Houston Retail Tenants, Landlords Brace For Slower Holiday Shopping Season
It's been a hard year for Houston retailers, and the struggle isn't over yet. The public health crisis, economic downturn, forced closures and limited occupancies have all landed heavy blows on the sector.
Retailers of every size have felt the impact, with bankruptcies affecting everyone from the large national retailers to the small mom-and-pop stores across the city. That has led to more vacant space appearing over the last two quarters, but average asking rents have yet to come down, reflecting hopes that the retail bloodbath will soon come to an end.
The upcoming holiday season will play a large part in determining which Houston retailers survive to see another year.
About 6.4% of Houston’s 363M SF of retail space was vacant during the third quarter of 2020, up from 6.1% during Q2 and 5.6% during Q3 last year, according to the most recent retail market report from JLL.
The increase in retail vacancy reflects a second consecutive quarter of negative net absorption, with 523.8K SF placed on the market during Q3. Shopping centers and malls fared the worst, followed by specialty centers, according to the report.
JLL Senior Vice President Matthew Parsons said luxury retailers are especially struggling this year, particularly in mall settings.
“Any time there's uncertainty in the market, luxury is one of the segments of retail that can quickly take a hit, because folks are going to be less likely to go into a luxury retailer and spend a few thousand dollars,” Parsons said. “The discount occupiers are going to maybe even receive some bit of an uptick just because of the basis of their business.”
A combination of state, county and city stay-at-home orders forced retail stores and restaurants to close for at least six weeks during the second quarter of 2020, and the Texas Restaurant Association is projecting that as many as 30% of restaurants in the state could permanently close.
Drive-thru quick-service restaurants have done very well during the coronavirus pandemic, because they allow for social distancing, Parsons said. But for fine dining restaurants, particularly in the urban core, occupancy costs are higher, and many have been forced to find ways to keep generating higher sales volume through other means.
Aside from takeout meals and expanding outside into parking lots, some higher-end Houston restaurants have turned to more catering services and even selling packaged meals through supermarket partners like H-E-B.
Despite the negative net absorption of the last two quarters, Houston retail asking rents have not come down. General retail, power centers and shopping centers actually saw prices per SF rise slightly during Q3, according to the JLL report. Only malls saw a significant decrease in average asking rents, falling by 2.1% to $29.70 per SF.
Evergreen Commercial Realty President Lilly Golden said landlords are hesitant to lower their asking prices and do long-term deals, despite interest from some retailers.
“Landlords are being asked to sign a 10-year lease at a much lower rent, and they're thinking, this is a temporary situation. So the landlord's saying, ‘Hey, I'd rather do something temporary than lock myself into a low rent for 10 years,’ which makes total sense,” Golden said.
Parsons said deals are being done, but it depends on the asset type and the creditworthiness of the prospective tenant. The structure of those new leases tend to be flexible and have provisions to allow landlords to raise the rent at a later date.
“What I'm generally seeing is that the landlords are willing to construct a lease structure that protects the tenant on the front end, but allows for the landlord to ramp those rents up,” Parsons said.
Satya Inc. CEO Sunny Bathija told Bisnow he has begun to see more interest from new tenants in leasing space across his portfolio of 15 retail centers in the Houston area.
“We are seeing a little more activity in leasing over the last 30 days. As more people are beginning to go out, there seems to be more confidence in the leasing market,” Bathija said.
The types of retailers that have approached Bathija looking to lease include liquor stores, medical users, dentists and fast-food franchises. In comparison, retail tenants that continue to struggle include day care facilities, restaurants, gyms and children's activity centers.
Andy Dow, chair of Winstead PC’s Real Estate Industry Group, noted that landlords are being more flexible with rent and going out of their way to help tenants for another reason: co-tenancy clauses, which allow tenants to reduce their rent or break their lease if an anchor tenant or other key tenants leave the same retail space.
“In some cases, it may make sense for the landlord to take less rent from a tenant in the short-term in order to make sure that they stay in business because that might trigger that snowball effect,” Dow said.
“If they have the snowball effect of co-tenancy rights crumbling down on them, then that could put the landlord under. So I think there's a little give and take on both sides that needs to happen.”
Dow said typical brick-and-mortar stores have a bigger problem that began before and will extend beyond the pandemic because they are competing with e-commerce juggernauts like Amazon. That’s going to continue even after a vaccine is found.
“I think they're the ones that probably have the longer-term issue, because the brick-and-mortar retail industry is just fundamentally changing. And they're the ones that are having to really look more at the long term — how do we reinvent ourselves? And how do we make it work?” Dow said.
Over the last seven months, the most successful retail businesses in Houston have been the ones to embrace e-commerce, Golden said. In particular, competitive pricing, easy-to-use websites and delivery options have been powerful tools in reaching a socially distant customer base.
“You've got to be omnichannel and make it extremely simple, and then have quick delivery and be able to compete head-to-head with Amazon and have your pricing be competitive,” Golden said. “If you were able to do that ahead of time, you've been a winner in this situation. And if you weren't able to do that, you've had trouble.”
In the retail sector, all eyes are now on the upcoming holiday season.
Holiday retail sales across the U.S. in 2020 are expected to average between 1% and 1.5% from November to January, according to Deloitte’s annual holiday spending forecast. That is less consumer spending growth than in prior years. In comparison, the U.S. saw 4.1% growth during the same period a year ago.
As Houston continues to struggle with both the economic disruption of the pandemic and a downturn in the energy sector, Golden said she expects to see a decrease in spending from Houstonians this year. As a result, retailers will be discounting heavily to try and generate sales.
Many will be able to sell out of their existing inventories, but they may not have the wherewithal to carry on much past Christmas, and be able to buy goods for the following season, Golden added.
“Especially the mall tenants. I think they're going to be wanting to get rid of their existing inventory. And then they're going to take inventory, I guess, and make a decision as to whether they're ready to continue or not," Golden said.
Bathija noted that the upcoming holiday shopping period will only intensify the existing trend of people choosing to shop online.
“This Christmas period will be different from previous years as more and more people are shopping online. Every retailer is trying to adapt to the need of online sales and delivery,” Bathija said.
Dow said he expects most retailers to extend their sales beyond the typical Black Friday promotions by starting much earlier, and by emphasizing online sales over in-person transactions.
“I think even the in-person sales, they want to continue to provide the type of environment that people are used to for holiday shopping, just understanding that you're not going to be doing it in the same numbers that they've done in the past,” Dow said.
“I'd say probably the biggest thing is, I would expect that [for] people who aren't comfortable still being out in the crowd, you're going to see a larger shift to online sales.”
The fate of many Houston retail stores will depend on how they perform during the upcoming holiday season. If sales are not strong enough, there could be a larger-than-usual wave of bankruptcies during the first quarter of 2021, particularly in the mall sector, according to Golden. For that reason, many landlords are already thinking about how they can backfill soon-to-be-vacated space.
“I think once we get vaccine or more comfortable with the treatments, then whether it's coworking or entertainment, or anything that makes money, I think they're going to be very open to it,” Golden said.
Other retail segments, like movie theaters and fitness centers, are also going to have to find creative ways to repurpose themselves in a post-pandemic world. How those spaces look and will be used in the future remains uncertain, but in 2020, the only way to survive is to adapt.
“What we see today in retail is drastically different than what we saw 10 years ago. And what we were seeing 10 years ago is different from 10 years prior to that,” Parsons said.
“When you look at retail as a whole, the only consistency in retail over time is change. And retail is always on the forefront of change.”