The Houston retail market has changed dramatically in recent years, but 2014 has seen historically strong real estate fundamentals to date. It is a sign of considerable economic strength that per capita personal income reached a new peak in 2013, even while Houston experienced the largest change in population across U.S. metro areas, according to the latest estimates from the U.S. Census Bureau.
Houston’s population increase of nearly 137,700 over the year ending in July 2013 outpaced all other metro areas, with New York in second place (111,749) and Dallas/Fort Worth in third (108,112). Additionally, with Houston employment growth among the strongest in country, it should come as no surprise that household incomes are rising and retail sales are strong.
A Retail Landlord’s Market
Retail occupancy in Houston reached nearly 93 percent during the first quarter of 2014. While retail availability is extremely limited across the city, it is particularly tight inside the Loop as well as in the northwest areas inside of Beltway 8. Class A product is in high demand across all submarkets, so much so that the highest profile centers currently have no availability.
However, despite this high demand, retail construction activity is less than a quarter of what was underway from 2006-2009. As a result, asking rents are approaching a historical high of $22 per square foot, on average. While there is some noticeable retail development activity, it remains largely led by grocers with mixed-use construction only beginning to rise.
The area surrounding ExxonMobil’s campus is particularly active with development projects. Some 418,000 square feet of retail space is set to deliver in the far north submarket by the first quarter of 2015. Additionally, the ExxonMobil campus is expected to create more than 10,000 jobs and could easily spark demand for nearly 700,000 square feet of new retail developments on its own since, on average, each Houston job supports 69 square feet of occupied retail space.
Retail Follows Rooftops
The battle for grocer and restaurant development is most evident toward the west, where Houston’s greatest population increases are occurring. Few traditional grocers are willing to enter the hyper-competitive market occupied by HEB, Kroger and Walmart.
However, specialty grocers such as Aldi, Sprouts Farmers Market, Trader Joe’s, Whole Foods Market and Costco are aggressively looking for sites within a number of the nationally top-selling master-planned communities in Houston, such as Cinco Ranch, Firethorne, Cross Creek Ranch, Aliana and Pine Mill Ranch.
In addition to grocers, several new and interesting retailers are following the population boom in the west, such as Newk’s Eatery, PDQ, Five Below and many others.
Rise of Affluence Apparent
Currently, the Inner Loop and Uptown areas are Houston’s tightest retail markets, with rents sitting just above $35 per square foot and occupancy reaching 96 percent. With the arrival of ultra-high-end retailers to the River Oaks District, along with the presence of numerous mid- and high-end retailers in the Galleria Mall, we predict that Uptown Houston will have stronger appeal for more affluent local and international tourists in the coming years.
As a result of the Uptown trade area generating more sales, we will likely see heightened demand from elite brands for retail space in this submarket.
Even though rents are significantly higher than they were just two years ago, retailers continue to expand and open new locations within the market. We will be seeing a continued influx of restaurant and food concepts, as well as the infilling and repositioning of facilities anchored by brands like Academy, Conn’s, Big Lots, Marshalls, HomeGoods and Bed, Bath & Beyond.
Going forward, we also expect to see additional phases added to existing projects to accommodate high retailer demand in the midst of the supply shortage.
— By Sara Rutledge, Director of Research and Analysis, and Matt Keener, Senior Vice President, with CBRE. This article originally appeared in the August 2014 issue of Texas Real Estate Business magazine.