant retail space on the market. Among the major property types, theme/entertainment retail has the lowest vacancy rate of 1.2%, followed by single-tenant at 1.7%, lifestyle centers at 3.1%, power centers at 4.1% and community centers at 5.3%. The highest vacancy rate is among outlet centers at 11.8%, and the largest amount of vacant space by square feet is among neighborhood centers.

There is currently 2.6M SF of retail space under construction of which 62% is pre-leased. The largest project under construction is the 300,000-SF Paragon Outlets located on Hwy 59 South in Rosenberg. This project is scheduled for completion in October 2017. Future tenants include Nike Factory Store, Old Navy, Gap Outlet, Carter’s, Banana Republic Factory Store, Skechers, Brook’s Brothers Factory Store and Converse.

Also under construction is the 168,000-SF Market at Springwoods Village neighborhood shopping center located in the Far North submarket. The Kroger-anchored center sits on the south side of the Grand Parkway at Holzwarth Rd, adjacent to Springwoods Village. The center is expected to deliver third quarter 2017. Other future tenants include MOD Super Fast Pizza, Supercuts, Chick-fil-a, Torchy’s Tacos, and The Big Salad.

RENTAL RATE & VACANCY PERCENTAGE

ABSORPTION & DEMAND

Houston’s retail market posted 0.9M square feet of positive net absorption in the first quarter. A large majority of the absorption was caused by big box single tenants such as Target, Lowes, and Sam’s Club. Other large tenants that moved during the first quarter include Floor and Decor, Urban Air, Home Goods/Marshalls, Rustic Furniture, PetCo and Party City.

RENTAL RATES

According to CoStar, our data provider, Houston’s citywide average quoted retail rental rate for all property types increased slightly over the quarter from $14.86 per SF NNN the in fourth quarter to $14.97 per SF NNN. These average rental rates are typically much lower than actual deal rates since they include all retail property types and classes. And, much of those properties are not well leased and are listed with discounted asking rates. According to Colliers’ internal data, Class A in-line retail rental rates can vary widely from $20.00 to $85.00 per SF, depending on location and property type.

LEASING ACTIVITY

Houston’s retail leasing activity, which includes renewals, decreased quarterly from 1.6M square feet in Q4 2016 to 1.1M square feet in Q1 2017.

▸ Click here to download the report as a PDF.

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