Houston A Rare Market Where Retail Investment Makes Sense
If you are going to buy retail, better do it in Texas.
Houston was ranked the third-best market to purchase retail property by Ten-X, which put three Texas cities in its top five buy markets. Austin was ranked No. 1 in the U.S., and Dallas was fourth. Economic and employment growth are the primary drivers in all three markets, boosting fundamentals and making retail product appealing for national investors.
Houston employment is at an all-time high (over 3 million workers), including the rebound of the energy sector. The Bayou City has been on a retail development tear, which has increased vacancy to 11.2%, but effective rents are setting new records after 28 consecutive quarters of growth. Ten-X forecasts Houston retail net operating incomes will grow 2.4% this year and then settle into 1.5% annual growth through 2021.
“Prices are still aggressive [in Houston], more so here than in some other parts of the U.S.,” Weitzman Executive Vice President Greg McDonald said.
An example: An LA Fitness in Houston just sold at a 6.5% cap rate, a big drop from when a similar LA Fitness sold at a 9% cap five years ago.
McDonald isn’t seeing a lot of new investors eyeing Houston property, partially because there are not a lot of Class-A retail investment opportunities. He expects that to change soon, as Class-A product delivers and leases up fully.
“Overall it’s pretty easy to close a deal if you have something to sell,” McDonald said.
Single-tenant restaurants and smaller strip centers are of particular interest in Texas, and people moving here can drive investment demand: McDonald is working with an investor now who sold a project in Philadelphia and is looking to buy in Houston because his son moved here. And activity could really pick up if cities were more open to converting retail properties to other uses, said McDonald, who has sold more than 7M SF of big-box redevelopment sites.
“Some of the vacant boxes have good demand, often from non-retail users, but the cities often oppose conversion to other uses than retail. That can be a drawback that kills some deals, or at least makes them more difficult to close.”
Texas’ retail real estate strength is running counter to most U.S. markets. Across the country, retail investment dropped 19% from Q4 2016 to Q4 2017. Ten-X reports “retail’s long and slow recovery … is definitely sputtering to a halt.”
Denver and Salt Lake City round out Ten-X’s top five buy cities, while the company recommends investors get out of Detroit, Kansas City, Chicago, Northern New Jersey and Memphis, the top five sell markets.