Quarterly Market Report: Houston Retail - Q3 2019

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HOUSTON RETAIL | Q3 2019

Quarterly Market Report


OCTOBER 2019

Supply & Demand


Completions Net Absorption Occupancy

EXECUTIVE SUMMARY 4.5 96%

Millions (SF)
Steady Houston retail market 4.0
95%
Net absorption in the Houston retail market increased 3.5
to almost 1.3 million sq. ft. in the third quarter 94%
3.0
compared to the previous quarter at 1.2 million sq.
ft., a 3.5% increase, while leasing activity included 1.4 2.5 93%
million sq. ft. of signed deals. The overall occupancy
rate remained unchanged quarter-over-quarter at 2.0 92%
94.4%, and down only 10 basis points from this time
1.5
last year at 94.5%. The retail market saw overall 91%
average asking rates rise yet again by $0.39 per sq. ft. 1.0
quarter-over-quarter to finish at $18.38—surpassing 90%
last quarter’s all-time high—on a triple-net basis. A 0.5

year ago, average rates were at $16.90, representing 0.0 89%


an 8.8% increase. Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Job growth remains healthy


The Houston metro created 81,900 jobs, a 2.7%
Market Indicators
increase, in the 12 months ending August 2019
Current Prior Quarter Year Ago
according to the Texas Workforce Commission. Q3 2019 Q2 2019 Q3 2018
The sectors adding the most jobs over the past 12
Vacancy (%) 5.6 5.6 5.5
months were professional, scientific, and technical
services (21,100); manufacturing (11,500); and other Net Absorption (SF) 1,278,983 1,236,181 1,574,036
services (9,700). Houston’s unemployment rate was Leasing Activity (SF) 1,445,450 1,581,133 2,081,784
3.9% in August, down from 4.4% in August of last
year. The Texas rate in August was 3.6%, the U.S. Deliveries (SF) 1,344,075 899,201 1,736,645

rate 3.8%. The rates are not seasonally adjusted. The Construction (SF) 3,512,309 4,321,235 3,602,230
U.S. Energy Information Administration (EIA) reported
Inventory (SF) 354,978,522 353,623,947 350,504,247
that the closing spot price for a barrel of West Texas
Intermediate (WTI) averaged $56.16 per barrel during Avg Asking NNN Rent ($) 18.38 17.99 16.90
the second week of September 2019, down 18.6%
from $68.96 for the same period in 2018. Monthly WTI
prices averaged $54.81 per barrel in August 2019.
Looking ahead, the EIA forecasts WTI to average $62
per barrel in the second half of 2019 and $63 in 2020.

HOUSTON | AUSTIN | SAN ANTONIO


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HOUSTON RETAIL | Q3 2019 Quarterly Market Report

MARKET OVERVIEW
Balanced year-to-date supply and demand Historical Investment Trends - Sales Volume
Quarterly Volume 09/30/19: $280,437,779
The Houston retail market has absorbed 3.1 million sq. Source: Real Capital Analytics
ft. and delivered 3.4 million sq. ft. year-to-date through Quarterly Volume
Q3 2019. Of the new construction delivered so far this 2.0
year, 70% has been leased, and of the over 3.5 million

Billions ($)
1.8
sq. ft. still in the pipeline, about half has already been 1.6
spoken for. Strong population growth, above-average 1.4
job growth, and a gradually recovering energy industry 1.2
represent Houston’s solid fundamentals. The new 1.0
rooftops and jobs have driven demand for retail, which
0.8
has led to an occupancy rate at or above 94.0% for over
0.6
the last five years.
0.4
0.2
Investment Sales
0.0
Real Capital Analytics data reports quarterly retail sales Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
volume for the third quarter 2019 in the Greater Houston
area at $280.4 million, compared to the second quarter
2019 at $289.0 million, resulting in a slight quarter-over-
quarter volume change of -3.0%. The primary capital
Vacancy & Availability
composition for buyers in the third quarter of 2019 was
made up primarily of private investors at 88.0%, followed Vacant Available
12%
by institutional investors at 8.4%. For sellers, the majority
of investors were private at 75.0%, trailed by institutional
investors at 9.9%. In July, Fondren Southwest Village 10%

was acquired by Wu Properties. The 305,000-sq. ft.


retail center is located at 11092 Fondren Road and was 8% 7.2%
90% leased at the time of sale by Garrison Investment
Group. The shopping center is grocery-anchored by 6% 5.6%

Fiesta Mart along with tenants dd’s Discounts and


Planet Fitness. 4%

H-E-B celebrates its 114th anniversary this year 2%


Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3
The Texas-based grocer currently has two construction 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
projects in West Houston totaling $16 million. The first
is an addition to its 4625 Windfern Road distribution
center in Houston, estimated to cost $12.5 million. The
second is for a store renovation at 11815 Westheimer Net Absorption
Rd. in the Memorial neighborhood—a project estimated
to cost $3.5 million. In addition, the recently opened 3.0
Millions (SF)

H-E-B store at 3663 Washington Ave., the anchor


of the soon-to-open Buffalo Heights mixed-use 2.5
development, is 96,000 sq. ft., located at the
2.0
intersection of Washington Avenue and South Heights
Boulevard. The store is one of the first in Houston
1.5
to offer two levels of grocery space. Another H-E-B
expected to open in 2019 is the MacGregor Market 1.0
store at the corner of State Highway 288 and North
MacGregor Way. H-E-B, with sales of $26 billion, 0.5
operates 400 stores in Texas and Mexico. Known
for its innovation and community service, H-E-B 0.0
Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3
celebrates its 114th anniversary this year. 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

