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Jackie Day is editorial director of Real Estate Media’s Newsletter Division.

HOUSTON-Retail may be a thriving sector nationally, but it’s particularly hot in the Greater Houston area, say local market watchers. By some accounts, the region’s yields on retail investment properties remain higher than those on the East and West coasts, attracting numerous out-of-state private buyers for 1031 Exchanges.

Investors, armed with plenty of debt and equity capital, are chasing shopping centers in all directions in the local market. “We have them stacked up 10 deep like cordwood,” says David Butler, locally based principal and director at Colliers International, who heads up the investment sales department.

“From an investment standpoint, the retail market is very, very hot right now,” Butler tells GlobeSt.com. “It’s a great time, but very frustrating in that you get a deal, immediately put it under contract and then six or seven other buyers come along right behind them.” He estimates his retail investment sales business will be about 50% to 75% higher than last year.

Yields on local properties are running 50 to 100 basis points higher than comparable yields on the East and West coasts, according to Butler. The spread is lower than a few years ago, he notes, but “still enough to get people interested.”

Even the recent upward tick in T-bill rates did not slow up interest in the city’s product. “If it’s good looking, fully leased and relatively new in a good location, it will sell in a heartbeat,” Butler says. “Even when rates ran up, the cap rates didn’t budge an inch and I had fully expected they would. There is so much demand that buyers just accepted lower returns.”

Most of Butler’s sales are stabilized-yield, triple net-leased product that may not offer much upside beyond current rent rolls, but provides a stable, largely passive investment without “a lot of moving parts.” In the unanchored, fully leased strip centers sector, properties are selling with cap rates in the high 7% to 8% range, about 200 basis points below the norm, he adds.

Butler says the region’s strength extends in virtually every direction, except the eastern industrial area. The hot pockets are west and northwest of the city line and the Woodlands, high-growth areas for single-family and multifamily development. “They need somewhere to shop,” says Richard Zigler, research director for locally based O’Connor & Associates.

One surprising heavyweight submarket is the Pasadena-Fairmont Parkway-Beltway 8 area near Clear Lake, southwest of Houston, where new upscale housing growth and attractive demographics are spurring retail expansions. “It has really exploded in an area that is not traditionally a real strong retail area,” Butler says.

Yet there is a dark cloud on the horizon. Developers have been “enjoying some really nice windfalls” and a plethora of speculative development has hit the ground, which could lead to occupancy problems, Butler says. “We’re headed for a train wreck,” he predicts. The first hint about the seriousness of the situation is a colleague’s report of a “free rent” sign spied hanging on a newly completed center–a first as far as Butler knows.

Butler doesn’t expect a flurry of foreclosures because so many developers used ample cheap capital and, in some cases, cash. “We will see a shakeout in rents,” he says. “The A corner will get filled up, but the B and C stores in the middle of the block or the secondary locations won’t.”

If that’s the case, the numbers haven’t quite started to show it yet. Houston absorption is still strong, according to Zigler, who writes in his second-quarter report that the area’s 12-month absorption is at its highest since 2000. “When you look at occupancy across the category, it’s solid everywhere,” Zigler tells GlobeSt.com. His research shows overall occupancy was 85.9% for the second quarter or just 0.10% higher than Q1 and 0.7% higher than a year ago.

However, Zigler’s report did indicate a “subtle downward trend” from Q3 2003 in strip center occupancy, resulting in a quarterly 0.20% loss and a 0.22% setback over the past year.

According to Butler, strip center spec development already has caused occupancy issues. “Those guys with the vacant centers just haven’t figured it out yet,” he says. “There is too much on the ground and more being built in that strip category.” The one exception, he says, are the developers building on pad sites flanking the popular big boxes. “The guy with the pad on the lot be fine,” he adds.

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