Houston Retail asking rent reaches record-high of $20.43 per sq. ft.

EXECUTIVE SUMMARY

Q3 in Review
By the end of Q3 2023, the overall vacancy rate and availability rate in the Houston retail market have remained flat from the previous quarter at 5.1% and 6.0%, respectively. Consistent demand and healthy market fundamentals have kept these rates below their historical 5-year averages of 5.6% and 6.5%, respectively. Net absorption is at 581,912 sq. ft., slightly down from the prior quarter’s 603,273 sq. ft. Deliveries decreased slightly year-over-year from 601,669 sq. ft. to 597,572 sq. ft. Despite the decrease, year-to-date deliveries (2.7 million sq. ft.) outpaced year-to-date net absorption (2.2 million sq. ft.), by 464,398 sq. ft. Construction is at 4.6 million sq. ft., up 3% from the prior quarter—with the Southwest submarket accounting for 1.4 million sq. ft. (31%) of all space under development. Lastly, the metro’s annual rent growth outpaced the national average by 130 basis points, standing at $20.43 per sq. ft.—a 4.8% increase from $19.49 per sq. ft. in Q3 2022.

Houston Economic Update
Houston’s unemployment rate increased to 4.9% in August 2023 (up from 4.8% in July 2023). The metro’s jobless rate lagged the state’s and the nation’s rates at 4.5% and 3.9%, respectively. Houston’s employment stood at 3.3 million in August 2023. The largest job gains by sector included: other services (+3,900 jobs, 3.3%), leisure and hospitality (+3,400 jobs, 1.0%), and financial activities (+1,800 jobs, 1.0%). The largest job declines by sector included: professional and business services (-3,300 jobs, -0.6%), construction (-2,300 jobs, -1.0%), and trade, transportation, and utilities (-600 jobs, -1.0%).

MARKET OVERVIEW

Vacancy and Availability Rates Remain Below The 5-Year Historical Average
The overall vacancy and availability rate in Houston retail market remained flat from the previous quarter at 5.1% and 6.0%, respectively. Consistent tenant demand for retail space kept the overall vacancy rate and availability rate below their historical 5-year averages of 5.6% and 6.5%, respectively. The Southwest submarket noted the greatest quarter-over-quarter decrease in its vacancy rate, down 20 basis points from 4.7% to 4.5%. Meanwhile, the Southeast submarket experienced the greatest quarter-over-quarter decrease in its availability rate, down 40 basis points from 6.5% to 6.1%. Net absorption is at 581,912 sq. ft., slightly down from 603,273 sq. ft. in Q2 2023. Year-to-date, net absorption is at 2.2 million sq. ft.

Southwest Submarket Led Construction
Retail construction is at 4.6 million sq. ft., up 3% from 4.5 million sq. ft. the last quarter. Year-over-year construction increased 1%–with an additional 42,465 sq. ft. of projects underway. Over the prior three years, construction averaged 4.3 million sq. ft. annually—indicating construction activity has remained relatively strong in Houston’s retail sector, despite monetary pressures such as rising construction costs affecting the current real estate environment. The Southwest submarket led construction, with 1.4 million sq. ft.—or 31%—of all space under development, followed by the North submarket with 909,627 sq. ft. (19%). A notable construction start in Q3 2023 included a 147,111-sq.-ft. retail center at 5200 Navigation Boulevard. This building is expected to be completed in February 2024. On the flip side, deliveries decreased slightly year-over-year from 601,669 sq. ft. to 597,572 sq. ft. Year-to-date, deliveries are at 2.7 million sq. ft.—32% higher than the prior year-to- date delivery figure of 2.0 million sq. ft.

Record-High Asking Rents
Low availability rates and rising retail sales drove the average asking rent in the Houston retail market to a record-high—$20.43 per sq. ft. in Q3 2023. Year-over-year, the metro’s average asking rent increased 4.8% from $19.49 per sq. ft. in Q3 2022—outpacing the national average’s annual rent growth by 130 basis points (3.5%). On the quarter, the Inner Loop submarket had the highest average rate at $32.49 per sq. ft. On the other hand, the Northeast submarket had the lowest average rate at $18.17 per sq. ft. Asking rents are projected to remain on an upward trajectory—reaching $24.64 per sq. ft. by Q3 2028.

Alex Babcock
Senior Research Analyst
[email protected]
tel 713 275 9618