Competition Explodes For Inner Loop Redevelopment
Demand for infill property is strong in the Inner Loop. To continue to meet consumers’ demands for a centralized location and access to entertainment-driven retail spaces, developers and investors are increasingly tearing down properties and redeveloping those sites into mixed-use environments or high-rise apartment complexes.
But as the area densifies, opportunities to adapt properties are becoming more limited and prices for redevelopment sites are skyrocketing.
Less than three years ago, there were only a few developers interested in purchasing old shopping centers, gas stations and industrial buildings to be turned into mixed-use or retail and entertainment destinations in the Inner Loop, CBRE First Vice President Matt Berry said. That has turned around completely.
"Historically these types of projects were few and far between and in today’s market you can consistently see upwards of 10 [to] 15 active redevelopments at a given time," he said.
The proven success of the Heights and Washington areas has increased competition in an already tight market. New players want into the area while others try to re-create the effect in other Inner Loop neighborhoods.
"The guys that have been very successful at doing this have had a hard time finding new projects," Berry said. "Success breeds more people coming in trying to recreate that model."
The prices for redevelopment sites have risen by 10% or more in a very short period, according to Deal Sikes & Associates.
The catalyst for the growth of infill properties is connected to the demand for new urban development.
"The massive millennial generation is coming of age in the residential market and the unique character of the Inner Loop neighborhoods is appealing to them," Deal Sikes principal Matthew Deal said in a report.
He expects the general upward trend in valuations will likely continue for some time.
The CBRE database counts more than 400 businesses looking for space in the Inner Loop, which Berry said is higher than usual. These potential tenants, which include franchised restaurants, coffee shops, gastropubs and small breweries, boutique shops and grocers, seek to enhance the neighborhood experience for local residents, he said.
“Demand will continue to be strong,” HFF Director Joey Rippel said. “As there are fewer opportunities for pure land deals, developers will continue to be creative and find ways to redevelop and demolish pre-existing properties in prime locations.”
Sometimes this comes in the form of repurposing a building rather than tearing down and starting over. To gain access to the blazing Inner Loop market, developers and investors are seeking properties in prime locations even if the building’s current use doesn't meet the best value of the neighborhood.
“If there is an office building in a location that really should be a multifamily, you could potentially see a multifamily developer turning that building into for-rent apartments or even for-buy condos,” Rippel said.
Between the rising cost of sites and construction, it is becoming more common for developers to opt for street-level or entertainment-driven retail, which is prevalent in the Washington and Heights markets, compared to traditional retail centers, Berry said.
"When someone is making a financial decision on whether or not to redevelop or build ground-up it is entirely based on the potential income that they can derive from the property upon completion," he said. "As the price of land increases, the development must maximize that investment, which typically leads to either mixed-use projects or multifamily developments."
There are several redevelopment projects underway throughout the Inner Loop, particularly in the Washington and Heights communities.
Braun Enterprises, a company known for acquiring under-leased and underutilized property of mostly office and industrial, is under construction on the Heights Waterworks.
The project, on 19th and Nicholson, is transforming the historic three-building waterworks site into a collection of four free-standing buildings featuring restaurants such as JINYA Ramen Bar, Common Bond Cafe, Ripe Cuisine and Hopdoddy, with other retailers and a lawn area.
Heights Mercantile is another retail redevelopment haven, developed by Radom Capital. The project renovated four buildings and added two others for 40K SF of retail space.
In Downtown, Lovett Commercial plans to redo the former Barbara Jordan Post Office near the Theater District and Buffalo Bayou Park to develop Post HTX. The mixed-use project, which sits on 16 acres, will include a private event space, retail, restaurant and office options.
Berry expects multiple Inner Loop submarkets will continue to grow and revitalize older properties. Along with more activity on the outskirts of current hotbeds, one of the up-and-coming redevelopment submarkets is EaDo, just across the Highway 59 from Downtown.
“In particular, the areas east of Downtown Houston appear to be gaining with strong velocity, a major trend to watch in the future,” Deal said.
The area needs to improve its infrastructure and gain a major supermarket, Berry said, but he is optimistic it will next few years.
"The land is just too valuable for a lot of these sites to remain what they currently are," he said.