Retailers Navigate Competitive Landscape Amidst Houston’s Population Boom and Job Market Growth
Key Takeaways
- Vacancy remains steady
- Positive absorption continues
- Leasing activity slows
- Rental rates increase slightly
Houston Highlights
Houston’s vacancy rate stabilized at 6.4% during the second quarter, representing a decrease of 30 basis points from a year ago. Demand outpaced new supply, with the retail sector recording 238,130 square feet of net absorption and 50,892 square feet of new deliveries. Leasing activity slowed, dropping 30% from both the first quarter and year-over-year. The construction pipeline remains limited with 1.1 million square feet currently underway, although several larger projects are proposed and ready to break ground in the South and North. Rental rates show slight increases from both the previous quarter and year-over-year.
Executive Summary
Tenants lack options with declining inventory while increased costs delay construction
As we enter Q3 2023, we continue to see active F&B tenants outpace the amount of inventory. Whether it is quick-service restaurants (QSRs) looking for pads in new suburban grocery developments or chef-driven restaurants looking for urban core space, a high level of competition remains.
We are seeing record-breaking rents being achieved in the urban core which begs the question – how much room is left for rent to increase before deals become too difficult to make? We are currently in a landlord’s market, but we are beginning to walk the line of rents being pushed as much as they can go while allowing tenants to be successful.
High construction costs, increased interest rates, and land costs have set these rents, but even the tenants who have expanded their rent threshold are reaching a ceiling.
In our current state of the market, ground lease players with little or no contribution typically continue to beat out build to- suit (BTS) or Reverse BTS users despite credit. When a new grocery-anchored site hits the market, the pad lineup is often already established. While deals may not be happening quickly, landlords are identifying their target QSRs and banks early.
We are seeing a healthy pipeline of 2025 and 2026 planned delivery of lifestyle and grocery-anchored centers to satisfy our growing population and tenant demand, but the standstill from a lack of current inventory and the decision to break ground remains due to increased costs across the board.
Houston Retail Market Statistics | Q2 2023
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