Q3 2019 | Houston Retail Market Report

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How will restaurants win the affection of Gen Z?

Commentary By Hannah Tosch

 

Retail Trends

As 2019 nears its end, so should the fixation on the millennial, our culture’s “buzzword” for the past few years. It is time to shift focus to Generation Z, today’s teens and early twentysomethings. Generation Z (born in mid 1990s to early 2000s) will outnumber millennials as of this year, and moving forward will hold the majority of the spending power. As Gen Z moves into college dorms and enters the workforce, how will restaurants fight back against delivery services and win Gen Z’s dollar?

It is no secret that the food delivery industry, valued at $1 billion+, is proving to be a threat to the traditional restaurant industry, particularly with Gen Z on the rise. This is a group that has never known the world without technology, iPhones, apps, and the like. For a generation who has grown up with the retail shopping experience at the click of a button, why not do the same for food? Food delivery is not a luxury to this generation as it has been in the past. Further, Gen Z has grown up with this as a norm in situations when parents are not able to prepare or procure food for their children. The solution? UberEats. Favor. Postmates. The fact that UberEats takes 35% of every order placed out of a restaurant’s pocket likely does not register with the customer. Similarly, Postmates charges each restaurant a commission between 15% and 30%. The seamless process of food delivery today keep the consumer satisfied without thinking about the implications on their favorite restaurants. Even multifamily developers are taking this new generation’s food preferences into account in new construction. The next trend we are hearing about is apartments with no ovens, only convection microwaves, in an effort to appease Gen Z and their habits. Further, there is discussion of developing “food delivery lobbies” for residents to wait comfortably for their dinner deliveries. Now that infrastructure is being developed to give food delivery services an even bigger upper hand, how do restaurants reclaim their customers?

If a restaurant wants to win over a Gen Z consumer, they must offer a shareable experience, customer engagement and a meal that goes beyond just good food. We hear the phrase “the camera eats first” more and more these days, meaning many people today will spend minutes photographing their meals and posting on social media before even taking a bite. Instagram has given way to the rise of self-acclaimed “foodies” and “food influencers,” who have their own accounts and post about all the delectable dishes they eat at various restaurants, prompting their friends, families, coworkers, classmates, etc. to check out the restaurant as well. When this new generation thinks about where they want to go for dinner, they are no longer thinking what is the closest option. Rather, they turn to social media for inspiration by viewing photos and posts shared by their peers and influencers alike. As a result of this, restaurants have had to shift focus to creating dishes that are “presentation” worthy. Similar to traditional retailers, restaurants need to curate an experience for the consumer that motivates him or her to physically come to the restaurant. It has to be more than just a place to eat; Gen Z cares about the ambiance, the service, the creativity of the dish, the quality of the build-out, the ”Instagram-ability” of the establishment as a whole. Further, this group is a social generation. They operate in groups and they spend money. If a restaurant can figure out how to engage the patron beyond the meal itself, they will earn their dollar.

There is a hybrid of expectations that this group holds; they want an authentic experience beyond just authentic food; they want a quick meal yet they don’t want the importance of health and sustainability to be overlooked; they want menu customization and diversification, without being overwhelmed with choices. They want to support a brand that upholds social and environmental responsibility. The restaurant industry has a lot to take into account when it comes to winning this group’s affection. Restaurants that engage with their customers today are also seeing success. In P.F. Chang’s recent campaign, they allowed their customers to get involved in menu creation by holding a contest for the newest menu item. Gen Z craves menu personalization, so any time they can be involved in this process, the more likely they are to have brand affinity.

Food delivery is indeed posing a threat to the restaurant industry, but the brands that understand the newest generation’s preferences and habits, will succeed. Restaurants have a new opportunity to capitalize on influencer Instagram habits and let these consumers spread the word to their peers for them. This group spends 6 to 8 hours online each day on average; there is huge potential for restaurants to captivate this group beyond traditional ads via social media. Gen Z holds a new level of spending power, but the restaurant industry will have to earn their dollar. Taking all of these factors into account to appeal to this next generation will be crucial for the future of the restaurant industry’s success.

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Vacancy & Availability

Houston’s average retail vacancy rate remained steady at 5.4%. At the end of the third quarter, Houston had 15.6M SF of vacant retail space on the market. Among the major property types, single-tenant retail and theme/entertainment had the lowest vacancy rate of 1.6% and 1.9%, respectively, followed by malls at 2.4% and Lifestyle Centers at 2.5%. Neighborhood centers have the highest vacancy rate of 8.5%, followed by strip centers with a vacancy rate of 8.2%.

Approximately 877,000 SF of new inventory delivered during the third quarter, of which 72% is pre-leased. There is currently 2.2M SF of retail space under construction, of which 70% is pre-leased. The majority of the projects under construction are located in the outlying suburban submarkets adjacent to rapidly growing residential developments, including Oyster Creek Place, located in Missouri City and Kingwood Place in Kingwood.

Rental Rates

According to CoStar, our data provider, Houston’s citywide average quoted retail rental rate for all property types increased 5.4% over the quarter from $16.13 per SF NNN in Q2 2019 to $17.00 per SF NNN. 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 $30.00 to $85.00 per SF, depending on location and property type.

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Absorption & Demand

Houston’s retail market posted 982,560 SF of positive net absorption in the third quarter, pushing the year-to-date 2019 positive net absorption to 2.5M SF. Some of the positive absorption can be attributed to tenants that expanded into new locations. Among those tenants are Costco, Walmart Supercenter, Star Cinema Grill, Hobby Lobby, Burlington Coat Factory, LA Fitness and James Avery.

Leasing Activity

Houston’s retail leasing activity, which includes renewals, fell 14.3% over the quarter from 1.4M SF in Q2 2019 to 1.2M SF in Q3 2019. Some of the tenants that signed leases during the third quarter are listed in the table below.

Q3 2019 Houston Retail Highlights

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Q3 2019 | Houston Retail Market Report

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Lisa Bridges

Director of Market Research | Houston

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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.

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Hannah Tosch

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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.

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