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A Retail Recalibration in Houston

Buff Brew's new brewery and restaurant in Houston's First Ward is slated for a late 2018 completion.

Buff Brew's new brewery and restaurant in Houston's First Ward is slated for a late 2018 completion.

For retail tenants and developers alike, Houston’s Space City moniker could easily be interpreted as a kind of tongue-in-cheek double meaning, mainly because space is one thing Houston always has plenty of.

Commercial developers have taken full advantage of that space in recent years, adding an eye-opening 16.3 million square feet of retail product over the last 36 months, according to a report from Colliers International. Houston added somewhere between 4 million and 4.5 million square feet of new retail during last year alone.

Jason Baker, Baker Katz

Jason Baker, Baker Katz

That pedal-to-the-metal pace has been the clear headline for so long now that it almost feels odd to talk about a change of pace. But that’s exactly what seems to be taking place in Houston, as the commercial development marketplace is in the midst of transitioning from the explosive growth of recent years into a more demand-based dynamic. This is not a slowdown so much as a stabilization or a recalibration — a sprinter taking a breath between laps.

This is an interesting and perhaps even necessary turn of events. Houston is a development-friendly city with a relative abundance of available and affordable land and a streamlined and generally permissive regulatory environment that makes permits, zoning changes and other logistical obstacles fairly easy to navigate. In that context, it is easier to understand why, after so many consecutive years of adding significant volumes of retail space, a change of pace is in order. In a city where supply can outstrip demand in the blink of an eye, healthy growth is both smart and strategic.

Given that notion, as well as the fact that Houston currently has as much retail as ever and the high occupancies to match it, we expect there to be less retail added this year — a pattern that could extend into 2019 as well. Retailers have already begun to scale back their appetites for aggressive growth. Some big names that drove growth in recent years — Walmart, Kroger and other grocers — have really pulled in their horns, as have junior anchors such as Charming Charlie, Office Depot and Michaels.

Kenneth Katz, Baker Katz

Kenneth Katz, Baker Katz

New Kids on the Block

Even in what promises to be a period of more modest retail growth, Houston remains a vibrant and active market. The city has firmly established itself as a gateway market nationally, and the last few years have seen an extraordinary number of first-to-market tenants and new concepts.

Newcomers include food and beverage brands like Upward Project’s Postino Wine Café — which will open its first Houston location early this year, taking roughly 3,000 square feet at the Heights Mercantile development — and SusieCakes bakery, which opened its first Houston location in the Rice Village shopping district this past fall. Momentum Indoor Climbing also opened its first two Houston locations last year, including one that, at 40,000 square feet, ranks among the largest indoor climbing gyms in the world. Hometown favorites, including Local Foods, Dish Society and Mia’s Table, have also recently expanded into additional Houston-area locations.

We can’t discuss Houston retail without touching on the grocery segment, which remains fairly active and highly competitive in and around the city. And while demand for their services has ebbed somewhat from a year or two ago, restaurants also continue to be a bright spot.

One of the most active restaurant segments involves smaller,  creative concepts in the 2,000- to 3,000-square-foot range. We expect this to continue in 2018, as the restaurant and entertainment sector becomes less about volume and more about innovation, with an emphasis on specialty and/or first-to-market brands.

While Houston is, like many markets in Texas, less susceptible to national economic trends than other parts of the country, there is no avoiding broader developments in the retail industry and more consumer dollars going to online retailers. This retail reconfiguration is not necessarily a bad thing, but it will contribute to periodic uncertainty as online and brick-and-mortar retailers find their respective footings.

We saw some fresh signs of that ongoing realignment over the Thanksgiving holiday weekend. The Houston Chronicle reported slower-than-expected foot traffic on Black Friday, pointing to anecdotal reports of smaller crowds at the usually busy Galleria mall. In another piece, the newspaper added more statistical evidence to suggest that online and mobile shopping is playing an increasingly important role in the retail industry: spending was up 11.9 percent on Thanksgiving and Black Friday compared to 2016, according to retail analyst First Data.

Interestingly, Texas saw the second-biggest year-over-year percentage increase in sales in both brick-and-mortar and online combined, a rise of 13.4 percent, led by the electronics and furniture industries. First Data also reported that 29 percent of the total dollars spent over the two-day period came from e-commerce sales, up from 25 percent last year and about double the 14 percent market share in 2014.

Harvey’s Impact

No projection of what’s next for Houston is complete with touching on the effects of Hurricane Harvey.

The retail real estate impact has been significant, but almost entirely short-term. The general consensus is that the long-term impacts will be essentially negligible. Ironically, some retailers such as Home Depot and home furnishing brands have actually experienced a Harvey-related boom — evidence that regional retail dollars were reallocated, rather than truncated.

While the flooding was widespread, the majority of retail centers that were impacted by the floodwaters are either back up and operating or are about to reopen their doors.

— By Jason Baker and Kenneth Katz, principals, Baker Katz. This article first appeared in the January 2018 issue of Texas Real Estate Business magazine. 

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