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HOUSTON RETAIL | Q3 2019 Quarterly Market Report

Port Houston—The crown jewel of the Texas economy


The greater Port of Houston, which is comprised of
Under Construction
about 200 facilities along the ship channel, has a
national economic impact of nearly $802 billion annually Leased Available

and supports about 3.2 million jobs. In Texas alone, North


the economic value of the port is about $340 billion.
Southwest
Operationally, the facilities have handled close to 30
million tons of cargo through August, an increase of 7% Inner Loop
over last year as both container volumes and steel have Northwest
maintained their upward trends in 2019. The number of
twenty-foot equivalent units or container TEUs handled Northeast

through August totaled nearly two million, an increase West


of 11% compared to this time last year. Port officials
Southeast
expect to approach three million by the end of this year.
The Port of Houston continues to be among the fastest- South
growing container ports in the country, fueled by an 0.0 0.2 0.4 0.6 0.8 1.0
increasing number of import distribution centers in the Millions (SF)

Houston region and a robust manufacturing base in the


State of Texas.

Rents continue to rise in tight market


Completions Year-To-Date
The tight retail market continued to push the Houston
Leased Available
metro average annual asking rents up, reaching $18.38
Northwest
per sq. ft. to end the third quarter of 2019 at a record
high. Prices have climbed 21.6% from the average North
asking rent of five years ago ($15.12 per sq. ft.). While
retail availability is especially limited across the Houston Inner Loop

area, it is particularly tight within the Inner Loop area, Southwest


with a total inventory of approximately 28.9 million sq.
ft., a vacancy rate of 4.7% and the average asking West
triple net rent at $27.53 per sq. ft. The concentrated
Southeast
Galleria area represents 4.5 million sq. ft. of high-end
retail space with only 35,000 sq. ft., or 0.8% of vacant South
inventory, and an average asking triple-net rent around
0.0 0.2 0.4 0.6 0.8 1.0
$41.00 per sq. ft. Although concessions such as free Millions (SF)
rent and tenant improvement allowances make posted
rents less meaningful as a market indicator, the price
of Houston’s retail space is rising. The highest-quality
space, with the best location, and ease of accessibility
will demand the highest rents. Average NNN Asking Rent

Inner Loop $27.53


Houston home sales registered the seventh
positive month West $22.18

According to the Houston Association of Realtors, Northwest $18.75


September single-family home sales were up 9.5%
year-over-year marking the second largest one-month Southwest $18.02
sales volume of the year. On a year-to-date basis, South $17.54
sales are 3.8% ahead of 2018’s record volume. Strong
inventory and low mortgage interest have generated a Northeast $16.48
positive climate for home buyers and created one of
Southeast $15.80
the strongest beginnings of the fall season in Houston
real estate history. The median price of a single-family North $15.44
home reached the highest level ever for a September, $10 $12 $14 $16 $18 $20 $22 $24 $26 $28 $30
climbing 4.7% to $244,000. The average price also set
a September record, rising 1.5% to $298,947.

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HOUSTON RETAIL | Q3 2019 Quarterly Market Report

MARKET OVERVIEW
Submarket Stats

Q3 2019 YTD Q3 2019 Total Avg


Net Total Net Total Net Leasing Q3 2019 YTD Under Asking Rent
Rentable Area Vacancy Absorption Absorption Activity Deliveries Deliveries Construction NNN
Submarket (SF) (%) (SF) (SF) (SF) (SF) (SF) (SF) ($/PSF)

Houston Total 354,978,522 5.6 1,278,983 3,104,802 1,445,450 1,344,075 3,409,208 3,512,309 18.38

Q3 2019 YTD Q3 2019 Total Avg


Net Total Net Total Net Leasing Q3 2019 YTD Under Asking Rent
Rentable Area Vacancy Absorption Absorption Activity Deliveries Deliveries Construction NNN
Submarket (SF) (%) (SF) (SF) (SF) (SF) (SF) (SF) ($/PSF)

Inner Loop 28,886,723 4.7 133,755 351,471 100,872 169,636 381,681 776,348 27.53

North 65,019,419 5.9 316,571 822,983 220,519 284,385 580,135 997,908 15.44

Northeast 25,635,265 5.0 -42,020 4,428 89,012 0 127,116 260,106 16.48

Northwest 63,596,995 5.6 346,855 737,498 340,817 420,164 874,043 444,212 18.75

South 14,949,909 4.5 71,487 234,000 18,796 76,999 164,841 67,431 17.54

Southeast 55,528,883 5.5 109,102 367,950 189,622 45,657 326,416 121,246 15.80

Southwest 57,116,611 5.9 255,200 581,428 291,876 258,917 577,887 604,983 18.02

West 44,244,717 6.6 88,033 5,044 193,936 88,317 377,089 240,075 22.18
99

99
Houston Retail Submarkets
6

1. Inner Loop
59

99

290

90 2. North
90

3. Northeast
59
290
90
10

10

10

4. Northwest
Sam Houston Tollway

Westheimer
99

Tollway
West Park Houston 225

5. South
6

45

288
59
Fo

90
rt Bend Tollway

6. Southeast
7. Southwest
8. West

Information and data within this report were obtained from sources deemed to be reliable. No warranty or representation is made to guarantee its accuracy.

HOUSTON RETAIL | Q3 2019


Quarterly Market Report
OCTOBER 2019

NAI Partners
Houston Office
1360 Post Oak Blvd., Suite 1900
Houston, TX 77056
Leta Wauson
Director of Research
tel 713 629 0500
leta.wauson@naipartners.com
www.naipartners.com tel 713 275 9618
5

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