Houston Retail Occupancy Surpasses National Average As 'New Wave' Replaces Dead Wood

Houston’s retail market ended 2022 with an occupancy rate on par with year-end 2019, and brokers are sanguine about the year ahead despite the threat of economic turmoil.

A 95.1% occupancy rate coupled with a low rate of new construction led Weitzman to give the market a good health report this month. The company noted Houston's vacancy rate of 4.9% put it well ahead of the national average as well as last year's 7% rate, giving much of the credit to new shopping concepts and a post-pandemic clear-out of poorly performing retailers.

The national retail vacancy average is 5.7%, according to Cushman & Wakefield’s Q4 retail report.

“I continue to be very optimistic,” said Kyle Knight, senior vice president at Weitzman’s Houston office. “We had back-to-back years of pretty healthy leasing and conservative new construction, so 2022 was no exception. If we do see a slowdown or even a recession in 2023, we face it in a position of strength.” 

Houston’s steady job and population growth, combined with the market’s current balance of supply and demand, should lead to continued stability, Knight said. 

Occupancy stayed stable throughout 2022 because of expanding concepts — among them, “junior anchor” discount stores like Dollar General’s pOpshelf, dd’s Discounts and Ollie's Bargain Outlet — and limited large-format closures, the Weitzman report states. 

The largest closures in 2022 were the 51K SF Randalls grocery anchor at the Williams Trace Plaza in Sugar Land and the Macy’s store and furniture clearance center, the final retailer at San Jacinto Mall in Baytown.

The long-struggling mall is removed from available inventory as it is slated for redevelopment as San Jacinto Marketplace, the report states. Fidelis Realty Partners plans to have that 105-acre property transformed into a live-work-play destination by the end of 2024.

Other notable conversions included in the report are a 32K SF strip center at 2311 Westheimer Road that will be converted into a multifamily complex; a Randalls at 5130 Bellaire Blvd. being demolished for medical space; and a 146K SF former Fry’s Electronics store at 21300 Gulf Freeway in Webster, which has been repurposed for an aerospace engineering firm. 

Grocers and home improvement stores continue to be active after picking up popularity during the early days of the pandemic, Knight said. Small-shop tenants, including restaurants, services, beauty, fitness, medical and dental are also expanding, the report states.

These businesses are part of a “new wave” of retail that pandemic-related closures made room for, according to Marcus & Millichap Senior Vice President of Investments Gus Lagos.

“Given what Amazon was doing to retail, some retailers, they were kind of hanging on,” Lagos said. “Then when the pandemic came, it just took 'em out.” 

That made room for new retailers. Some of those were e-commerce players opening brick-and-mortar locations, but many others focused on offering an experience, he said.

“People started to realize that when you go out shopping retail more than anything, is an experience,” Lagos said.

Lagos cited Baybrook Mall, which offers outdoor green space, restaurants and family-friendly activities, as an example of malls that remained successful amid a spate of closures.

“They changed the mall experience,” Lagos said. “The pandemic accelerated the fact that if you’re going to survive in retail, you have to change the way the customer or the consumer wants to be served in the experience.” 

New retail construction in 2022 was higher than 2021’s 535K SF at 1.2M SF, but still “remarkably conservative” for a tight retail market in a metro area with a healthy economy, the Weitzman report said. 

Lagos attributes the low rate of new retail construction to high construction and labor costs along with a slowed down permitting process due to new guidelines established after flooding events.

Deal velocity decreased over the course of 2022 after interest rates shot up, Lagos said, though he expects that to increase again toward the end of 2023 as people “come into the new reality.”

That means sellers will have to lower prices and accept a different cap rate than they did in 2020 or 2021, he said.