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Research &

Forecast Report

HOUSTON | RETAIL
Q2 2018

A tale of two sectors in a city on the rise


Lisa Bridges Director of Market Research | Houston

Retail Trends
Commentary by Kelly Hutchinson, Senior Associate Market Indicators Annual Quarterly Quarterly
Relative to prior period Change Change Forecast*
Colliers First Quarter Retail Trends Report, stated that Houston’s
VACANCY
strong economy and steady population growth (2nd fastest growing
metropolitan area in the U.S.) are what have helped maintain NET ABSORPTION
healthy retail occupancy and rent growth.
NEW CONSTRUCTION
The Houston retail market remains relatively stable in the second UNDER CONSTRUCTION
quarter, however there is a definite tale of two markets within
the retail sector. Houston saw negative absorption in the second *Projected
quarter and a statistically significant increase in overall vacancy
for the first time in several years. The continued weakness in the
“big box” retail sector, led by the bankruptcy of Toys R Us (18
closed locations in the Houston MSA), created negative absorption
in Community (two anchors), Power (three or more big boxes)
and Malls (both traditional and outlet). Smaller, neighborhood and Summary Statistics
Houston Retail Market Q2 2017 Q1 2018 Q2 2018
unanchored strip centers on the other hand had healthy positive net
absorption. Vacancy Rate 5.3% 5.4% 5.6%

Despite this quarterly setback, Tex-X chief economist, Peter Muoio Net Absorption (SF)
(million square feet)
1.4M 0.7M -0.6M
ranks the city’s retail market the third strongest in the nation,
forecasting rents to rise and vacancy rates to fall across the metro New Construction (SF)
(million square feet)
1.8M 0.8M 0.9M
area by 2020 as demand will continue to outpace supply.
Under Construction (SF)
2.3M 2.9M 2.6M
Houston’s projected population and job growth are brisk tailwinds (million square feet)
for retail real estate and are expected to fuel the expansion of
Houston’s retail real estate market for years to come even as the Asking Rents
Per Square Foot Per Year
industry continues to retrench nationwide.
Average NNN $15.40 $15.35 $15.31
What notable factors are behind this long term positive trend?
Neighborhood Centers $14.73 $14.58 $14.53
Primarily, Houston, the most diverse city in the U.S. and second Strip Centers $18.32 $19.23 $19.51
fastest growing, is powered by a skilled and well-trained talent
base, with an excellent quality of life and low-cost of doing The above asking rents are an average of all property types and classes that are currently listed with
an asking rate. This average does not include properties that are fully leased or that do not list an
business. Forbes says Houston’s “secret sauce” is lower rents, easy asking rate. Please see page 2 of this report for an expanded discussion of retail rental rates.

parking, no zoning, housing affordability, diversity, upbeat attitude


and openness to outsiders has made Houston a super city.
Retail Trends - continued Job Growth & Unemployment
>> POPULATION GROWTH – Ranked #2 fastest growing metro area (not seasonally adjusted)

in the U.S. UNEMPLOYMENT 5/17 5/18


>> JOB GROWTH – After a dip caused by the oil downturn, job 4.8% 4.2%
HOUSTON
growth is back to a very healthy 60-80k jobs per year pace.
TEXAS 4.1% 3.7%
>> AFFORDABLE COST OF LIVING – 5th lowest overall cost of living
among the top 20 metros. U.S. 4.1% 3.6%

>> THRIVING MILLENNIAL POPULATION – Millennials make up


Annual # of Jobs
approximately 28% of Houston’s population vs. a national average JOB GROWTH Change Added
of 13%. Millennials disproportionately drive experiential retail and
HOUSTON 2.6% 79.2K
restaurant traffic. As Millennials age, their consumption of retail
products and services are anticipated to grow. TEXAS 2.8% 344.7K

>> IMPACT OF THE BABY BOOMERS – Houston has a relatively U.S. 1.6% 2.4M
smaller population of “Boomers” than most major cities, however
this group continues to drive the healthcare expansion (now a
significant retail use). Sales Activity
Source: Real Capital Analytics
>> ETHNIC AND RACIAL DIVERSITY – Houston has the 5th largest Q2 2018
immigrant population among the larger metros and is the most 50
NO. OF PROPERTIES:
diverse ethnic mix in the U.S. This population diversity opens
opportunity for niche retail and cross-cultural concept growth. TOTAL SF: 1.7M

AVERAGE $/SF: $264


The long-term curve for Houston retail remains positive. Big box retail
will continue to struggle in the near term as multi-channel retailing AVERAGE CAP RATE: 7.1%
continues to erode the need for these large space concepts. Big boxes
lease up in a significantly shorter time in areas with population density
Change in Sales (Year over Year)
and high growth. Houston has both, and couple that with a historically 120.0%
proven track record of redeveloping and leasing up problems, Houston 100.0%

sustains itself in face of these negative factors. Grocery expansion 80.0%


60.0%
following population growth and the associated small space retailers 40.0%

will remain strong for the foreseeable future. For a more detailed 20.0%
0.0%
exploration of these topics, please check out our white paper at -20.0%

https://knowledge-leader.colliers.com/kelly-hutchinson/houston- -40.0%
-60.0%
retail-factors-to-success/. -80.0%
Q2 '14 Q2 '15 Q2 '16 Q2 '17 Q2 '18

Vacancy & Availability Average Price Per SF


Houston U.S.

