Houston's Retail Market Primed for Q4 Surge in Sales

HOUSTON-With the heaviest trading quarter right around the corner, a just-released market report shows more than 4.5 million sf of retail space has reeled in $103.3 million in 92 sales to date this year.

William Forrest, president of the locally based Revac Inc./CID Sourcenet LLC, says prices and demand in the metro area have and will continue to soar. “The number of sales is down, but demand is up and prices are up because so many people are chasing them,” he tells GlobeSt.com. “As soon as I get a center, people are jumping on it.”

Historically, 15 to 18 retail properties sell per month so volume is down, but pricing and demand definitely is up and still pointed north. Forrest says the usual fourth-quarter momentum has surfaced just a few weeks early, predicting a strong three-month end to the year.

The Revac report shows sales are averaging $65.11 per sf, up 85 cents from last year and $15 per sf from 2002. This year’s traded assets average 48,925 sf in comparison to 47,753 sf in 2003 and 60,829 sf in 2002. He says investors are snapping up older centers for repositioning due to pricing that’s reached $100 per sf to $200 per sf for fully leased properties in hotspots like the west and northwest sectors. The county’s average price is $70.34 per sf for centers in the 20,000-sf to 80,000-sf category and $55.03 per sf for centers from 80,001 sf to 300,000 sf.

Whether it’s sales or construction, the west and northwest submarkets lead the Houston pack. “Everyone’s building a neighborhood or community center…up and down the Grand Parkway,” Forrest says, “and they’re building faster than they’re absorbing.”

The northwest sector has nearly 1.2 million sf under construction; last year, it delivered 458,000 sf. In the west, there is 447,780 sf rising in comparison to 360,000 sf completed in 2003. And there are two mall proposals sitting on drawing boards: Katy Commons, a Trammell Crow Co.-led project, and West Houston Regional Mall, a Simon Property Co. plan.

The Revac report shows there are 24 centers, totaling more than 2.8 million, under construction in Harris County. Nine are in the northwest and five in the west. By midyear, 14 centers delivered, with three positioned in the northwest and four in the west. And the drawing boards are holding 23 more developments, of which another six will rise in each hotspot. The down side is the two submarkets have the highest vacancies, 15.6% in the inner northwest and almost 19,8% in the inner west.

The push for a foothold in the west and northwest has the effective rent averaging $17.19 per sf and $20.80 per sf, respectively. The metro average is $19.10 per sf. Ironically, centers from six to 10 years old, not the newer ones, have the highest average rent–$25.19 per sf. “When you get this kind of competition in a market,” Forrest explains, “the pre-leasing starts at lower rates. They’d rather have someone in there than no one so the newer centers are getting cheaper rates.” The proof is in the telling: the lowest vacancy, about 9.6%, is found in centers less than five years old and it’s 11.7% for the next age category. Across the board, occupancy is 14.3%, down one point from a year ago.