Healthy increase in occupancy and rental rates anticipated.

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The Houston retail market experienced modest improvement in 2011 as the area economy began to shake off the effects of the national recession with strong local job growth and reasonably steady, if not particularly noteworthy, housing starts. Positive retail space absorption of 2.8 million square feet combined with only 1.2 million square feet of new construction resulted in a decline in the overall retail vacancy rate from 7.1 percent in the first quarter of 2011 to 6.7 percent at year-end. However, average quoted rental rates edged down slightly from $14.51 per square foot in the first quarter to $14.35 per square foot in the fourth quarter.

Although the retail statistics for the past year aren’t terribly compelling on their own, they are more encouraging in the context of the regional economy in the sense that retail leasing and development activity generally lags the overall economy. The national recession hit Houston in full force in September 2008. The area lost 152,800 jobs through January 2010. In February 2010, Houston began to create new jobs again, and by October 2011, Houston had regained all the jobs lost during the recession. The Greater Houston Partnership projects that the Houston metro area will add another 84,600 jobs in 2012. Similarly, single-family housing starts in the Houston MSA fell from a robust pre-recession level of 42,217 new homes in 2007 to approximately 18,000 in 2011, but analysts project Houston single-family housing starts to rise 10 percent in 2012 to over 20,000 units.

In light of the severity of the recession, the long lead time for new development, and the lack of available financing for new construction, it is not surprising that only 1.2 million square feet of new retail space was completed in Houston in 2011. That is only slightly more than the 800,000 square feet which was completed in 2010, the lowest level of new retail construction in the last 30 years. New construction for the 10-year period from 2000 through 2009 averaged more than 9 million square feet annually. Almost all the new retail projects in 2011 were build-to-suits for major retailers such as Wal-Mart, H-E-B, and Academy, and they were often expansions of successful existing centers such as Fidelis Realty Partners’s addition of a 73,000 square foot building for Burlington Coat Factory to their Northline Commons project at I-45 and Crosstimbers.

Since positive absorption exceeded new construction by 1.6 million square feet, it is clear that most of the leasing activity occurred in existing projects as retailers’ appetites for new locations ran ahead of new construction opportunities. Examples included Smithco Development’s lease with H-E-B to occupy 51,000 square feet of a former Kmart location for a Joe V’s Smart Shop concept store at U.S. 290 and West 43rd Street in northwest Houston, AmREIT’s lease of a former Circuit City building in The Woodlands to The Container Store, and Brixmor’s lease for 21,121 square feet with dd’s Discounts for a portion of a former Randalls store on Interstate 45 at West Dyna Drive.

As prime existing space is rapidly absorbed and retailer demand remains strong, retail developers are thinking creatively and working hard to meet that demand. The Ainbinder Co. commenced construction this past year on a 23-acre shopping center to be anchored by Wal-Mart at the intersection of Yale and Koehler in the close-in Heights neighborhood. The property was formerly occupied by a large steel fabrication plant and an old apartment complex. The Ainbinder Co. acquired the property in 2007, and they spent the last 4 years working through numerous environmental and planning issues before completing a 16-acre site sale to Wal-Mart in 2011. The project is scheduled to open in the second quarter of 2012.

As the Houston and Texas economies lead the nation out of the recession and rising retail sales have prompted national retailers to accelerate their expansion plans, it’s not surprising that many national retailers are choosing Houston for new store locations. What is somewhat surprising are the number of California concepts that discovered Houston in 2011. Trader Joe’s, the Monrovia, California-based specialty grocery store with an extremely loyal and enthusiastic customer base, announced their first Houston-area store in The Woodlands in a center owned by Realm Realty. Pinkberry, the yogurt shop of choice for celebrities such as Katy Perry and Justin Bieber, opened in the Baybrook Passage shopping center in the Clear Lake area. Palo Alto, California-based electric car maker Tesla Motors opened its first Texas showroom in October in the Galleria. Los Angeles home furnishings retailer Teletron, which caters to the Asian market, announced that they had leased 17,500 square feet from Whitestone REIT in their Lion Square Shopping Center located at Bellaire and Wilcrest. And Katsuya By Starck, a high-profile Los Angeles Sushi restaurant, announced that they would open a restaurant in the mixed-use West Ave project in early 2012.

Sales of individual shopping centers were limited in 2011, but two significant portfolio sales were completed:

· In June, private equity group Blackstone Real Estate Partners acquired 49 Houston-area community and neighborhood shopping centers from Centro Properties US as part of a $9 billion acquisition of 585 centers across the country. Centro has since been renamed Brixmor. Blackstone has committed significant capital to Brixmor for project redevelopments and tenant improvements.

· In October, NewQuest Properties announced that it had closed the sale of a five-property portfolio to Inland American Real Estate Trust for $172 million. The five properties have a combined leasable area of 710,000 square feet. Inland is the nation’s largest non-traded REIT, and it now owns 60 shopping centers throughout Texas.

Development of suburban shopping centers will continue to be constrained through 2012 as a result of limited new home construction and lenders’ reluctance to finance new development that is dependent upon projected housing growth. However, if job growth remains healthy through 2012 and retail sales continue their current positive trend, then the Houston retail market should enjoy healthy increases in occupancy and rental rates during the year as new demand for retail space begins to outpace new supply.

Charles Scoville, senior vice president & director of operations for AmREIT

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