Q4 2019 | Houston Retail Market Report

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More retailers embrace omnichannel

 
Commentary By Anjee Solanki

Retail Trends

It has been quite a year for tenants and landlords as the retail industry resets after a stifling 18 months of uncertainty. Retailers have finally embraced omnichannel as the strategy of record, investing in online and mobile solutions. As more progressive brands keep a watchful eye on Alibaba, we predict new and existing technologies like artificial intelligence (AI) and machine learning to play a more prominent role in 2020.

BUILDING A CULTURE OF CONNECTIVITY

According to Eggplant Automation, more than one-third of retailers (34%) are looking to incorporate AI to improve the digital experience and 70% have already deployed AI to test their software and applications. The continuous aggregation of data by retailers will provide clarity on consumer behavior, informing marketing and merchandising decisions.

Advertising to get customers’ attention and then having in-store experiences will help solidify sales. One major influence will be how companies connect with customers through social media to bring them into stores for purchases. Consumers live on their phones and retailers who market through this medium will drive sales both online and in-store.

Currently, 90% of retail shoppers use their smartphones in stores, creating a direct connection between retailers and consumers. Beacon technology is expected to surge by 45.5% over the next five years. The small inexpensive, wireless transmitters use low energy Bluetooth technology to transmit signals to nearby compatible smart devices. The emergence of Beacon technology will implement even more connectivity between consumers and locations, allowing companies to learn what products consumers are drawn to, what direction they’re coming from, where in-store they spend the most time, and how long they shop.

THE SURVIVAL OF THE FITTEST

High-end luxury retail brands continue to perform thanks to the personalized, hands-on experience they provide consumers. Successful high-end retailers will continue to do well as they cater to a specific limited demographic who are less apt to buy their luxury items online and prefer to see and touch before purchasing.

Upon establishing a physical presence, direct-to-consumer brands create valuable and impactful experiences for consumers. And it enhances their online sales, too: Direct-to-consumer brands have seen online traffic jump nearly 37% after opening a physical store. Direct-to-consumer brands continue to open brick-and-mortar stores with great success, as seen by strong sales and increased brand awareness.

MIXED-USE ANCHORS

Landlords have also experienced a hard reset, broadening the scope of their tenant mix to include brands and retailers that generate foot traffic, engagement and are more adaptable to change. The stress in the mall sector appears to be moving up the food chain. As the dust settles, we’ll see non-traditional anchors — apartments, hotels, senior housing, medical, entertainment, ball fields, etc. — increase in velocity. We are seeing additional redevelopment across the sector, increasing the social and community components of the property with food truck events, live music, open seasonal markets, among others. Food and beverage, as well as fitness and entertainment uses, have continued to be active, increasing the category’s footprints.

THE CONVENIENCE OF DELIVERY

The existing infrastructure that supports delivery options is changing at a rapid pace. How retailers respond to customer demand for the immediate distribution of goods will continue to be a major influence on the e-commerce experience. We will see brands expanding their online catalog by adding SKUs to create additional options for consumers to stay loyal. Capital allocation by brands to strengthen e-commerce focusing on same-day delivery and the convenience of in-store pick-up or home delivery by the consumer will be critical to their survival.

FUTURE OUTLOOK

The U.S. economic growth relies heavily on consumer attitudes and buying intentions. As the U.S. GDP slowly regains momentum, we have seen a slight increase in consumer spending (2.9%), including a 5.5% increase in spending on goods. There is much speculation on how the state of the elections may influence consumer decisionmaking, impacting CRE and retail in the new year. It’s unclear how the 2020 presidential election may affect CRE. When you consider the sales year over year, things are as good as they can be, and hopefully, will be no worse after the election. As for the rest of it, we’ll have to wait and see.

As for Houston, while overall job growth is expected to be positive, the energy sector, especially up and mid-stream companies are expected to continue to shed jobs. The loss of jobs in the energy sector will have a negative impact on the higher-end retailers and restaurants as the average income for those positions is roughly double the average income for all other industries in Houston. We still expect the economy and consumer spending in Houston to have modest growth in the next two years and population growth will continue to drive the demand for retail and retail services.

