HOUSTON RETAIL | Q4 2018 Quarterly Market Report JANUARY 2019 Supply & Demand EXECUTIVE SUMMARY Completions Net Absorption Occupancy 6 96% Houston’s retail market 94.6% occupied Houston’s overall retail vacancy rate ended 2018 at Millions (SF) 5 95% 5.4%, unchanged for the last three quarters. Net absorption dropped to about 700,000 sq. ft. in the 4 94% fourth quarter compared to the previous quarter’s two-year high of 1.5 million sq. ft. In addition, metro Houston leasing activity is at 1.5 million sq. ft., almost 3 93% unchanged from the previous quarter, and down 37% from a year ago at 2.4 million sq. ft. The retail 2 92% market saw overall average asking rates rise yet again by $0.41 per sq. ft. quarter-over-quarter to finish at $17.50—surpassing last quarters all-time high—on 1 91% a triple-net basis. A year ago, average rates were at $16.39, representing a 6.8% increase. 0 90% Houston has, for the most part, survived the -1 89% oil downturn Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 The Greater Houston area created 108,300 jobs, a 3.5% increase, in the 12 months ending December 2018, according to the Texas Workforce Commission’s preliminary data. The five sectors adding the most jobs Market Indicators in 2018 were construction (19,400); administrative Current Prior Quarter Year Ago and support services (16,800); durable goods Q4 2018 Q3 2018 Q4 2017 manufacturing (15,500); professional, scientific and Vacancy (%) 5.4 5.4 5.3 technical services (11,200); and health care (11,100). The sub-sectors losing the most jobs in 2018 were Net Absorption (SF) 6 97,514 1,510,257 1,919,736 clothing stores (-2,000), building materials stores Leasing Activity (SF) 1,546,972 1,579,126 2,442,130 (-2,000), restaurants and bars (-900), insurance carriers (-800), telecommunications (-800), and oil Deliveries (SF) 889,774 1,622,915 1,627,9 9 6 and gas extraction (-800). Houston nonfarm payroll Construction (SF) 3,854,782 4,063,634 4,259,127 employment is at a record high 3,181,700. Allowing for revisions, this number should exceed 3.2 Inventory (SF) 352,605,554 351,710,702 347,875,732 million by mid-year 2019, according to the Greater Avg Asking NNN Rent ($) 17.50 17.0 9 16.39 Houston Partnership. Despite doubts during Houston’s continuing recovery from Hurricane Harvey, 2018 proved to be a record year for Houston home sales. According to the Houston Association of Realtors’, single family home sales rose 3.8% to 82,177 while sales of all property types totaled 98,323, a 3.7% increase over 2017’s record volume. Total dollar volume for full-year 2018 jumped 21.5% to a record-breaking $28 billion. HOUSTON | AUSTIN | SAN ANTONIO www.naipartners.com HOUSTON RETAIL | Q4 2018 Quarterly Market Report MARKET OVERVIEW Supply and demand remained aligned in 2018 Vacancy & Availability Vacant Available Houston has absorbed 4.1 million sq. ft., and delivered 10% 4.7 million sq. ft. in 2018, down from 2017 at 4.5 million sq. ft. and 6.5 million sq. ft. year-over-year. However, 9% even with the difference in space, either added or being removed from the market, the fundamentals are very 8% strong, with occupancy at 94.6%. While deliveries had been outpacing absorption during the last three 7% 6.8% quarters of 2018—indicating a slightly slower tenant 6% demand for new space—construction activity leveled 5.4% off, averaging 4.3 million sq. ft. during the same period, 5% signaling controlled growth. This controlled approach will support steady retail growth going forward in a 4% challenging national retail market. The amount of square Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 feet currently under construction is at 3.9 million, down slightly from 4.1 million sq. ft. quarter-over-quarter, and 4.3 million sq. ft. year-over-year. New development has gradually been decreasing on a quarterly basis since Net Absorption the third quarter of 2016, when it reached 5.5 million 3.0 sq. ft., a level not seen since 2008. In addition, retail space has remained at or above 94% occupancy since 2.5 Millions (SF) the fourth quarter of 2013. 