HOUSTON RETAIL | Q3 2020

Quarterly Market Report

OCTOBER 2020

Supply & Demand

EXECUTIVE SUMMARY Completions Net Absorption Occupancy

5.3 96%

Millions (SF)
Occupancy drops to 93.6%
Net absorption in the Houston retail market went into 4.0 95%
the red for a second straight quarter at -516,000 sq.
ft. in Q3 2020—down significantly from 1.4 million sq.
2.8 94%
ft. in Q3 2019. Leasing activity—which is comprised
of both new leases and renewals—included 1.3
million sq. ft. of signed deals, down 35% from this 1.5 93%
time last year. The overall occupancy rate decreased
by 30 basis points quarter-over-quarter, and 80 basis
0.3 92%
points year-over-year at 93.6%. The retail market
saw overall average asking rates increase by $0.21
per sq. ft. quarter-over-quarter to finish at $18.29 on -1.0 91%
Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3
a triple-net basis. A year ago, average rates were at 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
$17.52, representing a 4.4% increase.

Houston economic indicators

The Federal Reserve Bank of Dallas reported that Market Indicators
indexes of economic activity for Houston continued Current Prior Quarter Year Ago
Q3 2020 Q2 2020 Q3 2019
to show growth over the second half of the summer
thanks to a boost from the services sector. However, Vacancy (%) 6.4 6.1 5.6

the pace of the recovery in the region has slowed, Net Absorption (SF) -515,959 -579,520 1,445,145
due mostly to ongoing weakness in the energy
Leasing Activity (SF) 1,295,462 1,193,303 1,986,812
sector that is weighing down Houston’s recovery
relative to Texas and the nation. Taken together, Deliveries (SF) 653,334 877,718 1,524,553

data suggests that while Houston’s recovery is likely Construction (SF) 2,412,676 2,685,685 3,892,973
to continue, it will trail the state. Houston payrolls
Inventory (SF) 358,928,590 358,207,107 354,646,168
lost 353,600 jobs between February and April 2020
as pandemic lockdowns reduced economic activity. Avg Asking NNN Rent ($) 18.29 18.08 17.52
The most recent data show that the total number of
jobs recovered since April increased from 106,600
in July to 117,100 in August. That puts Houston’s
recovery at 33% of jobs lost. By comparison, 42%
of Texas job losses and 48% of U.S. jobs lost due to
the pandemic had been recouped by August.
.

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HOUSTON RETAIL | Q3 2020 Quarterly Market Report

Broker’s Perspective
T hroughout much of Q2 and Q3, we saw several businesses
shutter in the aftermath of the onset of the COVID-19 “We are just now
pandemic. The local businesses and smaller retailers that beginning to see
were hit the hardest were only able to weather the closure
mandates for only so long—even with the PPP funding lifeline. the ripple effect of
Businesses that were limping along pre-COVID were propped the pandemic and
up with the additional funding, but as time has progressed, are seeing several
these funds have gone dry. We are just now beginning to
spaces coming
see the ripple effect of the pandemic and are seeing several
spaces coming back to the market. I expect to see this wave back to the market”
continue through the end of the fourth quarter, and even into
early 2021.

National retailers have been more fortunate in some regards

than smaller businesses, with several being able to ride out
the storm—though not all have been immune to filing for
bankruptcy or restructuring. Many of these tenants have
paused their growth and are waiting, ultimately, to see how
the beginning of 2021 will unfold prior to resuming activity. Shaffer Braun
Vice President
NAI Partners

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 HOUSTON RETAIL | Q3 2020 Quarterly Market Report

MARKET OVERVIEW
Supply and demand Vacancy & Availability

The Houston retail market realized negative net absorption

for the second time since 2009 during Q2 2020 and Q3 Vacant Available

2020. The aggregate effect of the net occupancy decline 12%

was 516,000 sq. ft. of negative absorption for the quarter,
raising the vacancy rate to 6.4%, while delivering 653,000 10%

sq. ft. during July, August and September of 2020. Of the

8%
3.2 million sq. ft. of new construction delivered so far in 7.6%

2020, 68% has been leased, and of the 2.4 million sq. 6%
6.4%
ft. still in the pipeline, 63% has been spoken for. Strong
population growth, above-average job growth, and a 4%
gradually recovering energy industry had all underscored
Houston’s solid fundamentals. The new rooftops and jobs 2%
Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3
had driven demand for retail, which led to an occupancy 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

rate at or above 94.0% for the last five years, prior to the
coronavirus (COVID-19) pandemic.
Cumulative Monthly Sales Volume Houston Retail
Source: Real Capital Analytics
Investment Sales
Real Capital Analytics data reports quarterly retail sales
2020 2016 2017 2018 2019
volume for Q3 2020 in the Greater Houston area at 4.0
Billions ($)

$96.9 million, down compared to this time last year at 3.5

$386.6 million sq. ft. The primary capital composition for 3.0
buyers in 2020 was made up of 66.3% private and 19.1% 2.5
institutional investors. For sellers, the majority was 65.2%
2.0
private and 23.1% user/other investors. Skanska recently
1.5
acquired a key retail center at the southwest corner of
1.0
Westheimer Road and Montrose Boulevard in the Inner
Loop River Oaks submarket. Westmont Shopping Center, 0.5

a 124,000-sq.-ft. retail plaza on 2.86 acres sold for $27 0.0

J F M A M J J A S O N D
million. Madison Marquette owned the property which
was home to Half-Price Books, Mattress Firm, Spec’s
Wine and Sprints, and Mattress Pro. Skanska plans to
convert the Montrose area plaza into a mix of retail and
multifamily space.
Net Absorption
Leasing activity
Net Absorption
The volume of square footage signed during the third
Millions (SF)

3.5
quarter—which is comprised of both new leases and
3.0
renewals—was at 1.3 million sq. ft., up slightly from the
2.5
previous quarter’s 1.2 million sq. ft., although down
2.0
from 2.0 million sq. ft. this time last year. Almost one-
1.5
fourth of the leasing activity took place in the Southwest
1.0
submarket, followed by the Northwest submarket at
0.5
19%. The largest deal signed in the third quarter was
0.0
a 72,786-sq.-ft. retail lease at 7355 Highway 6 South in
-0.5
Mercado 6 Marketplace. According to CoStar data, the
-1.0
undisclosed tenant’s sign date was in September 2020 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
with plans to start occupancy in February 2021.

