Q2 2020 | Houston Retail Market Report

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Houston’s retail sector negatively impacted by COVID-19 in Q2 and through the near-term

 
Commentary By Hannah Tosch and Kim Lenardson

 
Retail Trends

It is no secret that retail has taken one of the hardest hits by the economy’s shutdown, surpassed only by hospitality. A closer look at the restaurant industry, in particular, reveals this sector is doing what they can but are hanging by a thread. COVID-19 is causing a ‘survival of the fittest’ effect in our restaurant community, restaurants are making changes to stay afloat, and we are finally seeing a shift to favor tenants here in Houston.

In today’s environment, it is not a matter of making profits for most restaurants; it is merely a matter of minimizing losses. New data from Yelp shows that just over 50% of U.S. restaurants that closed during COVID-19 are now permanently closed. As we make our way through Q3, we see more restaurants shutter here in Houston as PPP loans dry up. Both one-off concepts, as well as larger restaurant groups, are disappearing, proving the more prominent players are not immune to COVID-19’s impact. Pappa’s, Houstonbased family of restaurants, announced the closure of 5 long-time locations throughout Houston.

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Regarding QSRs, we foresee inexperienced operators close unfortunately due to COVID-19, which will lead to more vacancy in the near term, leading to a steadier retail market. Any new store openings in the next year will be strong operators who are wellcapitalized, leading to fewer restaurant failures and vacancies in the future.
 
The restaurants that are open for business are making tangible changes to their business model. We see price increases on menus, even if it is just $1 or $2, due to supply chain shortages of certain foods. Many restaurants have implemented a limited menu to cut costs of too many ingredients and operations, some getting rid of happy hour entirely. Restaurants are changing their operating hours to cut back on staff wages and focus on the time frame that will bring in the most revenue. Restaurant owners are rethinking site designs with less space and incorporate either a drive-thru or pick up window to keep business going should another shutdown happen in the future.

With many of the big box soft-good users and fitness concepts filing Chapter 11 (JC Penny, Neiman Marcus, Stage Stores, 24 Hour Fitness, to name a few), more (40k+) SF boxes are going to come to market. This poses another challenge to owners as soft-good users are downsizing their business models moving forward, even the ones that come out of Chapter 11. Some larger users, (50k+), are already revamping their model to be able to fit into the (20k) box, which brings their costs down.

Active tenants, restaurants and traditional retail, which can expand during these conditions, are set up for success as a tenant in today’s environment have more negotiation leverage than we have seen in over ten years. Houston retail rents have been at an all time high and absorption is negative for the first time since 2012. We believe that there will be a softening of rents as the markets adjust to higher vacancy and lower top-line volume for retailers. Landlords, highly motivated to sign deals, will be much more flexible if they can ink a deal.

Many landlords will be offering more free rent and are amenable to a “moving target” commencement date dependent on traffic returning. We are seeing landlords negotiate percentage rent based on capacity allowed or revenue. Many credit tenants are holding firm on requiring some form of force majeure language to be included in the leases that will cover them should another shutdown ensue. Smaller, local owners are struggling to accept that this type of language will likely be covered in all contracts moving forward.

As the market continues to change through the Fall, owners, retailers and consumers alike will need to adapt to the shift in retail and restaurant life to keep the economy going.

Vacancy & Availability

Houston’s average retail vacancy rate rose 50 basis points from 5.3% in Q1 2020 to 5.8% in Q2 2020. At the end of the second quarter, Houston had 17.5M SF of vacant retail space on the market. Among the major property types, Theme/Entertainment and Single-Tenant retail had the lowest vacancy rate of 1.0% and 2.1%, respectively, followed by Lifestyle Centers at 2.7% and Malls at 3.3%. Neighborhood centers have the highest vacancy rate of 9.9%, followed by strip centers with a vacancy rate of 9.4%.

Approximately 450,000 SF of new inventory delivered during the second quarter and currently there is 1.6M SF of retail space under construction, of which 64% is pre-leased. One of the larger projects under construction is Brookhollow Marketplace located on a former Exxon campus in northwest Houston. The Fidelis owned development is approximately 190,000 SF and 100% pre-leased. Some of the tenants that will occupy space in the center include Burlington, Michael’s, Ross, T.J. Max, Old Navy, Ulta, Five Below, Rack Room Shoes and Bath & Body Works. Brookhollow Marketplace is expected to deliver in September 2020.

Rental Rates

According to CoStar, our data provider, Houston’s citywide average quoted retail rental rate for all property types increased from $16.71 per SF NNN in Q1 2020 to $17.33 per SF NNN in Q2 2020. These average rental rates are typically much lower than actual deal rates since they include all retail property types and classes, the majority of those properties are not well leased and are listed with discounted asking rates. According to Colliers’ internal data, Class A in-line retail rental rates can vary widely from $20.00 to $85.00 per SF, depending on location and property type.  

