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HOUSTON-According to a new third-quarter 2004 study by locally based real estate consultants O’Connor & Associates, retail is the hot property type in the Houston MSA, the tenth-largest conurbation in the country, and one of the fastest growing. Considering the lackluster state of the office market especially, that might not be a surprise, but for the fact that retail absorption is at its highest levels in four years, and occupancies are very high as well.

“The market is strong across the board,” Richard Zigler, director of research for the firm and editor of the report, tells GSR. “New development, most of which is pre-leased, is following suburban population growth in the Houston area, which has been enormous in recent years. There are some vacancies in the lower-tier malls, and some of the former Kmarts and Service Merchandises are still empty, but on the whole, every segment of the market is strong.”

The O’Conner report notes that strong quarterly absorption across all retail types has brought the demand in the first three quarters of the year to more than 5.2 million sf, the highest figure for that period since 2000. Absorption is typically stronger in suburban areas, following residential developments, and begins to soften closer to Houston proper. Only the near northwest market recorded negative quarterly absorption in Q304, with a minuscule 6,848 sf returned to the market. Six other submarkets posted gains in excess of 100,000 sf, led by the far southeast sector with 303,400 sf absorbed.

Moreover, according to the report, overall retail occupancies are at the highest levels since mid-2001, at 86.62%. All retail types except strip centers posted occupancy gains over the second quarter of 2004, and over the same quarter last year. Strip center occupancy levels are down over the last year primarily due to the large volume of new construction, but, the report adds, as long as demand for strip centers remains strong and outpaces construction, occupancy levels will catch up.

Most major national retail players are already represented in the Houston market, Zigler notes, adding that he’s keeping a close eye on CVS as it tries to expand its beachhead in the market against a dominant Walgreens. Also, he says that Wal-Mart will push deeper into the Houston market as part of its national drive to compete with grocery stores.

“If grocery and specialty stores weren’t already feeling the pinch brought on by Wal-Mart, they are in for a big squeeze as Wal-Mart announced plans to add 55 million sf of expansions, including the addition of 240 to 250 supercenters nationwide in 2005,” the report explains. “Wal-Mart has become second in grocery sales in Houston with 20%, just points behind Kroger with a 26% share. HEB takes fourth place with 13%, just behind Randall’s at 14%. HEB is aggressively pursuing the Houston grocery market, and has expanded their store format in order to compete with Wal-Mart while still offering a variety of ethnic and specialty food items.”

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