Navigating Changing Economic Tides: Houston’s Retail Market in Q2 2023.

Sales Volume

Year-to-date, the cumulative retail sales volume in the greater Houston area registered at $153.5 million as of Q2 2023 down from a more robust $1.071 billion in Q2 2022 , reports Real Capital Analytics. In perspective, 2022 experienced the highest deal volume in the second quarter thus far. Rising interest rates and fears of a recession have decreased dealmaking throughout 2023, leading to a sales cooldown from the post-pandemic surge in mid-2021 through mid-2022. However, over the next three to six months, price discovery will narrow the dislocation between buyers and sellers ultimately leading to higher transaction volume in the near future.

Buyers and Sellers

Five months into 2023, the overall vacancy rate was 24.6%, down slightly from 24.8% in April. Houston’s office market accounted for 5.9 million sq. ft. of leasing activity, up 13% from this time last year. Lyondell Bassell—a multinational chemical company—signed Houston’s largest office lease of the year thus far, filling 318,000 sq. ft. at the Williams Tower in the Galleria submarket in early May. Construction experienced minimal year-over-year movement—at 2.8 million sq. ft. by May 2023 (a 58,000-sq.-ft. increase from May 2022). Lastly, deliveries fell year-over-year by 38%, from 723,171 sq. ft. to 445,000 sq. ft.

Market Cap Rates

Houston’s retail market cap rates (6.8%) are right in line with the national benchmark of 6.9% as of Q2 2023. The market sales price per remains at $227 per sq. ft., unchanged from the previous quarter. Neighborhood and power centers–the non-anchored strips–have the highest cap rates at 7.0%, respectively. Overall, retail market cap rates have compressed on average by 10 basis points annually over the past several years (7.1% in Q2 2017). Despite the decline, higher capital costs and uncertainty around monetary policy are starting to force cap rates upward. Cap rates are expected to rise by 40 basis points (7.2%) by the end of 2023.

Alex Babcock
Senior Research Analyst
[email protected]
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