2.0 PlazAmericas largest section sold 1.5 Real Capital Analytics data reports year-to-date retail 1.0 sales volume for 2018 in the Greater Houston area at $2.9 billion. The fourth quarter sales volume was $533.5 0.5 million compared to fourth quarter 2017 at $452.5 million, 0.0 resulting in a year-over-year quarterly volume change -0.5 of 17.9%. The primary capital composition for buyers Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 in 2018 was made up of 45.9% private investors, and 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 45.1% cross-border investors. For sellers, the majority was 48.0% REIT/listed investors, and 38.7% private. In December RAIT Financial Trust sold the largest section Historical Investment Trends - Sales Volume of PlazAmericas mall in Houston for an undisclosed Quarterly Volume 12/31/18: $533,599,605 Year-over-Year Change: 17.9% price. Baker Katz acquired the mall’s largest section Source: Real Capital Analytics at 7500 Bellaire Boulevard, which totals 638,605 sq. Quarterly Volume ft. and was approximately 70% occupied at the time 1.8 of the sale. According to 2018 Harris County Appraisal 1.6 District records, the property was valued at more than Billions ($) $12.2 million. The mall was built in 1961, known then 1.4 as Sharpstown Mall. The attached anchor department 1.2 stores and the ten-story high-rise office building, which 1.0 are separately owned, were not included in the sale. 0.8 0.6 Leasing activity remains stable 0.4 Leasing activity totaled 1.5 million sq. ft. in Q4 2018, almost unchanged quarter-over-quarter, although down 0.2 0.0 37% from this time last year. A few of the metro’s largest Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 leases signed during 2018 include the 120,000-sq.- 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 www.naipartners.com 2 HOUSTON RETAIL | Q4 2018 Quarterly Market Report ft. lease signed by Life Time Fitness at Baybrook Mall in the Southeast submarket; the 108,632-sq.-ft. deal signed by At Home at 3000 Kirby Dr. in the Far South Under Construction submarket; and the 89,869-sq.-ft. lease signed by Leased Available H-E-B at 2121 FM 2920 Rd. in the Far North submarket. Southwest There was some unease in Houston’s retail sector North with many high-profile store location closings such as Randall’s, Mattress Firm, Sears, and Toys R Us. But as Northwest the saying goes, retail follows rooftops and according West to the Greater Houston Partnership, from 2010 to 2017, Inner Loop Houston’s population increased by 16.4%, which is the fastest rate of growth among the nation’s 10 biggest Southeast metropolitan areas. Northeast Port Houston surpassing the goal line South 0 100 200 300 400 500 600 700 800 900 1,000 United States-bound retail container imports hit a new Thousands (SF) record in October, according to the Port Tracker report issued by the National Retail Federation. The amount of merchandise imported provides a rough barometer of retailers’ expectations. Volumes have been coming in at higher-than-usual levels in recent months, with retailers Completions Year-To-Date importing merchandise ahead of schedule. The past Leased Available six years have represented the most significant growth North period in Port Houston’s history: from 1.4 million twenty- Southwest foot-equivalent container units (TEU) to a projected 2.7 million TEU annually for the calendar year 2018 (nearly Northwest doubling in six years). In addition, more than 13 million Southeast TEU passed across Port Houston docks since 2014, West and for the first time ever, container terminals reached and surpassed the 2 million TEU mark in a single year Inner Loop and are positioned to top the 3 million mark—perhaps Northeast as early as 2020. Port Houston Q4 2018 YTD Operating Statistics reported that container volume is solid South outpacing last year by 10%; steel is up 21%; and overall 0.0 0.2 0.4 0.6 0.8 1.0 1.2 Millions (SF) tonnage is up 8%. Rents continue to rise in tight market The tight retail market continued to push the Houston metro average annual asking rents up, reaching $17.50 Average NNN Asking Rent by Submarket per sq. ft. to start 2019 at a record high. As of the end of Inner Loop $25.29 the 2018, prices have climbed 22.0% from the average asking rent of five years ago ($14.34 per sq. ft.). While West $21.95 retail availability is especially limited across the Houston Northwest $18.05 area, it is particularly tight within the Inner Loop area, South $17.95 with a total inventory of approximately 28 million sq. ft. with a vacancy rate of 4.8% and the average asking triple Southwest $16.42 net rent at $25.29 per sq. ft. Although concessions such Northeast $15.76 as free rent and tenant improvement allowances make North $15.15 posted rents less meaningful as a market indicator, the price of Houston’s retail space is climbing.