InterFace Panel: Houston Is Not Over-Retailed. In Fact, It Needs More
HOUSTON — Retail follows rooftops, as the expression goes, but over the last decade in Houston, brick-and-mortar development and single- and multifamily construction have rarely moved at the same pace.
Houston experienced a major housing boom in the years leading up to the oil downturn, which began in late 2014. A report from houstonproperties.com, which tracks the metro’s single-family market, notes that Houston topped the nation in new construction starts of single-family homes in 2013 and 2014.
In addition, during that two-year stretch there were 28 high-rise apartment buildings under construction, and 83 additional high-rise multifamily projects either approved or proposed.
Houston’s emergence as a strong-performing retail market in an era where brick-and-mortar shopping is on shaky ground was one of the key topics explored by real estate professionals at the second annual InterFace Houston Retail Real Estate conference. Crowds packed into the meeting rooms of the Royal Sonesta hotel in the city’s Galleria neighborhood on Tuesday, April 17 to hear about just how much new retail development the market can bear.
Before retail development could catch up to the torrid pace of housing development, oil prices tanked, thousands of blue- and white-collar energy workers were laid off, housing prices dropped and rent growth in the apartment sector stagnated. And by the time oil prices began rising again in 2016, the e-commerce boom was well underway, threatening the future of brick-and-mortar retail.
“If you look back at the arena from 2009 to 2013, there was very little new retail space being built,” said panelist Dean Lane, a partner at NewQuest Properties. “For the retail projects currently being built, the housing and population densities are already there. Retail developers are being cautious, but at the same time doing deals where there’s real opportunity.”
According to CoStar Group, the Houston area added less than 3 million square feet of retail space annually between 2010 and 2013. This modest rate of development kept the inventory growth under 1 percent in each of those years. Annual net absorption kept pace during that stretch, ranging from approximately 2.7 million to 5.6 million square feet at different points in the span.
Retail development throughout the Houston area cranked up between 2016 and 2017, two years in which the market added more than 6 million square feet of new space. CoStar projects the overall supply of retail space to increase by approximately 5.8 million square feet by the end of 2018, a 1.5 percent increase in the total inventory.
Today, as retailers across the country adapt to e-commerce and oil prices continue their ascent, the discrepancy between the paces of retail and housing development has proven to be a blessing in disguise.
Unlike its office and multifamily sectors, Houston’s retail market boasts strong metrics that do not preclude continued growth and expansion.
Strong Metrics Are Nothing New
In both commercial and residential real estate, job and population growth are the straws that stir the drink. But whereas the fundamentals of office and industrial markets are more directly tied to job creation, the metrics of housing and retail sectors are more immediately influenced by population growth.
“Where there’s people, there’s going to be retail,” said panelist Lilly Golden, president of Evergreen Commercial Realty. “The population of metro Houston is projected to exceed 14 million people by 2050, which means the market can not only bear new retail development, it needs it.”
Whether oil is trading at $40 per barrel, $100 per barrel or its current price of about $68 per barrel, Houston is a perennial leader in population growth. According to a 2017 study from the U.S. Department of Housing & Urban Development (HUD), Houston’s population grew by an average of roughly 120,000 residents per year in the 2000s and 134,000 in the 2010s. The metro area’s total head count currently measures somewhere around 7 million.
Healthy population growth has sustained development of new retail space and absorption of existing retail space in Houston for years. According to CoStar’s first-quarter 2018 report, Houston’s retail market has experienced 10 consecutive years of positive net absorption. This strong tenant demand also enabled landlords in the metro area to achieve annual rent growth of more than 2 percent between 2010 and 2017.
The metro’s vacancy rate declined every year between 2007 and 2016. Between 2016 and 2017 it rose from 4.7 percent to 5.3 percent, an uptick that was to some degree tied to Hurricane Harvey’s rendering some retail spaces uninhabitable.
Developers, Investors Respond
The stability of these metrics has encouraged new retail construction in recent years. More than 200 retail properties totaling roughly 4.6 million square feet are currently under construction, with 69.4 percent of that space already preleased.
Ground-up development of new space is largely concentrated in the suburbs. In particular, suburban pockets along Grand Parkway on the city’s north and west sides have emerged as hotbeds for retail development.
In the western suburb of Katy, a 121,000-square-foot VillaSport Athletic Club & Spa is set to break ground this summer. Construction is also underway on The Crossing at Katy Fulshear, a Walmart-anchored development that will feature a 12-screen Xscape Theater come October.
On the north side of town, ExxonMobil’s development of a 385-acre office campus in Spring, about 25 miles north of downtown, has been a major catalyst for retail development, according to the InterFace panel. That project was completed in 2015.
Strong fundamentals have also helped maintain a robust investment market for retail assets in Houston.
“We are not seeing a slowdown in retail investment,” said moderator Dave Luther, first vice president and regional manager at Marcus & Millichap. “As Houston rebounds, the city is attracting more out-of-area capital. We’re seeing deals become more competitive with exchange money as well.”
Luther added that investors are particularly hot for properties that feature small-shop spaces, and that multi-tenant assets are generally trading at cap rates somewhere between 6.5 and 7.5 percent.
Entertainment is King
E-commerce has claimed its fair share of victims. Nearly 7,000 stores either closed or announced plans to close in 2017, and 2018 has already seen the bankruptcy of major retailers like Toys ‘R’ Us, Nine West and Bon-Ton.
But for every company that closes a store, there are three companies opening new stores, according to a 2017 report from Tennessee-based retail advisory firm IHL Group. As new concepts in food, fitness and entertainment spaces grow in Houston, developers are increasingly undertaking value-add plays in the urban core.
“We’re seeing everything from go-karting to axe-throwing,” said Golden of Evergreen Commercial. “If you have a creative concept, you can fill the retail space, and we’re seeing that in Houston.”
Demand for these kinds of tenants, particularly entertainment concepts, was virtually nonexistent in Houston in the past, according to Lane of NewQuest.
“The entertainment industry has always been a great arena for retail,” he said. “But in the past, there were so many leases that prohibited bowling alleys, movie theaters — anything that took a lot up a lot of parking.”
— Taylor Williams