Even With Space Removed, Retail Stays Strong

HOUSTON—For the most part, Houston has survived the oil downturn. The Greater Houston area created 108,300 jobs, a 3.5% increase, in the 12 months ending December 2018, according to the Texas Workforce Commission’s preliminary data. Houston nonfarm payroll employment is at a record high 3.1 million. Allowing for revisions, this number should exceed 3.2 million by mid-year 2019, according to the Greater Houston Partnership.

The five sectors adding the most jobs in 2018 were construction (19,400), administrative and support services (16,800), durable goods manufacturing (15,500); professional, scientific and technical services (11,200); and healthcare (11,100). The sub-sectors losing the most jobs in 2018 were clothing stores (-2,000), building materials stores (-2,000), restaurants and bars (-900), insurance carriers (-800), telecommunications (-800), and oil and gas extraction (-800).

“Retailers are trying to operate in a smaller footprint in order to reduce rents,” Joe Kidwell, partner of Husch Blackwell, tells GlobeSt.com. “However, events and entertainment-type uses are drawing customers in as experiential retail gains traction.”

Houston’s overall retail vacancy rate ended 2018 at 5.4%, unchanged for the last three quarters, according to a report by NAI Partners. Net absorption dropped to about 700,000 square feet in the fourth quarter compared to the previous quarter’s two-year high of 1.5 million square feet.

In addition, metro Houston leasing activity is at 1.5 million square feet, almost unchanged from the previous quarter, and down 37% from a year ago at 2.4 million square feet. The retail market’s overall average asking rates increased yet again by $0.41 per-square-foot quarter-over-quarter to finish at $17.50—surpassing last quarters all-time high—on a triple-net basis. A year ago, average rates were at $16.39, representing a 6.8% increase.

Houston absorbed 4.1 million square feet and delivered 4.7 million square feet in 2018, down from 2017 at 4.5 million square feet and 6.5 million square feet year-over-year. However, even with the difference in space either added or being removed from the market, the fundamentals are very strong, with occupancy at 94.6%, says the report.

While deliveries had been outpacing absorption during the last three quarters of 2018—indicating a slightly slower tenant demand for new space—construction activity leveled off, averaging 4.3 million square feet during the same period, signaling controlled growth. This controlled approach will support steady retail growth going forward in a challenging national retail market. The amount of square feet currently under construction is at 3.9 million, down slightly from 4.1 million square feet quarter-over-quarter, and 4.3 million square feet year-over-year.

New development has been gradually decreasing on a quarterly basis since the third quarter of 2016 when it reached 5.5 million square feet, a level not seen since 2008, say NAI Partners. In addition, retail space has remained at or above 94% occupancy since the fourth quarter of 2013.

Leasing activity totaled 1.5 million square feet in fourth quarter 2018, almost unchanged quarter-over-quarter, although down 37% from this time last year. A few of the metro’s largest leases signed during 2018 include the 120,000-square-foot lease signed by Life Time Fitness at Bay brook Mall in the Southeast submarket, the 108,632-square-foot deal signed by At Home at 3000 Kirby Dr. in the Far South submarket and the 89,869-square-foot lease signed by H-E-B at 2121 FM 2920 Rd. in the Far North submarket.

There was some unease in Houston’s retail sector with many high-profile store location closings such as Randall’s, Mattress Firm, Sears and Toys R Us. But as the saying goes, retail follows rooftops and according to the Greater Houston Partnership, from 2010 to 2017, Houston’s population increased by 16.4%, which is the fastest rate of growth among the nation’s 10 biggest metropolitan areas.

And, despite doubts during Houston’s continuing recovery from Hurricane Harvey, 2018 proved to be a record year for Houston home sales. According to the Houston Association of Realtors’, single-family home sales rose 3.8% to 82,177 while sales of all property types totaled 98,323, a 3.7% increase over 2017’s record volume. Total dollar volume for full-year 2018 jumped 21.5% to a record-breaking $28 billion.

United States-bound retail container imports hit a new record in October 2018, according to the Port Tracker report issued by the National Retail Federation. The amount of merchandise imported provides a rough barometer of retailers’ expectations. Volumes have been coming in at higher-than-usual levels in recent months, with retailers importing merchandise ahead of schedule. The past six years have represented the most significant growth period in Port Houston’s history: from 1.4 million 20-foot-equivalent container units/TEU to a projected 2.7 million TEU annually for the calendar year 2018 (nearly doubling in six years). In addition, more than 13 million TEU passed across Port Houston docks since 2014, and for the first time ever, container terminals reached and surpassed the 2 million TEU mark in a single year and are positioned to top the 3 million mark—perhaps as early as 2020. Port Houston fourth quarter 2018 year-to-date operating statistics reported that container volume is solid outpacing last year by 10%, steel is up 21% and overall tonnage is up 8%.