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HOUSTON RETAIL | Q2 2020 Quarterly Market Report

Port Houston monthly container volumes rise

Port Houston reported that container activity in
Under Construction
September surpassed the record level of TEUs for the
Leased Available
same month last year, despite the negative impacts
of the COVID-19 pandemic, which has slowed global Northwest
commerce this year. This is the first turn toward growth
North
since the effects of the pandemic in March. Port Houston
Inner Loop
handled 1% more TEUs in September 2020 compared
to September 2019. For all of 2020, container activity Southwest

already eclipsed the 2 million TEU mark, just 3% less West

than the same period last year. The Port is optimistic Southeast
that a rebound in container volumes is underway and South
that it will continue for the remainder of the year and
Northeast
into 2021.
0 100 200 300 400 500 600 700
Thousands (SF)

Average asking rents

The Houston retail overall triple-net average rates are
at $18.29 per sq. ft., an increase of $0.77 from $17.52
a year ago. Rent growth has varied across Houston’s
Completions Year-To-Date
submarkets, and with additional space likely coming
Leased Available
available in Houston, tenants may have more leverage
than at any time in the last decade with regards to Northwest
negotiating rental rates, terms, tenant improvements
North
and concessions. The Inner Loop ($27.86 PSF) and
Southwest
West ($20.77 PSF) submarkets currently have the
highest annual overall average rate, followed by the West
Southwest ($18.75 PSF) and South ($18.35 PSF). With Inner Loop
the rising costs to developers that are bringing new
Northeast
projects with high quality space to the market, rental
rates could remain elevated. South

0 100 200 300 400 500 600 700 800 900

September home sales defied expectations Thousands (SF)

According to the Houston Association of Realtors,

Houston’s red-hot summer of home sales expanded into
September as consumers continued to take advantage
of historically low mortgage interest rates amid a Average NNN Asking Rent
pandemic. Heightened sales, combined with a steady
decline in the number of homes entering the market in Inner Loop $27.86

recent months, has sent inventory to its lowest level in West $20.77
almost six years, making a sales slowdown inevitable
Southwest $18.75
as would-be buyers are left with a narrower selection
of homes. In September, 9,101 single-family homes South $18.35

sold compared to 7,050 a year earlier, a 29.1% increase Northwest $18.02

marking the fourth straight month of positive sales.
North $17.03

Northeast $15.83

Southeast $14.90

$10 $12 $14 $16 $18 $20 $22 $24 $26 $28 $30

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 HOUSTON RETAIL | Q3 2020 Quarterly Market Report

MARKET OVERVIEW
Submarket Stats

Q3 2020 YTD Q3 2020 Total Avg

Net Total Net Total Net Leasing Q3 2020 YTD Under Asking Rent
Rentable Area Vacancy Absorption Absorption Activity Deliveries Deliveries Construction NNN
Submarket (SF) (%) (SF) (SF) (SF) (SF) (SF) (SF) ($/PSF)

Houston Total 358,928,590 6.4 -515,959 -283,669 1,295,462 653,334 3,080,504 2,412,676 18.29

Q3 2020 YTD Q3 2020 Total Avg

Net Total Net Total Net Leasing Q3 2020 YTD Under Asking Rent
Rentable Area Vacancy Absorption Absorption Activity Deliveries Deliveries Construction NNN
Submarket (SF) (%) (SF) (SF) (SF) (SF) (SF) (SF) ($/PSF)

Inner Loop 29,631,472 5.7 -57,994 -171,470 111,800 169,508 254,869 460,200 27.86

North 66,174,936 5.6 84,129 433,361 220,578 64,870 747,402 653,608 17.03

Northeast 25,424,985 7.3 -51,684 -195,867 99,101 49,699 159,883 60,393 15.83

Northwest 64,067,681 7.3 -466,930 -280,244 246,435 122,906 792,878 671,154 18.02

South 15,273,977 5.8 -29,585 -63,738 57,259 38,125 136,982 106,384 18.35

Southeast 55,106,163 6.5 -71,031 -191,034 136,004 72,233 130,223 106,458 14.90

Southwest 58,713,072 6.8 -11,455 -44,176 273,060 135,993 482,803 212,278 18.75

West 44,536,304 6.2 88,591 229,499 151,225 0 375,464 142,201 20.77

99

99
Houston Retail Submarkets
6

1. Inner Loop
59

99

290

90 2. North
90

3. Northeast
59
290
90
10

10

10

4. Northwest
Sam Houston Tollway

Westheimer
99

Tollway
West Park Houston 225

5. South
6

45

288
59
Fo

90
rt Bend Tollway

6. Southeast
7. Southwest
8. West

Information and data within this report were obtained from sources deemed to be reliable. No warranty or representation is made to guarantee its accuracy.

HOUSTON RETAIL | Q3 2020

Quarterly Market Report
OCTOBER 2020

NAI Partners
Houston Office
1360 Post Oak Blvd., Suite 1900
Houston, TX 77056
Leta Wauson
Director of Research
tel 713 629 0500
leta.wauson@naipartners.com
www.naipartners.com tel 713 275 9618
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