Absorption Strong as Retail Projects Ramp Up

HOUSTON—Intense tenant demand continues to encourage retail developers in the metro. As multifamily and office builders have scaled back development, a number of mixed-use projects with large retail components are coming to fruition, resulting in pre-leasing activity remaining robust across the market. In addition, household formation is rising at a stable pace, encouraging several grocers to move forward with expansion plans in the metro, including H-E-B, Kroger and Wal-Mart, according to Marcus & Millichap's third quarter retail market report. 

This year, the Houston metro will lead the nation in retail completions as more than 3.2 million square feet of retail space is delivered. Vigorous pre-leasing for space underway will continue to benefit existing centers nearby, attracting burgeoning retailers. Though several Sports Authority and The Fresh Market locations have left large blocks of space vacant across the market, positive absorption will remain robust as expanding merchants pen new leases, says Marcus & Millichap. As vacancy remains at historically low levels, demand for space will permit the average marketed rent to rise, allowing assets' net operating incomes to remain strong and support desired yields.

Houston investors interested in building retail portfolio in select areas are optimistic about the long-term economic outlook and opportunities. The market is shifting to buyers' expectations while out-of-state investor activity temporarily cools as the market employment composition diversifies following losses in upstream energy and related industry jobs. As a result, those acquiring assets are capturing higher yields than 12 to 18 months ago in some instances, according to the report.

Areas near the Medical Center, NASA/Clear Lake and Kingwood in particular are attracting investor attention as the petrochemical industry and medical community employers grow and sections of the Grand Parkway open, allowing easier access to select shopping hubs. Properties in these locations, along with other high-demand submarkets such as Sugar Land, Katy and The Woodlands, draw premium returns and trade in the low- to mid-7% range, depending on credit and lease terms. Initial yields average up to 100 basis points higher in other portions of the metro, says Marcus & Millichap.

Metro employment will rise 0.2% this year, in contrast to 0.7% last year. With 5,000 jobs created this year, the majority will be generated in the education and health services industry, as well as the leisure and hospitality segment.

Builders will deliver approximately 3.25 million square feet of retail space in 2016, more than any other market in the country. This is down slightly from the 3.9 million square feet of inventory that came online last year.

“Bars, restaurants and other tourism-related retailers will add new locations over the coming months as the metro prepares to host the Super Bowl in 2017,” John Chang, first vice president, Marcus & Millichap, tells GlobeSt.com.

Strong tenant demand will drive the absorption of more than 3.3 million square feet of retail space this year, pushing down the vacancy rate 10 basis points year over year to 5.4%, the report indicates. Last year, the rate declined 30 basis points.

Tightening conditions will encourage rent growth this year, and the average asking rent will tick up 0.5% from the end of 2015 to $16.21 per square foot. This increase follows a 3.9% rise in the average rent last year.

HOUSTON—Intense tenant demand continues to encourage retail developers in the metro. As multifamily and office builders have scaled back development, a number of mixed-use projects with large retail components are coming to fruition, resulting in pre-leasing activity remaining robust across the market. In addition, household formation is rising at a stable pace, encouraging several grocers to move forward with expansion plans in the metro, including H-E-B, Kroger and Wal-Mart, according to Marcus & Millichap's third quarter retail market report. 

This year, the Houston metro will lead the nation in retail completions as more than 3.2 million square feet of retail space is delivered. Vigorous pre-leasing for space underway will continue to benefit existing centers nearby, attracting burgeoning retailers. Though several Sports Authority and The Fresh Market locations have left large blocks of space vacant across the market, positive absorption will remain robust as expanding merchants pen new leases, says Marcus & Millichap. As vacancy remains at historically low levels, demand for space will permit the average marketed rent to rise, allowing assets' net operating incomes to remain strong and support desired yields.

Houston investors interested in building retail portfolio in select areas are optimistic about the long-term economic outlook and opportunities. The market is shifting to buyers' expectations while out-of-state investor activity temporarily cools as the market employment composition diversifies following losses in upstream energy and related industry jobs. As a result, those acquiring assets are capturing higher yields than 12 to 18 months ago in some instances, according to the report.

Areas near the Medical Center, NASA/Clear Lake and Kingwood in particular are attracting investor attention as the petrochemical industry and medical community employers grow and sections of the Grand Parkway open, allowing easier access to select shopping hubs. Properties in these locations, along with other high-demand submarkets such as Sugar Land, Katy and The Woodlands, draw premium returns and trade in the low- to mid-7% range, depending on credit and lease terms. Initial yields average up to 100 basis points higher in other portions of the metro, says Marcus & Millichap.

Metro employment will rise 0.2% this year, in contrast to 0.7% last year. With 5,000 jobs created this year, the majority will be generated in the education and health services industry, as well as the leisure and hospitality segment.

Builders will deliver approximately 3.25 million square feet of retail space in 2016, more than any other market in the country. This is down slightly from the 3.9 million square feet of inventory that came online last year.

“Bars, restaurants and other tourism-related retailers will add new locations over the coming months as the metro prepares to host the Super Bowl in 2017,” John Chang, first vice president, Marcus & Millichap, tells GlobeSt.com.

Strong tenant demand will drive the absorption of more than 3.3 million square feet of retail space this year, pushing down the vacancy rate 10 basis points year over year to 5.4%, the report indicates. Last year, the rate declined 30 basis points.

Tightening conditions will encourage rent growth this year, and the average asking rent will tick up 0.5% from the end of 2015 to $16.21 per square foot. This increase follows a 3.9% rise in the average rent last year.