Key Takeaways
- Vacancy continues to decrease
- Positive absorption recorded
- Rental rates increased 2.0% annually
- 2022 leasing activity up 24% annually
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Houston Highlights
Houston’s vacancy rate decreased 50 basis points from 5.6% to 5.1% over the quarter as more inventory was leased than new inventory delivered. Houston’s retail sector recorded 1.3 million square feet of positive net absorption in the second quarter, pushing the year-to-date total absorption to 2.4 million square feet. Year-to-date leasing activity reached 3.1 million square feet, an increase of 24% when compared to mid-year 2021. The average asking rental rate increased 2.0% on an annual basis.
Market Indicators
Historic Comparison
Market Fundamentals
The forecast in the above graph is based on a trailing 4-quarter average.
*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.
Executive Summary
Commentary by Patrick Duffy, MCR
The Consumer is Still Consuming – Retail Holding On
Despite recent readings of consumer confidence dipping to the lowest level in seven years and a 40-year high inflation environment, the U.S. consumer is still buying. Retail sales (excluding food services) nationally hit a record high of $594B in June (unadjusted for inflation). That represents an increase of 7.7% over last year, which is below the reported CPI increase of over 8.5%. Our take-away is that the consumer is buying roughly the same amount of goods, but the goods cost more.
According to the National Retail Federation, “As COVID-19 eases, households are rebalancing their spending and adjusting their shopping habits. Restaurant sales showed impressive month-over-month growth of 0.7 percent and yearover- year growth of 17.5 percent in May – activity that serves as a proxy for broader service spending in sectors such as recreation and transportation that have been on the upswing”. “Regardless of the prospect of a downturn or whether it will meet the threshold of a recession, the consumer outlook over the next few months remains favorable, with most U.S. households continuing to have high levels of purchasing power. The economy is moving away from extremely strong growth toward moderate growth, but increased income from employment gains, rising wages and more hours worked is expected to support household spending.”
Houston’s retail market has remained very strong, with a vacancy rate for retail space at 5.1% overall, the market is at historically tight levels. Rents (like everything else these days) have been rising as Landlords have the upper hand in this tight market and the new space that is delivered requires higher rents to justify the higher cost of land and construction. We have absorbed approximately 2.4 million square feet of retail space in the first half of this year and our data suggests there is only 2.4 million feet of new product in the near-term delivery pipeline. We are not building new retail as fast as tenants are leasing space, as a result, we expect vacancy rates to decline further in the next year. This will keep pressure on lease rates and occupancy costs.
The Federal Reserve is raising interest rates to try to slow demand and tame inflation. Lenders have adjusted their underwriting and capital for real estate development is more difficult to obtain and more expensive than we have seen in the past ten years. This should keep the development of new space muted in the near-term. Wages are not increasing as fast as inflation which will negatively impact the buying power of consumers and eventually impact discretionary spending.
Consumers have been utilizing savings and credit cards to keep up their spending, but eventually their ability or desire to continue that behavior is likely to wane, negatively impacting the retail sector.
The light in this tunnel is the low unemployment rate nationally and locally. While Houston’s unemployment rate of 5.3%, is higher than the national average, that appears to be a factor more of workforce/population growth than job losses. In June, Houston created over 31,000 new jobs which is the second-best June on record (June 2020 after the shutdown was #1). The average job creation for June in Houston is 12,000. We have a record number of people employed in Houston as of the end of June at 3,261,600. Our employment picture is strong, and most consumers seem to feel comfortable that their jobs are not in jeopardy or that alternative employment is readily available. That is good news for retailers and restaurants.
We expect the consumer to continue to buy retail goods and services despite the headwinds and, while there may be some pull-back, the retail sector should remain strong.