Houston’s average retail vacancy rate increased 20 basis points 300

between quarters from 5.4% in Q1 2018 to 5.6% and increased 30 250

basis points annually from 5.3% in Q2 2017. At the end of the second 200

quarter, Houston had 15.8M SF of vacant retail space on the market. 150

Among the major property types, single-tenant retail had the lowest 100

vacancy rate of 2.0%, lifestyle centers at 2.4%, followed by theme/ 50

entertainment at 2.8% and community centers at 5.0%. Outlet malls 0


Q2 '14 Q2 '15 Q2 '16 Q2 '17 Q2 '18
saw the largest increase over the quarter from 2.6 to 12.5% and malls
vacancy rate increased from 4.6% to 5.5%. Neighborhood centers
have the largest amount of vacant space by square feet and are 8.8% Average CAP Rate
Houston U.S.
vacant. 10.0%

9.0%
There is currently 2.6M SF of retail space under construction of which 8.0%
69% is pre-leased. The majority of the projects under construction
7.0%
are located in the outlying suburban submarkets adjacent to rapidly
6.0%
growing residential developments. The largest project under
5.0%
construction is the 240,000-SF Metropark Square located north of
Houston in the City of Shenandoah, Montgomery Co, TX. AMC and
4.0%
Q2 '14 Q2 '15 Q2 '16 Q2 '17 Q2 '18

Dave and Busters are among the tenants in the new development.

2 Houston Research & Forecast Report | Q2 2018 | Retail | Colliers International


Absorption & Demand
Houston’s retail market posted 556,245 SF of negative net absorption in the second quarter, a significant decrease from the 680,964 SF
of positive net absorption posted in the previous quarter. Some of the negative absorption can be attributed to the closing of “Big Box”
stores located in Community Centers, Power Centers and Malls. Houston area Toys R Us stores closed all locations during the second
quarter. The other source of negative absorption was from single tenant or free-standing retail such as branch banks, many closing
branches closing due to a continued shift by consumers to on-line banking. Among the tenants that expanded into new locations during the
second quarter are Kroger, HEB, Marshalls and Pluckers Wing Bar. These expansions are an indication that grocery stores, restaurants and
discount retailers still pull in a healthy amount of foot traffic.

Rental Rates
According to CoStar, our data provider, Houston’s citywide average quoted retail rental rate for all property types decreased slightly
between quarters from $15.35 per SF NNN in Q1 2018 to $15.31 per SF NNN. These average rental rates are typically much lower than
actual deal rates since they include all retail property types and classes, the majority of those properties are not well leased and are listed
with discounted asking rates. According to Colliers’ internal data, Class A in-line retail rental rates can vary widely from $30.00 to $85.00
per SF, depending on location and property type.

Q2 2018 Select Retail Lease Transactions


BUILDING NAME/ADDRESS SUBMARKET SF TENANT LEASE DATE

Deer Park Triangle NASA/Clear Lake 53,300 Joe V’s Smart Shop Apr-18

Four Corners Shopping Center Far South 12,500 Family Dollar Store Apr-18

Pinecroft Center I Montgomery County 12,000 Bassett Furniture Apr-18

Pearland Town Center Far South 7,000 Altar’d Interiors Jun-18

11 Gemini St NASA/Clear Lake 7,000 Nasa Kids Academy Apr-18

23692 Highway 59 N Montgomery County 6,800 The Draft Apr-18

Price Plaza Far Katy North 6,700 Mambo Seafood Jun-18

Pearland Town Center Far South 5,600 Victoria’s Secret/Pink Jun-18

Market Summary
Q2 2018 Retail Market Statistical Summary
DIRECT SUBLET SUBLET TOTAL
RENTABLE DIRECT TOTAL 2Q18 NET CLASS A RENTAL
PROPERTY TYPE VACANCY VACANT VACANCY VACANCY
AREA VACANT SF VACANT SF ABSORPTION RATES (IN-LINE*)
RATE SF RATE RATE
Strip Centers (unanchored) 35,834,161 2,895,662 8.1% 10,804 0.0% 2,906,466 8.1% 161,282 $27.00-$45.00

Neighborhood Centers (one anchor) 71,381,645 6,267,332 8.8% 76,390 0.1% 6,343,722 8.9% 268,202 $28.00-$46.00

Community Centers (two anchors) 47,614,673 2,317,313 4.9% 76,160 0.2% 2,393,473 5.0% (198,680) $28.00-$45.00

Power Centers (three or > anchors) 28,392,341 1,454,508 5.1% 11,625 0.0% 1,466,133 5.2% (331,271) $28.00-$45.00

Lifestyle Centers 6,052,121 145,457 2.4% - 0.0% 145,457 2.4% 67,473 $40.00-$85.00

Outlet Centers 1,330,725 165,860 12.5% - 0.0% 165,860 12.5% (131,624) $20.00-$40.00

Theme/Entertainment 499,468 13,859 2.8% - 0.0% 13,859 2.8% 3,879 $25.00-$35.00

Single-Tenant 72,744,169 1,306,412 1.8% 116,705 0.2% 1,423,117 2.0% (187,071) N/A

Malls 23,599,518 1,280,409 5.4% 12,397 0.1% 1,292,806 5.5% (203,456) N/A

GREATER HOUSTON 287,448,821 15,846,812 5.5% 304,081 0.1% 16,150,893 5.6% (551,266)

3 Houston Research & Forecast Report | Q2 2018 | Retail | Colliers International


Q2 2018 Houston Retail Highlights

115.6M SF

15.3M SF

FOR MORE INFORMATION


Lisa Bridges Kelly Hutchinson
Director of Market Research | Houston Senior Associate | Houston
+1 713 830 2125 +1 713 830 2146
lisa.bridges@colliers.com kelly.hutchinson@colliers.com

Colliers International | Houston


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