Retail Rents Rise and Grocers Step on the Gas

Together, these factors make the greater Houston area one of the most dynamic retail markets in North America.

A Landlord’s Market

Conditions clearly favor the landlords. Quality space that was renting in the low $20s per square foot during the downturn now commands rents in the $30s and in some cases the low $40s. Fierce competition for quality space is particularly intense within the range of 1,500 to 3,500 square feet.

This has been forcing brokers and Realtors to get creative in discovering and closing on any available quality space for their tenants. Some are pressing landlords about space that’s set to roll over or asking which tenants may be willing to relocate.

Rents are increasing largely because of high retail occupancy, which edged up from 93.3 percent to 93.5 in the Houston MSA during second quarter 2013, according to CoStar. At mid-year, net retail space absorption stood at a healthy 980,185 square feet.

Yet, despite these positive signs, the Houston area’s older Class B and Class C retail space still suffers from considerable vacancy or requires repurposing. Among the biggest investment transactions this year was AEW Capital Management’s $46.2 million June sale of the Class B 450,000-square-foot North Oaks Shopping Center in northwest Houston to World Class Capital Group.

Grocers Lead Development

We are starting to see retail construction gear up again, although there’s not quite as much ancillary retail activity as some in the industry might hope for. The development will be on a limited scale, in part because of multifamily developers have been outbidding retail developers for prime tracts, and for good reason — August was the 27th consecutive month of positive sales for the housing market, which has posted an average year-over-year home price increase of 16.4 percent to $260,600, according to the Houston Association of Realtors.

Grocery stores remain the front-­runners of what new development and store openings there have been in the Houston retail market. This trend is exemplified by a new 91,000-square-foot HEB Market that opened in Conroe in May. Additionally, value grocer ALDI entered the market with a bang this spring, already having completed about a dozen of the 30 stores it plans for the area through 2014.

With all of this new grocery development, we are going to see much less additional inline space built alongside them than we have in the past, forcing retail competition to remain high. One exception to this is a long-delayed Whole Foods store pegged for a summer 2014 completion in Houston’s BLVD Place. It will be part of a mixed-use 211,000-square-foot retail, restaurant and office complex.

Although it may not be anytime soon, it will take multifamily putting on the brakes in order for urban retail development to ramp up again. What we have seen, outside of grocers, is mostly with the remaining phases of existing multi-phased power center projects. A more notable power center project from this year was the 156,482-square-foot first phase of Katy Ranch Crossing in Katy.

One of the more promising areas for future development and leasing opportunities is in the northwest segment of the market, where a new section of Grand Parkway linking Texas 249 to Interstate 45 will open in 2015. Exxon Mobil Corporation’s new 385-acre campus along future Grand Parkway near the Hardy Toll Road will provide a huge role in attracting ancillary commerce. More than 10,000 workers will be employed at the campus, which will begin a phased opening in 2014.

The Woodlands and the cities of Spring and Tomball are among those areas that stand to benefit most.

Medical Repurposing

We’re also seeing an interesting shift in the non-traditional retail segment: urgent care clinics, hospitals and other medical tenants are aggressively filling well-located retail locations.

For example, Kelsey-Seybold Clinic, a physician group, leased a two-story, 72,000-square-foot former Borders Books space at Meyerland Plaza Shopping Center this spring. And, in a combined medical-retail lease, Texas Children’s Hospital has taken over another former Borders near Rice University in Houston’s River Oaks community, with Ulta taking over the lower level.

These medical tenants are highly desirable for landlords because they are paying the lofty rents that many retailers can’t afford, which is likely a result of their flexible space requirements and relatively low tenant-improvement needs. The growing desire for brand visibility and market share, as well as rising office rents, are the main drivers of this medical push.

Forward Momentum

With all the activity retail is currently experiencing, it’s no surprise to see that retail real estate brokers are noticing a huge increase in business. At least 15 retail brokerages in the Houston area have added new brokers in the past 12 months.

Some brokerage firms are even turning down business because they’re beyond capacity. This is great news for recent graduates looking to get into the business.

In conclusion, Houston retail is on the upswing, and all indicators point to a great 2014. Despite stiff competition and slow development, Houston will continue to see more grocers enter the market. This will ultimately create additional space for retailers to occupy, whether it’s in the same center or across the street.

Rising rents will bottom out at some point, as rates in the urban core will likely become too expensive for even medical tenants to occupy. Creativity and flexibility will be key for brokers and retailers to find their optimal space in the Houston market, which gives hungry new brokers a great opportunity to bring their “A” games and make a mark for themselves early on in their careers.

— Clay Albers, retail tenant representation broker, Baker Katz