The market for soft and hard goods remains somewhat weak due to uncertainty in the economy and labor market (although the Houston job market is generally stronger than the rest of the country). However, in the last several months, many big boxes that went dark due to bankruptcies and/or downsizing have been absorbed, either in the totality or because of the lack of 50,000-square-foot tenants in the market. Landlords have had to get creative and divide larger spaces to accommodate smaller tenants.
Generally, the most active tenants in this arena have been health clubs, discount stores, dollar stores and non-traditional retailers. Landlords, eager to fill dark spaces, are making very aggressive deals (low base rents, extra tenant allowances, more free rent, etc.).
On the other hand, fast casual (FC), quick-serve restaurants (QSRs) and casual dining remains robust. As such, many companies are aggressively seeking locations in Houston. It has been increasingly difficult to find locations that can accommodate FC, QSR’s (especially users with a drive-thru) and casual dining needs because quality locations have become scarce and parking requirements can’t be adequately met.
Alternatively, fine dining has been spotty with good thru-puts but lower average checks. Many restaurateurs have been reluctant to open new ventures due in large part to the high costs associated with these types of establishments. However, Brasserie 19 from Clark Cooper Concepts has seemed to buck the trend and is doing extremely well.
Houston has several 100,000-square-foot grocery-anchored centers located in the far northwest that are currently 88 percent occupied. The overall market in northwest Houston sits at 7 percent to 9 percent vacancy, which is much better than other areas.
Source: Colliers International
Through June of this year Houston had retail sales of $685 million, an increase of 228 percent from this time last year. However, the numbers for Houston and the nation are skewed due to the large Blackstone/Centro deal. In Houston, Blackstone bought 38 centers for an estimated $433 million. If you deduct that figure out of the current figures that leaves you with deals of $252 million. That would be compared to about $300 million a year ago.
As you can see, the market is fairly flat if you look at the figures, but approximately 78 percent of the deals closed this year were done in the second quarter, so the market is beginning to see slightly more velocity. Average cap rates were at 8.6 percent, down 9 basis points from the previous year. Top buyers include Blackstone, RioCan REIT, Weingarten, Regency Centers, Cole Real Estate and Inland Real Estate.
As far as trends are concerned, interest rates should hold steady if not slightly decline for the remainder of the year. There is still a lot of capital on the sidelines looking for yields. Real estate can provide those yields, so look for well-positioned properties to continue to sell. The turmoil in the stock market will likely benefit real estate as investors seek better and more stable returns. We may even see prices for investment real estate increase with additional demand.
The main challenge is finding where the next few big plays are. Most developers know what their development plans are for the next year or so, but the question is what market can sustain, and needs more new development. We will continue to see some developers get more creative in finding re-development opportunities in Houston and surrounding areas. The recession’s legacy includes strict lender restrictions and a lack of trust in the government and financial institutions.
Some major projects for Houston’s retail market include The Redstone Companies’ mixed-use development, known as the Perennial on Post Oak Boulevard. The property includes 370,000 square feet of Class AA office space, 74,000 square feet of retail space, 297 hotel rooms and more than 100 residential units.
Also, Wulfe & Co. is developing Blvd Place, a mixed-use development that includes office and retail space, including high-end dining. Whole Foods also plans to have a 48,000-square-foot store that should bring traffic to the site and should draw potential tenants for the rest of the development.
We are seeing a lot of activity in The Woodlands, and along Interstate 45 North, as a result of the Exxon announcement of its campus being built on 385 acres. Not only will the demand for housing increase, but also the demand for restaurants and other services. Fairmont Parkway and East Beltway 8 are areas getting a real good look from a number of users — many of them are restaurants. Banks and gas/food combo users are also looking for sites.
The general business climate must improve. Lending restrictions must be eased and taxes need to be lowered or stay the same, because this would increase consumer spending.
We don’t believe there will be any major news over the next several months that will adversely or positively affect the retail market, however as long as the energy and medical industry continues to thrive, Houston will be well positioned to flourish. In addition to the energy and medical industries we believe the expansion of the Panama Canal — due to be complete in 2014 — will have a tremendous positive impact on the Houston economy by creating more revenue for Houston-based businesses and, in turn, more jobs.
— Lisa Bridges is director of market research for Colliers International in Houston. Marshall S. Clinkscales, Jr., Robert Hantgan, Tim Seckinger, Crady Newton, Jenny Seckinger and John LaRue contributed to this report.