Why Retail Development's Not Booming
Fundamentals in Weingarten's nationwide portfolio don’t really get better than they are now, yet CFO Steve Richter is frustrated--the firm's struggling to buy or build new product. We’ll delve into the fascinating world of a booming yet locked-down retail sector on Nov. 21 at Bisnow’s Houston Retail Summit at The Houstonian, starting at 7am.
Weingarten, like most public REITs, has been upgrading its portfolio, says Steve (a panelist at our event). It’s a good time to be a seller—Weingarten has disposed of $2B in the last three years, exiting secondary and tertiary markets and getting rid of Class-B assets. It’ll wrap up that program this year, and it’s been trying to reinvest the funds into higher-quality assets in 20 top markets, but that’s been amazingly difficult. When a quality property comes to market (a rare occurrence, Steve says), it gets 15 to 30 bidders.
That drove Weingarten back into development, but Steve tells us that’s been just as challenging. The firm wants to build in core infill markets, but retailers have to compete with multifamily guys wanting the same (hard-to-find) sites. In most markets, once residential development slows, it will open the doors for more retail groundbreakings. (And Steve says if you can find a site, it’s usually not hard to fill it with retailers willing to pay the rents.) Weingarten hasn’t found any opportunities in Houston lately, but has projects underway in Baltimore, DC, Raleigh (adjacent to Crabtree Valley Mall, pictured) and Seattle.
In the meantime, Weingarten has been emphasizing redevelopment, including work on Westchase Shopping Center. (That property sits just outside the Beltway—Randall's has left, but Whole Foods is moving in.) It’s also been paying down its debt; Steve tells us its balance sheet is down to 33% leverage. Meanwhile, its existing portfolio is rocking; 95% occupancy nationwide, including 99% on anchor boxes.
By focusing on suburbs, NewQuest has had more luck on the development side. Partner Dean Lane (another event panelist) tells us it has five projects underway across Houston, with sites in Baytown, Katy, Pearland, League City and Cypress that will deliver 1.1M SF over the next 18 months or so. Kroger has been active--three of those centers are anchored by the grocer, and Dean tells us he’ll announce a few more Kroger deals in spring 2015. He's facing the same competition with multifamily buyers and says land prices are definitely slowing retail development. And good luck getting anything done that isn’t grocery-anchored; it’s the only thing banks want to finance. (Banks love grocers cause they're so similar; frozen accounts and frozen food both really aren't good for you.)
To get as much retail on the ground as possible and meet demand, NewQuest is building small strip centers on its pad sites. Meanwhile, its existing portfolio--7M SF in Houston, DFW, Austin and San Antonio—is 97% occupied, and Dean says he doesn’t have a single anchor box available. Most of the vacancy is in new deliveries, but many new projects are nearly leased up by groundbreaking. That tightness has pushed rent increases of 10 to 15% across the board. (It’s a rough time to be a tenant.)
NewQuest’s upcoming projects:
1) Chambers Town Center at 146 and I-10 in Baytown: 300k SF. Anchor Walmart opened in Q3, and the other retail will launch next year and deliver in spring 2016. NewQuest is focusing on the pad sites now but also has Showbiz theater and a junior anchor approved.
2) Shops at Katy Reserve spanning the southeast and southwest corners of Spring Green and 1463: 275k SF, including a 123k SF Kroger Marketplace. It’ll open mid-’15.
3) The Shops at Pearland Parkway at FM 518: 14k SF. HEB opened earlier this year adjacent.
4) Fairfield Marketplace (pictured): 200k SF. NewQuest recently closed the land; Kroger will open in late 2015/early 2016.
5) Marketplace at 96 at League City Parkway and Hobbes: 300k SF. Anchor Kroger will open in 2016.
Transwestern managing director Nick Hernandez, another panelist, says the lack of development the last five years coupled with strong demand from retailers (everyone wants to capitalize on our strong economy) is putting tremendous pressure on rents. The River Oaks District is asking $200/SF, and Market Street in The Woodlands is asking $100/SF, unheard of even inside the Loop a few years ago. He thinks we’ll see some release soon, with significant new development from 2016 to 2018.
Nick updated us on his high-profile assignments—the River Oaks District (construction pic snapped moments ago from Nick's office) will start delivering space to tenants in Q1, and will celebrate its grand opening in late Q3. It’s pushing 70% pre-leased. City Place at Springwoods will start marketing its retail opportunities soon, but Nick’s already getting tremendous interest from companies wanting to serve the Exxon employees. Look for first tenant openings in late 2016/early 2017. Nick just got back the leasing assignment at West Ave and is remerchandising there. He says the Upper Kirby corridor will look very different in three years, especially with Hanover and Thor announcing projects in the submarket. Register here for our Retail Summit to hear more from these (and many other!) panelists, and we’ll see you Nov. 21!