Jun 30
It might seem counterintuitive to suggest that Houston, the nation’s fourth most populous city, is ever in danger of being overlooked, but the reality is that, for a long time, this rapidly growing Texas metropolis has frequently not been thought about in the same category as its peers. That is changing, however, and in many ways Houston has become that gateway market it has always longed to be. With the kind of population growth the city has been experiencing, population projections of 8 million – 9 million people in the not-too-distant future do not seem too far-fetched.
Along with that population growth has come sustained economic strength and a development boom: today Houston is seeing all-time highs in both occupancy and rental rate levels
In the last few years, office and multifamily development has been outstanding in Houston — coinciding with a significant influx of new downtown residents. Those categories have accounted for the vast majority of new development during that time. The economic outlook has become a little less certain of late, however, as lower oil prices have spurred layoffs and contributed to a general loss of confidence. For all of the diverse and dynamic social and commercial offerings that Houston has to offer, the city is still one of the energy capitals of the world, and is unavoidably and inextricably linked to the energy market — specifically oil and gas prices. Consequently, we have seen a slight correction in office and multifamily.
There have been suggestions that those categories may even be somewhat overbuilt, and, while there may be a slight surplus of supply, many close observers have concluded that the surplus is far from crippling. In some respects, the timing of the energy price drop is actually fortuitous: in another 150-180 days, a large number of new office and multifamily projects would have broken ground and moved forward, and the development landscape would absolutely have been significantly overbuilt.
So where does this leave Houston retail? The city’s retail market has languished somewhat during the last few years of booming development in office and multifamily. A large number of potential retail tracts of land that had been ‘earmarked’ as retail sites were gobbled up by multifamily developers who were simply able to pay more—up to two to three times as much in some cases — for the same locations. This period also coincided with national uncertainty in the retail market, with store closings and general nervousness about the future of retail a reality in a number of markets across the country. Even some of the retail stalwarts that seemed so strong in the early 2000s (e.g. Target, Walmart and JCP) have experienced turbulence of varying degrees in recent years. As a result, there is less overall demand from retailers to expand, and the competition with other real estate categories has not been tilted in retail’s favor in Houston for a good four to five years.
That narrative is beginning to shift, however, and the retail marketplace in Houston has really been loosening up in the last 6-12 months. We are seeing more retailers actively looking for quality sites and opportunities, and more brands starting to sit up and take notice of the strong performance their existing market locations have been delivering. Land valuations slowly coming back to earth is another side effect of the slowdown in office and multifamily, a development that is also helping to make Houston more accessible to quality retail. Grocery-anchored development has also been a significant catalyst. In many ways, grocery concepts have replaced Target and Walmart as the popular anchor/co-tenant of choice. In fact, on a gross basis, grocers are doing comparable volumes to many of those large traditional anchors.
Right now, with the city in its first legitimate period of retail expansion in some time, it is interesting to see where the heaviest activity is taking place. Retailers are demonstrating a strong and persistent desire to penetrate the inner loop, a prospect that is both exciting and somewhat scary for a market that has long been defined by sprawl. Retailers and developers focusing more on dense urban environments will be a challenge, and we can expect to see more multi-level retail and creative parking solutions for downtown retail development to address that challenge. Houston is a very big city, and there is some resistance to change what has worked, so it will be interesting to see how quickly this evolution comes to fruition.
In addition to inside The Loop, where else is retail development accelerating? One notable hot spot is the far west side of the city, where large numbers of new developments have continued to follow the large amount of residential development in this region. This highlights an interesting Houstonian dichotomy: despite the fact that so much current development action is taking place inside the city’s Inner Loop, suburban growth has been significant driver over the years. In that regard, the development and the expansion of the massive and ambitious Grand Parkway project has been a true game-changer for Houston. The vast majority of new development coming out of the ground in recent years has been along or adjacent to this route. When completed, the 186-mile Grand Parkway will be the largest loop roadway encircling a city in the world. By mid-to-late 2016, the decades-long project will be approximately halfway completed, spanning across the city’s north and west sides from 59 North to 59 South.
One interesting retail category to keep an eye on in Houston in the months and years ahead is in sporting goods and outdoor gear. Today Houston features Sports Authority and local concept Academy Sports + Outdoors. Dick’s and Field and Stream are reportedly entering the market, appearing regularly on sites plans with rumored real estate committee approved deals inked. Rarely do you see three-plus major competitors in a segment in the same city, and it seems unlikely that all of those brands will thrive — or even survive. If the recent trends are any indication, however, Houston’s broader retail marketplace will both survive and thrive in the months and years ahead.
Jason Baker is a co-founder and principal with Houston-based Baker Katz, an X Team International partner and full-service commercial real estate brokerage firm specializing in retail tenant representation, investment sales, and project development and leasing. To learn more, visit www.bakerkatz.com or connect with Jason at jbaker@bkdevelop.wpengine.com.