David Luther, Marcus & Millichap
Houston will be among the nation’s leaders in retail property deliveries in 2016 as nearly 3 million square feet of space is scheduled for completion this year.
The new construction will increase retail property supply by 1 percent, the fifth-largest rate of growth for retail space for major markets in the nation. Historically, Houston has had several growth spurts — and some economic recessions — related to the energy industry.
The Houston metro area, known as a world capital in the oil and gas industry, has some obstacles to overcome as the upstream oil sector is losing a significant number of jobs. Yet other area employers have gained momentum, keeping job growth positive.
Since the Great Recession, Houston’s annual job growth of 2.9 percent has outpaced the national rate of expansion by approximately 130 basis points.
However, energy-related layoffs have caused the market to trail national employment growth by the same spread in the last year. Similar to 2015, between 15,000 to 20,000 jobs are forecast to be created this year, maintaining the metro’s positive job outlook.
Growth in other sectors of the Houston area’s economy, like health care and downstream oil-and-gas operations, is positively influencing the market and keeping retail developers active.
A number of sizable retail projects are underway in Houston, including the 240-acre Valley Ranch Town Center in northeast Houston.
Development of Valley Ranch Town Center will bring shopping, dining and entertainment to residents of the 1,400-acre Valley Ranch community.
A total of 1.5 million square feet of shops and restaurants is planned, along with a 10,000-seat amphitheater, a multi-attraction entertainment venue, 1,000 multifamily residences and the newly opened 8,500-seat Texan Drive Stadium.
In Katy, the 450,000-square-foot Shoppes at ParkWest will also be delivered this year. Bed Bath & Beyond, Buy Buy Baby and Kirkland’s anchor the development.
Shoppes at ParkWest is part of a broader, 150-acre mixed-used project that will include office, medical and residential.
Preleasing Abounds
Overall, retail space in the metro area is coming online largely pre-leased, and as a result, vacancy is expected to remain near the mid-5 percent range in 2016, as it was in 2015.
Last year, the vacancy rate dipped 30 basis points year over year. With vacancy projected to remain tight this year, the average asking rent will reach $16.62 per square foot, a 3.1 percent year-over-year increase.
Private investors will continue to be drawn to commercial property investments in the Houston area by healthy property operations, and regional retail buyers are expected to stay active in the coming months.
Though development remains strong, retail operations will allow operators to strengthen net operating income as new space is leased.
Institutional investors may scale back their activity in Houston, however, and that is opening up opportunities for regional high-net-worth individuals to compete for quality assets that they were priced out of in the previous year.
Properties inside “The Loop” — the Greater Houston area’s hub-and-spoke freeway structure with multiple loops, with the innermost being Interstate 610 forming a roughly 10-mile loop around downtown – are in high demand, and first-year returns begin around 6 percent.
Throughout the metro area, newer properties with credit tenants trade at initial yields in the mid-6 percent to 7 percent range, and trend upward 150 to 200 basis points moving farther from high-traffic areas and down the quality scale.
The eastern portion of the Houston area is gaining steam as petrochemical companies expand and the Grand Parkway, soon to be the longest beltway in the U.S., is well underway, drawing investors to properties nearby.
In addition, single-tenant retail properties are in high demand as investors from all over the country target the market for quality deals, with cap rates starting near 5 percent.
Confidence in the long-term growth of The Woodlands, a master-planned community and census-designated place in Greater Houston located about 28 miles north of Houston, has builders investing in new projects. Buyers will seek retail assets nearby to capitalize on increased traffic and tenant demand.
— By David Luther, first vice president/regional manager with Marcus & Millichap. This article originally appeared in the May 2016 issue of Texas Real Estate Business.