After a very difficult year, retail is roaring back as the
country reopens. New concepts are blooming. Our
retail site selection teams are busier than ever.
Patrick Duffy | President
- Vacancy remains low
- Absorption drops significantly
- Developers face new challenges
- Houston continues to attract new residents
Houston’s vacancy rate increased marginally from 5.9% to 6.0% over the quarter as 263,800 SF of new product delivered. Construction activity remained steady between quarters and retail foot traffic picked up as COVID restrictions in the state of Texas eased. According to Emsi, a labor market data company, Houston’s MSA population grew by 500,885 over the last five years, now at 7,172,693, and is projected to grow by 544,540 over the next five years. Total regional employment grew by 74,098 over the last five years, now at 3,350,731, and is projected to grow by 166,496 over the next five years. The top three industries in 2020 were restaurants and other eating places, education and hospitals, and general medical and surgical hospitals.
Based on a 5-year historical average, the forecast trends to positive net absorption by year-end 2021.
The average asking rents in the table to the left are an average of all property types that are currently listed with an asking rate. This average does not include properties that are fully leased or that do not list an asking rate.
Commentary By Chadd Bolding, CCIM | Vice President
A quick drive through urban and suburban areas of Houston tells the story that post-COVID, Houston is continuing to grow and attract new residents and additional retailers. While growth is a positive indicator of the local economy, it can have some unwanted side effects. This quarter, we focus on retail development and three (3) factors that are having a financial impact; rising construction costs, new city guidelines for storm water detention and an investment trend moving into hard assets.
Last year we saw a disruption to the supply chain, giving developers a choice to seek alternative materials or delay construction. This material shortage is estimated to have a 4 – 6% increase in costs for 2021 before factoring in an impact from looming inflation. On top of material shortages, we now face a skilled labor shortage. According to a BizJournals study, Houston led the nation in lost construction jobs totaling 22,500 or 9%. The strange phenomenon is, even though Houston should have ample laborers for emerging projects, there are fewer qualified candidates. Researchers believe this shortage is caused by several factors; a decline in apprenticeship programs, construction workers seeking more stable opportunities, retiring baby boomers and less enthusiasm for skilled work. Combine all factors mentioned and the effects are higher wages, lower hiring standards and higher training costs.
Flooding seems to be an annual event now in Houston and Tropical Storm Harvey was the final nail in the coffin for the city to act and implement change. The new storm water guidelines affect the amount of detention required on-site and the height for the finished slab. Both of these factors have had a significant impact on total project costs. In some cases, detention requirements have tripled and developers are forced to choose between buying more land to accommodate larger detention ponds or construction of expensive underground detention through a network of pipes and plumbing. The revised slab height requires developers add clean fill (dirt) to the site or use poured-in place piers and beams. Even the Heights area (effectively the highest elevation in the City of Houston) is not immune to these changes. All of this results in complexity to the design, increased scope of material and labor and longer delivery time, all adding to the project’s total cost.
Reading the headlines today, it’s apparent we are living through a housing boom as families, investors, pension/private equity funds and single-family-for-rent developers compete over short supply. Did you catch it? Pension & private equity funds. This month, The Wall Street Journal ran an article about a DR Horton community in Conroe selling to a pension fund; “yield chasing investors are snatching up single family houses to rent or flip.” This buying trend continues in the single-tenant NNN market. We’ve seen cap rates compress up to 50 basis points for desirable locations with investment-grade retailers. Assets benefiting the most are those deemed Amazon-proof and essential as investors focus more of their portfolio on income-producing, investment grade retailers.
Houston is no longer the “oil town” of yesterday, diversifying into medical, shipping and logistics and, more recently, technology. Houston continues to attract new business and new families. At the same time, this growth creates challenges and increases costs for retailers. Houston lags behind other major metros such as New York, Los Angeles, and Chicago regarding the cost of doing business. It’s been exciting to watch Houston grow and we look forward to overcoming these current challenges and continuing the trend.