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Houston retail

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Houston Retail market caps off strong 2021 bolstered by robust fundamentals across the board.


EXECUTIVE SUMMARY

STRONG HOUSTON RETAIL MARKET Houston’s retail market was largely positive throughout 2021. Vacancy tightened, leasing activity remained steady, and rent growth increased. In the face of store closures and bankruptcies, combined with a significant amount of development over the past year, the market has continuously recorded positive net absorption. Vacancies have tightened to 5.9%, levels not seen since the start of the pandemic in Q1 2020. Leasing for the quarter was again robust, with Houston recording 2.0 million sq. ft. of activity, just above the ten-year quarterly average of 1.9 million sq. ft. With 3.4 million sq. ft. delivered in 2021, 3.7 million sq. ft. under construction, and another 7.8 million sq. ft. proposed through 2023, the demand for retail real estate shows little signs of slowing down.

POPULATION GROWTH PROVIDES POTENTIAL FOR STRONG RETAIL DEMAND Local economic experts predict Houston’s retail commercial real estate market would return to pre-pandemic levels of occupancy in 2022. Retailers leasing in existing space and the high demand for space from restaurants are examples of factors leading to the market’s resurgence. According to data from the Greater Houston Partnership, restaurants in Texas saw operating capacity returning close to 100% throughout 2021 and into 2022, despite COVID-19 surges from the Delta and Omicron variants. Positive job and population growth trends should keep retail demand elevated in the near future.et in Houston has been positive so far in 2021. Vacancy is tightening, leasing activity has picked up, and rent growth is improving. In the face of store closures and bankruptcies, combined with a significant amount of development over the past year, the market has continuously recorded positive net absorption. Vacancies have tightened to 5.8%, levels not seen since the start of the pandemic in Q1 2020. Leasing for the quarter was again robust, with Houston recording 2.1 million sq. ft. of activity, just above the five-year quarterly average of 2.0 million sq. ft. With 3.3 million sq. ft. delivered since the beginning of the year, 3.3 million sq. ft. under construction, and another 5.3 million sq. ft. planned through 2022, the demand for retail real estate may continue to outpace supply.


MARKET OVERVIEW

DEMAND CONTINUES TO OUTPACE SUPPLY IN Q4 The aggregate effect of the net occupancy increase was 1.5 million sq. ft. of absorption for the fourth quarter, lowering the vacancy rate to 5.9%, while delivering only 510,000 sq. ft. during the same time period, giving the market some time in which to recover. The Houston retail market registered positive net absorption for the sixth consecutive quarter, while outpacing supply for the third consecutive quarter.

INVESTMENT SALES TRENDS Real Capital Analytics data reports the cumulative monthly sales value in the greater Houston area at $2.5 billion as of December 31, 2021, up 200% compared to this time last year at $851 million. The primary capital composition for buyers in 2021 was made up of 44% private and 38% REIT/listed investors. For sellers, the majority was 40% REIT/listed and 37% private investors. Among recent noteworthy transactions include the sale of Shops of Bella Terra, a 271,157-sq.- ft. institutionally owned and operated regional power center in the Houston-area community of Richmond, Texas. The center was 93% leased at the time of sale with a tenant mix that includes 24 Hour Fitness, Total Wine & More, Best Buy, Five Below, and Ulta Beauty.

AVERAGE RETAIL NNN ASKING RENTS HIGHER Positive trends in leasing and absorption have driven average retail asking rents higher. The Houston retail overall triple-net average rates are at $19.13 per sq. ft., an increase of 4.3% from $18.34 a year ago. The Inner Loop has the highest rent of all submarkets in the Houston metro at $30.14 per sq. ft. (with a vacancy rate of 4.8%), followed by the South submarket at $19.84 per sq. ft. with a vacancy rate of 4.2%.

STEADY LEASING ACTIVITY IN Q4 The volume of square footage signed during the fourth quarter—which is comprised of both new leases and renewals—was at 2.0 million sq. ft. The largest amount of square feet leased took place in the North submarket at 26%, followed by the Southwest submarket at 19%. Significant transactions signed in the fourth quarter included a 136,000-sq.-ft. lease for Target in New Caney in the Montgomery County submarket in October; a new 50,000-sq.-ft. lease for the YMCA in Spring in the Montgomery County submarket in October; and a new 36,748-sq.-ft. deal signed with Seafood City in Sugar Land in the Stafford submarket In November.

POST HOUSTON In one of the most impressive adaptive reuse projects in the country, a development team led by Lovett Commercial and international architecture firm OMA transformed the 550,000-sq.-ft. concrete slab of the former Barbara Jordan Post Office into an expansive mixed-use project that includes a music venue, a food hall, an urban park and farm, a proposed hotel and office space. The 16-acre project, called Post Houston, opened in November near Downtown’s Theater District at 401 Franklin St. While Post Houston’s 120,000 sq. ft. of office space hasn’t been leased during Houston’s tough office leasing environment, the project’s 24,000-sq.-ft. coworking space by Common Desk—along with a much-hyped, 53,000-sq.-ft. food hall and a 90,000-sq.-ft. music venue—should ultimately attract office tenants.

CONSUMER DEMAND KEPT THE HOUSTON HOUSING MARKET ACTIVE According to the Houston Association of Realtors, single-family home sales for 2021 rose 10.3% to 106,229. Sales of all property types for the year totaled 131,041, up 13.3% from 2020’s record volume and only the third time in history that total property sales surpassed the 100,000 level. Total dollar volume for 2021 shot up 28.2% to a record-breaking $40 billion. Even as the surges in coronavirus variants began affecting the Houston metro, the need for housing never decreased. Limited inventory and shortages of building supplies and labor on the new construction side presented challenges in 2021, and as we enter 2022, inventory and affordability will continue to be a topic of concern.


Leta Wauson
Director of Research
[email protected]
tel 713 275 9618

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