Houston restaurant & retail vacancy rates have not yet dropped for prime real estate, despite COVID
Commentary By Wade Greene | Principal & Hannah Tosch | Senior Associate
As we enter 2021, COVID-19 continues to affect the way we live our lives, conduct business and the behavior of retail and restaurant consumers. While we have learned that no business is truly immune to the impacts of the pandemic, prime real estate remained occupied, leaving retail and restaurant vacancy rates low and making new desirable deals challenging to find.
For the restaurant and retail industry, 2020 has not been a matter of making profits for the most part, but merely a matter of mitigating losses. The first round of PPP loans played a major role in the majority of restaurants and retailers staying afloat for the first few months. Initially, we believed that once these government funds dried up, Houston retail inventory would start to see an increase in waves before and following the holidays. In turn, we were prepared for this to provide opportunities for well-capitalized and new-to-market concepts to penetrate the Houston market. However, nearly a year of COVID-19 financial impacts has passed for us to realize that Houston’s already low vacancy rate has remained relatively constant and dipped back below 6%.
In Q2 2020, we did see a slight increase in inventory occur, only for it to be reabsorbed by the end of the year. With the second round of PPP loans on the horizon, we believe this trend will continue. Further, we expect retailers to have fine-tuned their technology and logistics effectively by this next round in a way that will allow them to stay open.
Tenants remain bullish on the Houston market, and Colliers Houston has many clients eager to sign leases, both continued Houston expansion as well as first-to-market concepts. Over the past few months, we have learned that the issue isn’t finding clients for deals, but rather it is finding deals for clients. In other words, there are many active operators ready to sign deals in Houston; the issue is the lack of opportunities given the low inventory of quality vacancy. The majority of highly sought after and well-positioned deals are happening off-market, in a similar velocity to the pre-COVID era. Additionally, as we noted in our Q3 report, Landlords are taking extra precautions when underwriting new deals.
As discussed in our Q2 2020 report, Houston retail rents have been at an all-time high, and absorption was negative in 2020 for the first time since 2012. Our takeaway is that Houston has been and will remain a top destination retail market nationally. Still, our current occupancy rate makes the right deals for expansion and new-to-market concepts a little more challenging to achieve.
Vacancy & Availability
Houston’s average retail vacancy rate dropped 20 basis points from 6.0% in Q3 2020 to 5.8% in Q4 2020. At the end of the fourth quarter, Houston had 17.4M SF of vacant retail space on the market. Among the major property types, Theme/Entertainment, Single-Tenant retail and Malls had the lowest vacancy rates of 1.0%, 1.6% and 2.2%, respectively, followed by Lifestyle Centers at 4.2% and Power Centers at 4.5%. Neighborhood Centers have the highest vacancy rate of 10.4%, followed by Strip Centers with a vacancy rate of 9.3%.
Approximately 303,242 SF of new inventory delivered during the fourth quarter and currently there is 1.0M SF of retail space under construction, of which 60% is pre-leased. One of the larger projects under construction is Houston Farmer’s Market located at 2520 Airline Dr in the Inner Loop/Heights retail submarket. The development is expected to deliver in March 2021.
According to CoStar, our data provider, Houston’s citywide average quoted retail rental rate for all property types rose from $17.30 per SF NNN in Q3 2020 to $17.36 per SF NNN in Q4 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.
Absorption & Demand
Houston’s retail market posted 829,210 SF of positive net absorption in the fourth quarter. The retail sector posting the largest amount of positive absorption in Q4 2020 was Single Tenant retail properties, recording 345,596 SF of positive net absorption. Community Centers recorded the largest amount of negative absorption posting 319,916 SF of negative net absorption. Community centers usually have two anchors and the balance of the center is occupied by smaller retailers offering services from nail salons to casual dining.
Houston’s retail leasing activity, which includes renewals, rose 27.3% over the quarter from 1.1M SF in Q3 2020 to 1.4M SF in Q4 2020. Some of the tenants that signed leases during the fourth quarter are listed in the table when you download the PDF.