Houston Retail: Too Much of a Good Thing?

HOUSTON-During the past several months, Houston has been enjoying an uptick in the retail market that others might envy. Various Q3 reports place citywide net absorption at approximately 524,000 sf,  while the average vacancy rates across the region range from 7.6% to 12.4% -- down from its 2009 high of 20% and above -- depending on what report you read.   

But local retail experts tell GlobeSt.com that another challenge is coming to roost. “You can’t really find A space for tenants,” comments Lance Gilliam, managing partner with UCR moodyrambin Page. “A properties, for all intents and purposes, have a waiting list.” Though the submarkets vary in terms of available class A space, those interviewed agreed that, for the most part, the area inside Interstate 610 (also known as the “inner loop”) is seeing a dwindling supply of such space for retailers.

There are a couple of reasons for this. First, a lack of supply. “We were consistently building 7 million to 9 million sf of retail for many years, and got as high as 12 million sf,” explains Nick Hernandez, Transwestern’s managing director of retail services group. “But during the past few years, we’ve only been building 1 million sf to 2 million sf, and the majority of that has been free-standing space or box retail.” Added to this problem has been the challenge of obtaining financing to build new projects.

Another reason for the growing shortage in some areas is those two basic words: Underlying fundamentals. “The economy is relatively healthy, compared to the rest of the country’s,” says James Namken, senior vice president with the Weitzman Group.  A relatively healthy economy, in turn, puts Oil City on the radar of retailers as they seek to expand. Namken points out that there is still vacancy, but the empty Linens ‘n Things and Circuit City big boxes have been backfilled and “there is a definite shortage of class A space,” Namken says.

Though restaurants seem to be the prime retailers interested in space, other sectors are interested as well. “Houston, for the retailers we represent, is among the top five markets they’re looking at,” Hernandez adds, nothing that these retailers want areas with strong confidence levels and that are strong performers. “Houston has gotten good press; the job growth and home starts are higher than elsewhere in the country,” Hernandez says. “It’s attractive for retailers to come here and open.”

Gilliam cautions, however, that there is a huge vacancy among the B and C spaces and even some of the space in lower-income areas within I-610 has a higher vacancy. There are two types of retail space that fall into this category, he explains. The first is space that shouldn’t have been built because it wasn’t initially in a desirable location.  The second is space that, at one point, might have been vibrant and attractive, but for various reasons (such as the anchor tenant dropping out), may be undergoing some leasing malaise. The second-generation grocery space is a good example of this type of space, Gilliam adds.

All three brokers were adamant that the way in which tenants should handle this market is to make decisions, and quickly. Gilliam says that understanding the market and understanding the audiences being served, then waiting for the opportunities and acting on them is the best way to take advantage of the current market.

Hernandez, in the meantime, says tenants shouldn’t dawdle if they find that perfect space, because the chances are pretty good that another tenant also has its eye on that same space. Added Namken: “If you find a space you think will work for your business and it’s good real estate, don’t let the grass grow under your feet. Move fast and tie it up.”