O’Connor and Associates Retail Forecast Breakfast

Jazz Hamilton of CBRE speaking to crowd.

This morning’s Retail Forecast Breakfast at Courtyard on St. James Place had a great lineup and some great information. Below is my paraphrased summary of the speakers and the great perspective that they were able to provide!  Each speaker had some unique insight to the market, and I thoroughly enjoyed the presentations.  Any errors or mistakes are my own. – T. Koenig

Jazz Hamilton, CBRE

Past Retail Environment:

At the height of the boom, Houston had an average of 5% unemployment.  There was a lot of spec development- example: in 2007, there was about 6.7MM sf of retail.  Then, the bust.  The only thing that allowed retail brokers to survive was the expansion of the restaurant sector and the trend of medical uses taking over former retail spaces.  Now, this is commonplace.  If you don’t have a dentist or a chiropractor in your center, you aren’t doing your job.  They may not attract shoppers, but they keep the center stabilized.

Current Retail Environment:

Demand has finally caught up with supply.  There is not much development, and Houston is holding around 7.8% vacancy (Class A and B only).  Rents are on the rise again, but TI’s are still high ($15-20/sf for shell space).  There is 1.4 MM sf of retail currently under construction compared to a year ago when there was just 950k sf under construction.  Unemployment currently sits at 7%.  We have a 4.5 month supply of housing; a healthy market has about a 6 month supply, so we are doing really well.  Our retail absorption rate is approx 600k sf.

Future Retail Environment:

Grocery-anchored centers are the latest trend.  Big box-anchored centers are on the decline.  Specialty stores like Trader Joe’s, Sprouts, and Whole Foods are aggressively expanding.  HEB is expanding as well.  Grocers are looking at properties with lower surrounding densities as well.


Mark Raines, CBRE

Big box retailers are downsizing significantly (i.e. Best Buy, Staples, Office Depot) in large part due to online sales.  Some stores like Golf Galaxy, Golfsmith, and Big Lots are staying large.  Problem arises when former big box spaces are vacated bc they are traditionally very deep spaces (think bowling alley) and difficult to turn over.

Spec’s is another big box retailer in the market.  They are receiving competition from chains like Goody Goody Liquor.  Dentists’ office spaces are becoming very competitive in suburban, grocery-anchored spaces.  Fewer and fewer dentists exist in medical or office spaces; they are following their customers to the suburbs.  Another concept that is shifting is Petco.  They have a new “Unleashed” concept that is smaller and focuses solely on necessities- no live animals in the stores, etc.  Starbucks is receiving competition from Dunkin’ Donuts and has responded with a mobile concept that takes up only three parking spaces and is completely self-sufficient.  Randall’s has been hit hard by competition from HEB and specialty grocers.  Trader Joe’s is extremely successful; the new black.


David Luther, Marcus & Millichap

1.  What are the Houston submarkets?

Katy, West Houston, Woodlands, Sugar Land, Cypress, Spring, Uptown/Galleria, Inside the Loop.  High barriers to entry in Katy, Woodlands and Sugar Land due to development standards.  Emphasis on redevelopment in Uptown/Galleria and areas inside the loop, but prices are very inflated bc you are paying for surrounding area.

2.  Which submarkets are experiencing challenges?

Greenspoint, Alief, Sharpstown, and the near NW.  These areas are demographically and density challenged. It is tough to get retailers to locate even if there is sparse development.  High concentrations of REO properties.

 3.  What types of Investors are out there and what are they looking for?

  1. Yield-Oriented:  Likely a long-term investor of high net worth looking to take advantage of locking in low interest rates.
  2. Value-Added Investors:  Active, but very sensitive to the types of properties they are purchasing.  Challenges to attracting these investors include: two-story retail (despite urbanist trend), odd configurations (elbows), etc. Two main classes of value-added investors: Mismanagement Opportunities.  They want to scoop up properties that are perhaps 70-80% occupied and re-structure management to get them leased and make money. Not looking to dump a lot of money into a property.  Redevelopment Opportunities.  Prepared to put money into properties to see the return.
  3. Aggressive Investors: Seeing more hard money coming back into the market.

 4.  What factors are driving demand?

  • Improving fundamentals and yields.  400 – 450 basis point spreads.
  • NN and NNN leases allow for less management which is attractive to potential investors.  Allows better management of utility costs.  Water costs have risen 40% in the last decade, which can directly affect bottom lines. Landlords need to be able to pass on those costs.
  • Exchange investors getting active in the marketplace.

 5.  How are prices?

At or above peak pricing in 2007.

  • Grocery Anchored:  low 6 caps.
  • Strip Centers:  8 – 8.5 caps.
  • Retail Outparcels:  7.5 – 8.25 caps.

 6.  Single-Tenant Net Leases:

  • Pricing exceeding peak of 06/07.
  • Fast food/ C Stores/ Drug Stores / Banks
  • Casual dining is still viewed as a bit risky to lenders.

 7.  Additional factors driving demand?

  • Fewer expansions.
  • More attractive returns than bond purchases.
  • Cap date compression in national tenants is driving demand for regional tenants.
  • Crossover capital.

 8.  Where are buyers coming from?

  • Capital migration reports from Marcus & Millichap say TX, CA, FL.
  • Increase in out-of-area funding entering the marketplace.

 9.  What will the future look like?

  • Improving fundamentals.
  • There will be increased construction, but it will remain measured.

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