Elevated consumer spending tied to a strong job market in the greater Houston area is driving retail investment and tenant demand in suburban and urban submarkets alike. As a result, it’s one of the nation’s top MSAs for retail development, with more than 3 million-plus square feet under construction market-wide.
From an investment perspective, single-tenant and ground-leased assets remain favorable with investors. E-commerce-resistant tenants like fitness, restaurants, automotive service centers, car washes/detailing and dialysis facilities command the most attention with cap rates between the mid-5 to mid-6 percent range.
Cap rates tend to be 25 to 50 basis points lower for ground leases because there is no landlord responsibility. Credit, guarantee, location, lease term and landlord responsibility are the biggest factors affecting value.
David Luther, NewQuest Properties
Following Grand Parkway
In greater Houston, the majority of retail development recently has been in high-growth submarkets along the 180-mile Grand Parkway/TX 99, which loops through seven counties. National brands like Target, Ross Dress for Less, T.J. Maxx, Burlington, Ulta Beauty and Five Below are continually scouting sites in high-density suburban markets along the Grand Parkway. The exponential growth in the entertainment, fitness, dining and medical/healthcare sectors is an equally strong catalyst for retail and mixed-use development throughout the corridor.
Retail development has significantly increased in the southwestern and northern segments of the Grand Parkway. Year to date, there has been a 20 percent increase in sales transactions in the western and northern corridors of more newly constructed strip centers, many of which are shadow-anchored by larger developments. High-growth submarkets like Cypress, Katy, Richmond/Rosenberg, Sugar Land and Spring are all experiencing increased transaction volumes because they are far more accessible than ever before, thanks to the Grand Parkway.
Jeff Hayes, NewQuest Properties
A Class A retail development like NewQuest Properties’ Grand Morton Town Center, a 91-acre project, represents the future of retail — a curated mix of basic services, lifestyle retail that often includes healthcare providers. Located at the intersection of Grand Parkway and Morton Ranch Road in Katy, the center’s anchor tenants are Kroger, Walmart, Michael’s, HomeGoods and Petco. Co-tenants include service retailers like Verizon Wireless, Sport Clips, Kumon, Med Express and a strong lineup of national restaurants, discount-oriented retailers and leading financial institutions.
In Fort Bend County, NewQuest recently broke ground on the Grand at Aliana, a 57-acre development with frontage along West Grand Parkway and West Airport Boulevard in Richmond, the county seat. The project is rising at the gateway to the master-planned communities of Aliana and Harvest Green, which will have 6,844 homes at build-out. Staking an early claim to the NewQuest project are Burlington, Ross Dress for Less, Michael’s, Petco and 24 Hour Fitness.
The Grand at Aliana will feature more than 350,000 square feet and 12-plus pad sites along the Grand Parkway’s frontage road for restaurant, medical and service-oriented retail. The development is well-positioned to meet pent-up demand for daily and essential life needs, offering excellent access and a strong location at the “front door” of a rapidly growing consumer base with above-average annual household incomes in brand-new communities.
Generational Tastes
One of the newest trends in the industry is attributed to the millennial generation, who now outnumber baby boomers and are choosing suburban communities with recreational amenities like those being developed along Houston’s outermost loop (Grand Parkway) to raise their families. It’s all about the experience — where they live, shop and dine — for millennials and younger generations.
Retailers and developers have been quick to embrace millennials’ “experience-based” preferences. Going forward, it’s anticipated that entertainment tenants and a mix of “experiential” retail and restaurants will anchor more developments. Likewise, tenants such as Topgolf, which had a 30 percent uptick in users in 2018, and Cinemark Theatres’ forward-thinking designs to accommodate alternative uses will be highly attractive to the development community, as well as to investors.
With record numbers of people and families dining out, quick-service, casual and fine dining restaurants are trying to keep pace with demand. The fast casual sector has been booming over the last 10 years. In an analysis of new restaurants by the top 500 restaurant chains, four out of five openings are fast casual concepts.
We anticipate this sector will remain strong, although expansions may slow slightly. While many restaurateurs prefer standalone locations, end caps in strong developments are equally attractive. With food delivery contributing up to 10 percent of sales, most chains have adapted to the change by adding dedicated pick-up areas with reserved parking spaces.
Investment Potential
Retail investors have always looked to Houston for opportunity. The majority of shopping center sales are assets under $10 million, although there are some institutional investors that are shedding larger assets like power centers and older retail projects to rebalance their portfolios.
The result is some re-pricing in the power center and junior box categories, with cap rates exceeding 8.5 percent in some cases. A CMBS assumption in which an investor can assume an existing loan possibly at a higher rate or lower loan-to-value offers another opportunistic avenue for acquiring properties at higher cap rates.
Unanchored strip centers with good mixes of service-oriented retailers continue to attract 1031 exchange capital, making these deals highly competitive. Cap rates range from the mid-6 to the mid-7 percent range for these deals. Factors that affect valuations include location, lease expirations, upside potential in rents, reasonable NNN expenses and tenant mixes. Additional considerations also should be given to tenant restrictions, co-tenancy issues and expense caps.
— By David Luther, executive vice president of investment sales, NewQuest Properties, and Jeff Hayes, managing partner of tenant representation, NewQuest Properties. This article first appeared in the November 2019 issue of Texas Real Estate Business magazine.