Houston Surpasses Dallas in Retail Appeal
For years, retailers have entered Texas through DFW and then made their way down to Houston. That’s flipping now, because Houston is a significantly more profitable market for them.
Transwestern managing director Nick Hernandez—pictured at yesterday’s Bisnow Retail Real Estate Summit with Streetwise managing partner Ed James—says retail users often get 15% higher revenue here over Dallas. Houston is becoming a regular second market for companies looking to expand beyond their home base, and it’s typical for Houston to be a brand’s third-best location behind New York and Los Angeles. And it’s not because Houston’s a discount play, Nick says—the rents at the River Oaks District prove that, and he says the team’s about to take those to a whole new level there. (Nick says rents across Houston are sustainable even as development picks up.) Ed and Nick went to SMU together.
Houston’s also preferable to Dallas on the investment sales side, according to Marcus & Millichap market leader Dave Luther (far right, with his father David Luther and colleague James Bell; his mom was in the audience too). We’ve got 25 to 75 bps higher yield here and the metro’s become a darling for investors. Oil prices briefly decreased the appetite from out-of-area players, but Dave says they’ve seen our resilience and are back. Single tenant sales are particularly strong—they’re up 20% this year. And if you’ve got an Inner Loop center with ample parking, investors will snap it up. (The NOI on those has been huge, and parking’s more important as the city has changed its parking standards.) On the financing side, CMBS is playing a bigger role in retail this year.
Oil prices have dampened investors’ appetite for office and industrial net lease properties, but there’s been no slowdown in retail sales, says Stan Johnson regional director Jim Gibson. His firm is doing $4B in sales revenue across the US this year, and he agrees that Houston doesn’t need to envy any other markets; the amount of capital (especially foreign) that wants into the Bayou City is mind-boggling.
Oil prices aren’t impacting retailers’ growth either, says Evergreen Commercial Realty principal Lilly Golden. (Our event was a family affair for her, too; she’s pictured with her daughter Blair Golden, Manhattan Construction’s Bob Postma and Cedarwood’s Richard Bills.) As long as housing grows, retailers will expand. Our panel discussed how the concept of an anchor has changed. Lilly’s been anchoring Katy Ranch with fitness and entertainment users, and says those have some risks. They’re often lower credit tenants and they use an “exorbitant” amount of parking. But they pay higher rents, add character and pep to your center, and don’t always need the most desirable slot in your project.
Restaurants are becoming an anchor, too. Ed says cooking shows have created celebrities, and have made people interested in seeing the process—it’s performance art now. And while 10 years ago, retailers wanted to limit the number or proximity of restaurants to their store (they take up a lot of parking), now retailers like to have them close, especially if they've got a famous local chef. (Also especially if they give you a buzzer so you can peruse the cute boutique next door while you wait.) A lot of his tenants today are food-related, Ed says. Nick says there are multiple mixed-use projects being considered in Houston with food halls. They’re typically about 10k to 20k SF and have challenges: The common area has to be meticulous, he says, and they’re management intensive, but they do very well. Here’s our first panel: Ed, Dave, Lilly, moderator VCC Construction SVP Derek Alley and Nick.
Read King is working on one of those concepts. SVP Ryan Orr says Phase 2 of the Vintage is a restaurant village—two buildings just full of restaurant tenants. Demand for that space has been huge, and the team’s already seeing ancillary interest from hotels, medical users and more that want to be near it, and the Whole Foods expects its sales will increase when it opens. Ryan’s far right here with Old Republic Title’s Gregory Holmes, Read King’s Ford Jones, Streetwise’s Joe Silver and Kimley-Horn’s Kenneth Cargill.
But of course grocery anchors aren’t going anywhere—NewQuest partner Dean Lane (who has 1M SF of grocery-anchored product under development himself) laid out the grocers anticipated to deliver in the next two years: 10 HEBs, nine Krogers, three Whole Foods, three Walmarts, five Walmart Neighborhood Markets, 12 to 18 Aldis (proving neighborhood markets are back in a BIG way), a Costco and a couple of Sams. Ryan says the birth of smaller specialty grocers has been great because they can anchor projects on sites that didn’t used to be conducive to grocers. Here’s our second panel: moderator Seeberger Architecture president Perry Seeberger, Jim, Dean, Ryan and Arch-Con SVP Marc MacConnell.
Marc expects the grocer boom will continue for the next 24 to 36 months at least. He’s pegged Houston’s next hot retail market as somewhere that might surprise you: Baytown. Dean agrees, though saying there are a lot of opportunities on the east side, but it’s less sexy so it’s harder to sell tenants on the area. Marc and Dean’s other favorite market is less surprising: Katy’s got the population and new infrastructure (we’re looking at you, Grand Parkway) to continue its amazing retail growth.