The multifamily scope is good in Houston

Low Cost Housing Project

In its Winter 2016 Multifamily Perspective report, JLL Research identifies three factors that could drive multifamily development in suburban markets.

While cautiously bullish for 2016, investor appetites for new product remains strong overall. Factors that are continuing to drive multifamily investment include constrained housing starts, strong leasing performance and demand shifts in demography, namely the impact of millennials. The vast majority of multifamily development has been focused in Central Business Districts (CBD’s), growing at nearly four times that of suburban markets. However, the delivery of more and more Class A product in CBD’s begs the question of developers: Where to next?

Top 3 factors driving suburban resurgence

To answer this question, JLL Research took a closer look at suburban multifamily markets to identify three factors that are likely to impel suburban multifamily development.

  1. Suburban demographics – It’s all about jobs. Absorption trends currently demonstrate that the demography, economy and housing landscape of Sunbelt markets, like that of Texas, remain favorable. Furthermore, employment gains in these as well as Western Tech markets are strong.
  2. Affordability – The second driver of potential suburban development is affordability. Due to strong market fundamentals, multifamily rents have increased at a faster pace in 2015 than at any point in the last eight years. However, marginal wage growth, constrained single-family housing development, and increasing single-family housing prices have reinforced the relative attractiveness of renting.
  3. Public transit – As a significant driver for multifamily development in suburban markets. Product proximate to public transit is key for markets with dynamic or emerging urban cores or employment nodes with strong intra-market public transit infrastructure. While not applicable in every U.S. market, the accessibility of transit is a crucial consideration for some investors to identify property-level advantages that attract and retain residents.

This being said, suburban markets have not been entirely ignored by multifamily developers up to this point. In fact, relative to urban market counterparts, the pricing gap between urban and suburban rents has tightened. This trend has been observed across Houston’s west and northwest submarkets, and increasingly on the east side.

For 2016, however, suburban multifamily development is still well-positioned to benefit from the impacts of shifts in demography, looming affordability concerns, and expanding public transit.

Source: By: Greg Austin, JLL Houston.

What’s in store for Houston retail?

Retail Project

While office and multifamily markets in Houston have been negatively impacted by the effects of the prolonged downturn in oil prices, a more diversified economy than in the past has helped shield other Houston real estate sectors, retail being among them.

The long-term outlook for Houston retail real estate is strong, despite a minor correction that is anticipated for 2016.

Over the last five years, Houston has experienced notable growth in population and Gross Metropolitan Product (GMP). As the two biggest drivers for the demand of retail real estate, increases in population and gross production suggest increased demand for Houston retail CRE in the long run.

U.S. Census data placed Houston first in population gains among the largest U.S. metropolitan areas from mid-2014 to mid-2015. Houston grew its population base by 2.4 percent during the same time period. Furthermore, the city was one of only three U.S. metro areas that ranked in both the top 20 largest absolute population gains and the top 20 fastest-growing metros by percentage.

Despite these strong dynamics, the Houston retail market may see a slight correction in 2016 after a white hot year of construction, deliveries and absorption in 2015. Last year, Houston retail saw 3 million square feet of deliveries and 2.5 million square feet of positive net absorption. The market can expect to see a slight increase in vacancy in 2016 as absorption slows. However, long-term growth is expected to pick-up again in 2017, particularly with Super Bowl LI providing a boost to the local economy.

The impact of e-commerce

While some argue that e-commerce will diminish demand for brick and mortar stores, research shows that e-commerce has had less of an effect on retail than what is generally perceived in the market.

Research from the U.S. Department of Commerce shows that e-commerce sales account for less than 8 percent of total retail sales in the United States. There are, however, some segments of the retail industry that have been affected by e-commerce more than others. For instance, the music and video industries have been transformed by online purchasing. On the other hand, retail segments like clothing, consumer electronics and groceries have been minimally disrupted. Looking forward, a challenge for e-commerce will be the growing concern for online security and privacy. While e-commerce will continue to play an important role in the retail industry, research suggests that traditional brick-and-mortar stores remain an important and relevant part of the retail industry.

Mixed-use and lifestyle centers characterize retail growth

Today’s consumers increasingly identify dining as an important consideration in where they choose to shop. They are increasingly prioritizing multitasking as well. That being said, the growth that Houston can expect to see in retail will be in mixed-use properties, lifestyle centers and innovative redevelopments that combine dining, shopping, entertainment and social opportunities.

More and more consumers are looking for ways to mix shopping, socializing and other activities into single outings. Furthermore, they are looking to move into areas and neighborhoods that offer more than just residence. The commercial real estate industry should seek to capitalize on this core consumer preference.

In addition to addressing consumers’ desires for single-outing, multitasking experiences, lifestyle centers also address millennials’ preference for neighborhood or community shopping centers as opposed to enclosed malls and open-air shopping centers with big box stores.

This means one of the priorities for retail real estate going forward may be to create destination retail locations that include a distinct tenant mix reflective of the local character of a property and the consumers that surround it. Additionally, lifestyle centers have the ability to evolve and create value through intangibles like a sense of authenticity, community and belonging with their customers.

Further supporting the momentum of this trend in Houston is the demonstrated success of the city’s existing mixed-use developments. This, combined with an ever improving downtown scene, ongoing urban beautification projects, and population growth, position Houston and its retail sector for continued expansion in the future.

Source: By: Mark Raines, JLL Houston

Retail Confidence Grows in Houston

Retail Project

Houston will be among the nation’s leaders in retail property deliveries in 2016 as nearly 3 million square feet of space is scheduled for completion this year. The new construction will increase retail property supply by 1 percent, the fifth-largest rate of growth for retail space for major markets in the nation. Historically, Houston has had several growth spurts — and some economic recessions — related to the energy industry.

