Houston Retail Market Report | Q2 2017

by CoyDavidson on August 7, 2017

Houston Shopping Center

Houston’s retail market continues to expand following increased population, jobs and housing growth in suburbs

Houston’s retail market has remained healthy through mid-year 2017, with low vacancy, steady leasing activity and positive absorption. Despite 1.5M SF of new construction deliveries in Q2 2017, the average vacancy rate remained unchanged from last quarter, at 5.6%. Almost half of the 2.3M SF of retail space under construction is preleased and 83% of new construction delivered in 2017 is occupied.

Houston’s retail leasing activity, which includes renewals, increased over the quarter from 1.2M SF in Q1 2017 to 1.4M SF in Q2 2017. Much of the high-end class A space located within the major innercity retail hubs is 90-100% leased. It is hard to find good quality well located available space. Most of the space that is available is in older centers or projects under construction in the suburbs near new master-planned residential development. Many large retailers such as Macy’s and Sears, have announced store closings, but there are still new retailers entering the Houston market such as Dirt Cheap, a deep-discount chain, which recently leased space in 3 locations.

According to the U.S. Bureau of Labor Statistics, the Houston metropolitan area created 45,300 jobs (not seasonally adjusted) between May 2016 and May 2017. That is a substantial increase in job growth for Houston when compared to the 200 jobs gained in 2015 and the 18,700 gained in 2016, but still below the average of 65,000. Most of the recent quarterly job growth occurred in employment services, public education, food services and drinking places, health care, and fabricated metal products.

Houston Retail Real Estate Market

VACANCY & AVAILABILITY

Houston’s average retail vacancy rate remained unchanged over the quarter at 5.6% and decreased 20 basis points from 5.8% in Q2 2016. At the end of the second quarter, Houston had 15.7M SF of vacant retail space on the market. Among the major property types, single-tenant retail has the lowest vacancy rate of 1.7%, followed by theme/entertainment at 2.6%, lifestyle centers at 3.0%, power centers at 4.2% and malls at 4.8%. The highest vacancy rate is among outlet centers at 10.6%, and the largest amount of vacant space by square feet is among neighborhood centers.

There is currently 2.3M SF of retail space under construction of which 45% is pre-leased. The largest project under construction is the 438,000-SF Market Center at Aliana, anchored by H-E-B (completed and open) and Target’s new concept store which is opening in October. The entire project is scheduled for completion in October 2017. The shopping center development was driven by the 2,000- acre Aliana master-planned residential community. The Richmond, TX Aliana is one of the top-selling master-planned communities nationwide, according to RCLCO Real Estate Advisor’s most recent list.

RENTAL RATE & VACANCY PERCENTAGE

Houston Retail Real Estate Market

ABSORPTION & DEMAND

Houston’s retail market posted 1.4M square feet of positive net absorption in the second quarter. A large majority of the absorption was caused by big box single tenants such as Kroger, H-E-B, and Walmart. Other large tenants that moved during the second quarter include Fitness Connection, Total Wine, TJ Maxx, Michaels, PetSmart, and DSW.

RENTAL RATES

According to CoStar, our data provider, Houston’s citywide average quoted retail rental rate for all property types decreased between quarters from $15.00 per SF NNN the in Q1 2017 to $14.88 per SF NNN. These average rental rates are typically much lower than actual deal rates since they include all retail property types and classes, the majority 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, increased quarterly from 1.2M square feet in Q1 2017 to 1.4M square feet in Q2 2017.

▸ Click here to download the full report as a PDF.

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