By Patsy Fretwell | The CCIM Houston/Gulf Coast Chapter’s annual forecast competition offers two perspectives on market trends by local real estate experts in the office, retail, industrial and multi-family markets. A moderator for each property type kept the conversation flowing by asking questions of each competing participant in this year’s competition along with additional comments from a local land expert. CommGate, the commercial division of the Houston Association of REALTORS®, is a CCIM partner and a long-time forecast sponsor.
The Houston retail market is challenging for tenants seeking quality space. The area is experiencing an all-time high in occupancy, which has been the case in many submarkets for a few years. Many quality centers are 100% occupied, with the overall average up to 95%. Space is tight due to timing related to permits and supply chain issues, and the lack of new construction tied to financing issues. The trend of more drive-throughs replacing insider dining space is also continuing, while new retailers building out space are adding fun centers, providing entertainment for wary consumers in the post-Covid retail world.
Retail experts Tenel Tayar of Fifth Corner, Crystal Allen with Transwestern, and Jason Baker of Baker Katz reported another major challenge to tenants: the 50% to 100% cost jump in tenant improvements. Many development costs are at record levels and play into the rent structure. One example noted that a recent shopping center completed in 2022 was built for $245 per square foot (psf) when a similar center completed a year earlier was at $150 psf.
The competitors forecast similar market statistics, with rent growth reporting the highest discrepancy: Tayar indicated a 5.5% rent growth while Allen reported a 1.47% growth. Cap rates of 6.4% were expected by both. Vacancy rates and market rents projected by Tayar were 4.5% and $23.24 psf and by Allen, 4.61% and $22.34 psf. Allen suggested a 12.4% higher net absorption of 4.8 million square feet (msf) compared to 1.3 msf by Tayar, but fewer deliveries than her counterpart at 3.3 msf vs. 3.5 msf of new product on the market.
The overall market perception is that Houston retail is in a very favorable position, and many local tenants are reporting sales growth ranging from 5% to 25%. Diversity of sales is also recognized when comparing Houston to Dallas.
Patsy Fretwell is a guest contributor with more than 30 years of experience in real estate market research.