The Houston metro area, known as a world capital in the oil and gas industry, has some obstacles to overcome as the upstream oil sector is losing a significant number of jobs. Yet other area employers have gained momentum, keeping job growth positive.

Growth in other sectors of the Houston area’s economy, like health care and downstream oil-and-gas operations, is positively influencing the market and keeping retail developers active.

A number of sizable retail projects are underway in Houston, including the 240-acre Valley Ranch Town Center in northeast Houston. Development of Valley Ranch Town Center will bring shopping, dining and entertainment to residents of the 1,400-acre Valley Ranch community.

A total of 1.5 million square feet of shops and restaurants is planned, along with a 10,000-seat amphitheater, a multi-attraction entertainment venue, 1,000 multifamily residences and the newly opened 8,500-seat Texan Drive Stadium.

In Katy, the 450,000-square-foot Shoppes at ParkWest will also be delivered this year. Bed Bath & Beyond, Buy Buy Baby and Kirkland’s anchor the development.

Shoppes at ParkWest is part of a broader, 150-acre mixed-used project that will include office, medical and residential.

Preleasing Abounds
Overall, retail space in the metro area is coming online largely pre-leased, and as a result, vacancy is expected to remain near the mid-5 percent range in 2016, as it was in 2015.

Last year, the vacancy rate dipped 30 basis points year over year. With vacancy projected to remain tight this year, the average asking rent will reach $16.62 per square foot, a 3.1 percent year-over-year increase.

Private investors will continue to be drawn to commercial property investments in the Houston area by healthy property operations, and regional retail buyers are expected to stay active in the coming months.

Though development remains strong, retail operations will allow operators to strengthen net operating income as new space is leased.

Institutional investors may scale back their activity in Houston, however, and that is opening up opportunities for regional high-net-worth individuals to compete for quality assets that they were priced out of in the previous year.

Properties inside “The Loop” — the Greater Houston area’s hub-and-spoke freeway structure with multiple loops, with the innermost being Interstate 610 forming a roughly 10-mile loop around downtown – are in high demand, and first-year returns begin around 6 percent.

Throughout the metro area, newer properties with credit tenants trade at initial yields in the mid-6 percent to 7 percent range, and trend upward 150 to 200 basis points moving farther from high-traffic areas and down the quality scale.

The eastern portion of the Houston area is gaining steam as petrochemical companies expand and the Grand Parkway, soon to be the longest beltway in the U.S., is well underway, drawing investors to properties nearby.

In addition, single-tenant retail properties are in high demand as investors from all over the country target the market for quality deals, with cap rates starting near 5 percent.

Confidence in the long-term growth of The Woodlands, a master-planned community and census-designated place in Greater Houston located about 28 miles north of Houston, has builders investing in new projects. Buyers will seek retail assets nearby to capitalize on increased traffic and tenant demand.

Source: by Haisten Willis

Houston Sees Retail Grow With Infill And Exurban Projects

Retail Project

With double-digit rent growth and soaring occupancy rates, Houston and its surrounding markets are looking stronger than ever, despite a lingering perception of risk in the eyes of outside investors.

This disconnect between perception and reality is affording local Texas investors the opportunity to heavily engage in the retail market as outside investors look on from the sidelines, notes David Luther, first vice president of Marcus and Millichap.

What is the climate for retail in the Houston market?

Kenneth Katz: I think we’re in this interesting world where there are a lot of eyes on Texas, and specifically on Houston, and what’s happening on the ground with respect to jobs and population growth. The reality is that what we’re hearing from retailers just doesn’t seem to jive with the perception that we’re getting in Houston. When retailers are looking at their sales, their comp store increases and all of the metrics that they use to judge the strength of a store base of a market, they’re seeing something that they’re very pleased with. There seems to be this inconsistency between what we’re seeing and what we’re hearing from our tenants and our retail clients and what we perceive others are thinking about Houston. Top to bottom, things here are very strong.

Lance Gilliam: I agree that there is a disconnect between perception and reality. The retail asset class seems to stay strong. The other asset classes, which our firm engages in, are struggling. Office and multifamily both have perception issues that are probably more based in reality, but there continues to be a greater demand for retail than there is supply. It has kept rents high and occupancy rates very high.

Source: By Laura Massey

Houston’s Retail Demand High

Retail Project

In 2014, the retail market in Houston performed exceedingly well and analysts expect growth to continue in 2015. According to recent CBRE research data, in the last quarter of 2014 Houston absorbed 316,988 square feet, which brought the net absorption per year to 2.1 million square feet, the highest absorption rate since 2003.

Despite delivering 1.8 million square feet of new construction in 2014, vacancy dropped to a record 6.6 percent.  Demand remains high in retail centers located in Cypress, the Galleria area, The Woodlands and Sugar Land, where occupancy rates are well over 90 percent because of the multitude of single-family and multifamily projects that are under development there.

Q4 2014 is the second quarter in which Houston registered a lower quarter-to-quarter absorption rate; however the year-to-date absorption rate of 2014 exceeded that of 2013. The average rental rate for retail properties also continued to increase from $22.06 per square foot in Q3 to $22.15 per square foot in Q4. The most significant increases were registered in the Inner Loop, Far North and South submarkets.

Fueled by the highest occupancy rate on record and an estimated population increase of 125,000 residents in 2015, analysts remain optimistic about the retail market in Houston despite the problems in the energy industry.

The most notable retail transactions of 2014 in Houston were Fidelis Realty Partners’ development of a 750,000-square-foot shopping, dining and entertainment center; and HCL-MarqE’s acquisition of the 352,000-square-foot Marq*E Entertainment Center.

Source: By Laura Massey