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Absorption & Demand

Houston’s retail market posted 1.25M SF of negative net absorption in the second quarter, which is the first time Houston’s retail market has posted negative absorption since 2012. The retail sector posting the largest amount of negative absorption in Q2 2020 was Neighborhood Centers, with 535,450 SF of negative net absorption. Neighborhood Centers usually have one anchor and the balance of the center is occupied by smaller retailers offering services from nail salons to casual dining. 

Leasing Activity

Houston’s retail leasing activity, which includes renewals, decreased 28.6% over the quarter from 1.4M SF in Q1 2020 to 1.0M SF in Q2 2020. Looking forward, we expect leasing activity to decline during Q3 due to COVID-19.

Q2 2020 Houston Retail Highlights

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Q2 2020 | Houston Retail Market Report

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Related Experts

Lisa Bridges

Director of Market Research | Houston

Houston

Lisa joined Colliers in 2010 as Director of Market Research bringing 26 years of commercial real estate experience to the firm. Lisa initiates proactive market research projects to further the business goals of the company. She writes and prepares 29 market reports annually which include quarterly reports on Houston’s retail, office, industrial and healthcare properties.  Further, she prepares statistical ownership reports for various clients as well as an annual Houston Economic Overview. Lisa also creates PowerPoint market presentations, trade journal articles, and other marketing materials in support of the company's business endeavors. She works with senior management in planning the company's marketing strategy and public relations support for local and national conferences, luncheon meetings, recruitment programs, and special events.  Lisa works closely with the company's brokers to develop effective custom market research material specific to both existing and potential clients.

Lisa serves on the Colliers International Editorial Board, the Colliers International U.S. Research Council, is a Colliers Center of Excellence team member and is a recipient of the Colliers International Researcher of the Year Award.

Lisa earned the Commercial Property Research Certification (CPRC) from Colliers University.  CPRC is the first and only accreditation for commercial real estate research professionals. It offers a professional development path to increase strategic and tactical expertise in marketing/research, knowledge of the industry and capabilities with commercial real estate tools.

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Hannah Tosch

Associate | Houston

Houston

Hannah Tosch serves as an Associate for Colliers International in Houston, specializing in the retail sector of the greater Houston area. Her primary focus is on tenant representation and buyer acquisitions. Assisting clients in finding the ideal space for their business and working with specialized business owners has been a passion for Hannah.

Hannah is well equipped to handle transaction management in all aspects of the commercial real estate industry, specializing in a service-centric approach which consistently produces a winning client experience. 

As a native Houstonian, Hannah brings a wealth of knowledge about the Houston market to her local and national clients. With a wide network of local relationships, Hannah adds essential value to the Colliers retail group. 

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Kimberly Lenardson

Vice President | Houston

Houston

Ms. Lenardson joined Colliers International | Houston in 2012 as Vice President of Retail Services, bringing over 16 years of commercial real estate experience to the firm.  Kim is a dedicated retail specialist providing both landlord and retail tenant representation services.  She has worked with REITs on large portfolios as well as help local owners find smaller shop space.

Kim previously served as a Leasing Specialist with North American Properties – Southeast, Inc. | Ft. Myers, FL from 2007 to 2012.  She was primarily responsible for leasing document management of new leases, renewals, assignments and amendments of the North American Properties Ft. Myers portfolio consisting of Publix anchored and Target anchored centers throughout Florida and Georgia. The North American Properties Ft. Myers portfolio reached a scale of over 1.2 million square feet of GLA including approximately 360,000 square feet of small shop space. She acquired a working knowledge of shopping center construction with the ability to read construction plans. Assisted in site plan design of new developments along with building the design in accordance with creating merchandising plans.  Kim worked with many aspects of asset management including creating detailed reports for the purposes of Pro-Forma projections andlease assumptions. leasing summaries, competitive market surveys, and five-year budget projections.

Director of Sales and Leasing with Grand Bay Properties, LLC | Bonita Springs, FL from 2004 to 2007.  Retail leasing of grocery and specialty centers of up to 93,000 square feet as well as Class A office space.  Negotiated new and renewal lease agreements to ensure the best terms, compliance and obligations, with landlords, agents, attorneys and/or tenants directly.  Reviewed tenants construction documents, sign shop drawings and sample boards for conformity to Landlord’s criteria.  Monitored and verified negotiated construction to be built on schedule.

 Leasing Associate with Jones Lang LaSalle Americas, Inc.| Miami, FL from 2003 to 2004.  Represented Landlord, JP Morgan Investment Management, in leasing a 1.4 million square foot property with approximately 350 tenants.  Updated and distributed monthly reports to JP Morgan.

Property Administrator with Jones Lang LaSalle Americas, Inc. | Atlanta, GA and Miami, FL from 2002 to 2003.  Responsible for all aspects of lease administration including  compilation of lease documents for ownership approval and distribution of leasing status reports, rent rolls, and Winstack stacking plans.

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