Apr 30
In real estate news, few things excite people more than new retail development. Online community boards fill up quickly anytime a new retail project is proposed in a Houston suburb or a tenant leaves a large space in an existing development, opening opportunities for exciting new concepts.
As of the first quarter of this year, 3.5 million square feet of retail space is under construction across the Houston area, according to Cushman & Wakefield. Not surprisingly, the vast majority of it is in the suburbs, where retail is following residential growth. The far southwest, south and far northwest submarkets combined make up nearly 60% of current construction activity.
To learn more about Houston’s retail trends and where most new development is going, the Houston Business Journal spoke with Jason Baker, principal at Houston-based commercial real estate firm Baker Katz.
Looking at the Houston map, where are we seeing the most new retail, and what trends are emerging?
I’d start with the obvious: The biggest event in Houston commercial real estate over the last 30-50 years have been the evolution and extension of the Grand Parkway. It shows the city has been more forward-thinking than people give it credit for — this was discussed as far back as the lat ’70s and early ’80s.
If you look at where the Grand Parkway has extended — east toward Mont Belvieu, north toward New Caney, northwest through Tomball, south of Pearland — there really is a ton of new rooftops being added in every quadrant of our city, which is driving retail.
If I had to pick one area that will benefit most from a retail standpoint, it’s the stretch west of Houston along the Grand Parkway between the Westpark Tollway and U.S. 290. That “pizza slice” will be the crown jewel of everything that comes out of the ground. Residential growth continues pushing west and northwest, and that’s where a lot of attention is being given.
Bridgeland is the center of the bullseye in northwest Houston. It’s 11,500 acres and about 50% built out. There’s tremendous thoughtfulness in planning, and major announcements like the Houston Texan’s new headquarters reinforce its role as the anchor of northwest Houston. Nearby developments will feed into it.
Of the top eight to 10 master-planned communities, the five fastest-growing ones right now are on the west side. When you look at the Houston region, if you put a pin on the map, I think you would probably put it right at Bridgland with a close second being that Fulshear market.
The most retail development is happening in the suburbs, but how would you describe activity in the city?
The challenge inside the Interstate 610 Loop is land cost and assembling enough space for meaningful development. Inside 610, you’ve historically seen strong freestanding stores, but not the large-scale retail concentrations you see in suburban markets.
That said, there are some interesting projects: redevelopment in Rice Village, the former Sears site on North Shepherd Drive, and potential opportunities in (East Downtown) with the Interstate 69 changes. Just outside 610, Memorial City Mall is one to watch — MetroNational has plans that should be significant.
It’s funny; when I started my career nearly 30 years ago, everything that was considered urban was inside 610, and I think now everything that’s considered urban is inside the Beltway.
Retail took a big hit during the Covid-19 pandemic. How has the Houston market recovered since then?
Houston was somewhat overbuilt pre-Covid. The “blessing,” if you can call it that, is that for the mot part it really put new retail construction — and I’m talking about larger projects — on ice. There’s been very little new meaningful retail added around the city, so occupancy and rents are not at all-time highs. Retail is a very favorable investment category again.
Tenant mix has also shifted. For the first time, more than 50% of retail space nationally is occupied by service providers, according to CoStar. That’s everything from pet care to health and wellness. These users want visibility and to be closer to customers; they don’t want hidden office space. Brick-and-mortar retail isn’t going away, but the makeup of a traditional project is definitely changing.
If you looked at a new retail center 10-20 years ago, how would it look different from these being built today?
In the early 2000s, Houston and the rest of the country had a big run of power centers oftentimes anchored by a big discounter and a supporting cast of junior anchors and then small spaces and pads. You rarely saw grocery stores in these projects.
Today, grocery is often central, and fitness is much more integrated into projects rather than being an afterthought. You still see many of the same retailers — Target, Walmart, TJ Maxx — but the pace of development has slowed, and retailers are more cautious about over-expansion.
You’re not seeing as many large power centers come online at once like in 2006-2007. That’s partly due to higher costs and smarter, more disciplined expansion strategies.
We’re seeing more and more mixed-use retail development in Houston. How important is it today to have apartments next to retail?
Retailers like having nearby population density — it brings customers. But multifamily isn’t always a deciding factor when choosing sites. True “lifestyle” developments require multiple components — residential, retail, office and sometimes hospitality. There’s been very little done in terms of office development, so in terms of true lifestyle projects being added, I’m not seeing a lot of that. Plaza-style spaces can work well, especially for restaurants, but they’re not always executed well and can end up feeling like dead space.
For some time, we’ve heard of commercial real estate firms shifting to buying retail centers as opposed to developing. Is this still happening?
Construction costs continue to be high. The cost of borrowing, at least as you compare it to 10 years ago, is still higher, and developing tends to just take a lot of time. There’s definitely been an appetite to buy stabilized deals. I think that’s changing. Retail demand is high, the cost of borrowing has dropped some, and the cost of construction has dropped some — not across the board, but with certain materials. The good news is you can offset that with some higher rents than you would have seen 10 years ago with a real high level of leasing activity.
How does Houston’s retail market compare nationally?
We talk to colleagues of ours all over the country, and I will say the overall sentiment is that activity level is high and we’re finally seeing some new construction — not in every market, but in a lot of markets. In terms of activity level and just general health of the market, I would say Texas is as good a spot as any single state in the country, and Houston is at the very top of that list.
This interview has been edited for length and clarity.