3 things to watch in Houston’s retail scene in 2017

Retail Project

With 2016 having gone down as an overall strong year for the retail sector in Houston’s commercial real estate scene, things are looking relatively positive for 2017. Some of the defining trends of 2016’s retail market as well as new challenges are worth paying attention to in 2017.

How retailers adapt to inner Loop challenges

Retail dominates the suburbs through big-box shopping centers and mixed-use developments such as CityCentre, the new Imperial Market development in Sugar Land and the Baybrook Mall expansion. But retail inside the Loop is undergoing a transformative moment. Retailers are going vertical, as evidenced by Midway Cos.’ recently announced Buffalo Heights project, which will be anchored by a multilevel store by San Antonio-based H-E-B Grocery Co.

Meanwhile, Houston can expect more adaptive reuse in retail as developers work to find locations in an increasingly dense inner Loop. For example, work is underway to turn a former warehouse property into a new community-focused mixed-use project called EaDo Workspaces in East Downtown.

“Urban retail is hot,” Jazz Hamilton, first vice president with CBRE’s retail brokerage services group in Houston, told the Houston Business Journal. “Reusing and the refurbishing of warehouse space – that’s hot right now. And retail going vertical is not just hot, but it’s like you’re forced to go vertical.”

  1. The closing of brick-and-mortar stores

Last year claimed a lot of big box retailers such as Sports Authority, Aeropostale, Golfsmith and, most recently, the Limited. As more and more Americans opt to skip the lines at brick-and-mortar stores in favor of shopping online, this will be something to keep an eye on. About eight out of 10 Americans are now online shoppers — 79 percent have made an online purchase of any type and 51 percent have bought something using a smartphone, according to a December survey of U.S. adults from the Pew Research Center.

Meanwhile, Cincinnati-based retail giant Macy’s Inc. announced Jan. 4 that it will close 68 of its 870 stores and streamline its management. Three of the stores are in Houston: in Greenspoint Mall, West Oaks Mall and Pasadena Town Square.

  1. Can downtown become a destination?

Urban planners are wrapping up years-long projects that aim to establish downtown Houston as a destination for locals as well as visitors. Many of these projects were planned long before Houston was selected to host the 2017 Super Bowl.

Downtown’s convention center district has been revamped and renamed as part of a $175 million makeover that started in 2014. Urban planning entities rebranded the area enclosed by the convention center, Discovery Green, the new Marriott Marquis and the Hilton Americas as “Avenida Houston” rather than the convention district. The street that separates the convention center from Discovery Green, Avenida de las Americas, has been confined to two lanes from eight in a move that made way for what is being dubbed restaurant row. Grotto from Landry’s, Bud’s Pitmaster BBQ, McAlister’s Deli, Pappadeaux Seafood Kitchen and Kulture from the owners of the Breakfast Klub will all open in that space.

Meanwhile, six new restaurants, including a highly anticipated new concept called Xochi from Hugo Ortega, will open inside the Marriott Marquis.

However, whether Houstonians will frequent these restaurants is anyone’s guess.

“Downtown Houston is not the tourist destination like New York, Chicago or Philly. It’s different,” Hamilton said. “Houstonians are still not thrilled about driving to downtown and paying to park. (Retailers) are still catering to the business traveler that’s down there because of their office space or a conference center.”

Source: Cara Smith and Emily Wilkinson Houston Business Journal

Q2 2016 Houston Industrial Insight & Market Statistics

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Industrial market remains steady through mid-year

The Houston industrial market maintained solid fundamentals in the second quarter of 2016 despite notable headwinds in the overall Houston economy.

Although some companies are postponing expansion until things in Houston improve overall, consumer goods – driven by population growth and high retail demand – has compelled leasing activity in the city’s industrial market. While a few big-box leases have dominated headlines, the vast majority of industrial leases in the second quarter were significantly smaller in size. Eighty-four percent of industrial deals in the second quarter of this year were less than 100,000 square feet.

The industrial market’s resilient demand has kept supply tight across the city. Even with 1.6 million square feet of industrial space delivered in the second quarter, total vacancy remained unchanged at 5.5 percent. This speaks to the high demand for the metro area’s industrial sector as companies make long-term commitments to Houston.

Industrial development remained high during the second quarter, especially in two of the city’s strongest submarkets: the southeast and northwest. Most projects in the southeast are speculative but are leasing up relatively fast due to proximity to the Port. On the other side of town, the development pipeline in the northwest is largely characterized by owner-users. Given the area’s strong distribution channels, the Houston warehouse market should continue to prosper in the period ahead, especially if development activity remains disciplined in weaker submarkets.

Source: JLL Houston

Retail Activity Bucks Metro Trends

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Undeterred by low oil prices, development and leasing activity within Houston’s retail sector remain strong through mid-year.
With more than 3.6 million square feet of space under construction in the second quarter, Houston leads the nation in retail development activity. Strong demand for new retail space led to the highest quarter for deliveries since 2009. Grocery-anchored centers consistently made headlines as major stores like HEB, Kroger and Wal-Mart compete for market share.
Total vacancy in the second quarter tied its record low from 2015 at 5.2 percent and total availability dropped thirty basis points quarter-over-quarter to 7.1 percent. Houston’s retail vacancy stands in stark contrast to the city’s office market, which reached a total vacancy of 18.5 percent in the second quarter.
Not only is Houston retail activity booming, it’s exploring new dimensions with unique vertical concept developments. HEB is breaking ground on its first two-story location in Houston in 2017 and Gulf Coast Commercial Group has cleared an industrial site in The Heights area with plans for a retail center with multi-level anchors. General market tightness will likely drive retailers and developers to continue exploring new options in the Houston market.
While land sites in the urban core are limited, the expansion of the Grand Parkway is opening new suburban corridors. This has created opportunities for flourishing fast casual concepts to enter and expand across the metro. Food and beverage is busier than ever, and fast casual retailers like Pollo Campero, Verts Mediterranean Grill and Mama Fu’s Asian House are capitalizing on the current market environment.
Strong population growth and household formation should continue to drive Houston retail development and leasing activity through 2016.
Source: Mark Raines, Senior Vice President, JLL Houston Retail Lead

What’s in store for Houston retail?

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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

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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: rebusinessonline.com by Haisten Willis