Houston Retail Market Off and Running in 2012

Is this the start of something big for Houston’s retail sector? Forecasts, which call for more improvement in the coming quarters, say yes. Although the road to recovery is in its early stages, there is much to be optimistic about.

Vacancy Rates Lowering

After peaking at 13.4% in early 2010, the vacancy rate for the community neighborhood center market, most recently counted at 84.4 million square feet, ran within a few basis points of 13.0% in the period following and through 2011. It dipped to 12.7% in first quarter 2012, a decline of 30 basis points for the period, a 20-point loss year-over-year and the lowest rate recorded by Reis for this market since third quarter 2008. An additional decline is expected for year-end. While that’s still significantly higher than the 10.9% national average for retail, it has long been the practice of Houston developers, confident in future demand, to build in the teeth of relatively high vacancy.

New Supply on the Horizon

It took a while for the economic downturn to have its full effects on the development of local retail real estate. In 2010, however, fewer than 200,000 square feet of community neighborhood sector pace completed construction. The moderate increase seen in 2011 will be followed, moreover, by only 156,000 square feet of new supply in 2012, one of which, at 19,500 square feet, had delivered by the end of April. Indeed, the present year’s completion sum, minimal for a market this size, would stand as the smallest since 1997.

Other projects, however, are lining up. Reis expects nearly 800,000 square feet of community-neighborhood space to arrive on line next year followed by million-plus totals thereafter.

Reis expects a considerable demand-favorable imbalance for 2012: the current forecast calls for community-neighborhood sector net absorption at 659,000 square feet, more than four times the year’s portion of new supply. Demand, moreover, is expected to maintain its margin over newly completed construction thereafter as well, even as construction activity increases.

Rents on the Rise

While the increases were not great, the favorable performance put on by community neighborhood center market absorption in the latest quarter was accompanied by the strongest rent growth in a long while. At $15.91 psf and $13.65 psf, average asking and effective lease rates were each up 0.4% for the period—growth rates nearly as high as those recorded for all of 2011—and were up 0.8% and 0.9%, respectively, year-over-year. The gains in the vicinity of 2.0% projected for each for the year as a whole would stand as the largest since pre-recession times.

Here’s the catch

While the overall performance of the market is strong, retail property sales remain slow. The first quarter recorded sales of only two properties for a combined total of $26.5 million. For all of 2011, Houston saw just four deals totaling $91.7 million.

The Road Ahead

Favorable tailwinds should continue to boost occupancy and rent growth. While the margin will narrow as construction increases, Reis expects demand for community- neighborhood center space to maintain its lead over same-year new supply throughout the current five-year forecast period. The vacancy rate, accordingly, will descend slowly. Beginning at about 2.0% in 2012, rates of rent growth should gradually increase.

Photo: Houston Galleria (photo: Wikimedia Commons/Postoak http://commons.wikimedia.org/wiki/File:GalleriaOne.jpg)