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Vacancy & Availability

Houston’s average retail vacancy rate dropped 10 basis points from 5.4% in Q3 2019 to 5.3% in Q4 2019. At the end of the fourth quarter, Houston had 15.6M 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 1.6% and 1.7%, respectively, followed by malls at 2.3% and Lifestyle Centers at 2.7%. Neighborhood centers have the highest vacancy rate of 8.7%, followed by strip centers with a vacancy rate of 8.5%.

Approximately 865,000 SF of new inventory delivered during the fourth quarter. There is currently 2.3M SF of retail space under construction, of which 68% is pre-leased. The majority of the projects under construction are located in the outlying suburban submarkets adjacent to rapidly growing residential developments, including Cross Creek Ranch, located in Fulshear, TX in the Far Katy South submarket and Phase III of Sienna Crossing in Missouri City in the Far New Territory submarket.

Rental Rates

According to CoStar, our data provider, Houston’s citywide average quoted retail rental rate for all property types increased from $16.75 per SF NNN in Q3 2019 to $17.91 per SF NNN in Q4 2019. 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. 

Absorption & Demand

Houston’s retail market posted 1,035,391 SF of positive net absorption in the fourth quarter, making the year-end total positive net absorption to 3.5M SF. Some of the positive absorption can be attributed to tenants that expanded into new locations. Among those tenants are HEB, Northern Tool & Equipment, Life Time Fitness, Dick’s Sporting Goods, Floor & Decor, HomeGoods and Total Wine and More.

Leasing Activity

Houston’s retail leasing activity, which includes renewals, remained steady over the quarter at 1.3M SF in Q4 2019. Year-end 2019 total leasing activity is 3.5M SF. Some of the tenants that signed leases during the fourth quarter are listed in the table below.

Q4 2019 Houston Retail Highlights

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Q4 2019 | Houston Retail Market Report

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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.

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Anjee Solanki

National Director, Retail Services

San Francisco

AREA OF EXPERTISE

In Anjee’s current role, as National Retail Director for the USA, she has developed strong relationships and strategic leadership to over 500 + retail professional nationally across 140 markets within Colliers for Investment Sales, Agency, Retailer Rep, and Retail Asset & Property Management.

Anjee Solanki brings 28 years of focused retail real estate experience to Colliers International.  She provides strategic retail advisory services to enhance value for her clients with her expertise in lifestyle, community, power center, neighborhood, mixed-use retail/residential, and resort retail. 

She has developed and manages strong working relationships with institutional and private clients such as State of Florida, State of Michigan, Heitman, Invesco, Grosvenor Americas, American Realty Advisors, TH Realty, PNC, and Zurich to name a few.

Her strategy identifies current market and property inefficiencies to capture untapped value through asset repositioning, releasing, redevelopment, rehabilitation, proactive management, and enhanced marketing. 

Creative problem-solving is her specialty, and she becomes a key stakeholder with national and international retailers, such as JPMC, Opry City Stage/Ole Red and Tim Hortons, and many others. Her highly focused approach reduces the risk profile and provides clients with a thoughtful approach executing strategic multi-year planning initiatives. 

BUSINESS BACKGROUND

Previously, Anjee served as Executive Vice President, Retail Services for Madison Marquette. She successfully assisted with repositioning community centers to lifestyle projects and identified opportunities to create value, resulting in higher returns for her clients. She also provided strategic analysis on complex redevelopment projects to address both the asset’s financial stabilization and/or the client’s exit strategy

BLOG

Anjee continues to be an insatiable collector of all things retail. She’s a student of culture living next door to future shoppers, whose fleeting trends constantly change the retail landscape … driving retailers, landlords and developers crazy! Read her Blog at:  https://knowledge-leader.colliers.com/author/anjee-solanki 

COMMUNITY INVOLVEMENT

Anjee is originally from Southern California and currently resides in San Francisco.  She is active in the Rincon Hill neighborhood residential improvement group, which participates in the public review of the highly anticipated Salesforce Transit Center in San Francisco.
 

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