TEXAS SNAPSHOT, FEBRUARY 2006

Houston Retail Market

Lyle Cowand, Caldwell Watson Real Estate Group

Several noteworthy developments are underway in the market. La Centerra, for example, is a 272,000-square-foot office and retail development that Vista Equities plans to develop in Cinco Ranch. In Pearland, Poag & McEwen is developing The Promenade Shoppes at Shadowcreek at the corner of Beltway 8 and Highway 288. The approximately 600,000-square-foot lifestyle center will have Bass Pro Shops as its first anchor tenant. Brazos Town Center, a NewQuest Properties development located in Rosenburg, will contain approximately 700,000 square feet of retail, including Target, The Home Depot and Cinemark, upon completion. Apartments, condominiums and townhomes will be within walking distance of the center.

The majority of Houston's retail development is taking place in high residential growth areas in the northwest quadrant along Tomball Parkway and Highway 290 outside of FM 1960, as well as in outlying communities like Pearland, Richmond/Rosenburg, Sugarland, Cinco Ranch, The Woodlands and Atascocita. The more homes that are built, the more retail will be attracted to these areas to serve the needs of the residents. The intersections of Spring Cypress and Highway 290, Highway 249 and Interstate 45 also are growing as major retail corners in the northwest quadrant.

“The significant retail added at Highway 290 and Spring Cypress is indicative of the trend along Spring Cypress,” Cowand says. “We believe Spring Cypress is rapidly becoming the major east/west corridor north of FM 1960. The next large retail play along this corridor we believe will happen at the intersection of Spring Cypress and Highway 249. As retailers located in the Willowbrook area (FM 1960 and Highway 249) become further distanced from the new residential growth, many will begin moving north along Highway 249, with Spring Cypress being the most logical location to serve the significant residential growth along Spring Cypress.”

Barker Cypress Road, south of Highway 290, has been undergoing significant growth in a number of areas. In addition to the numerous residential subdivisions that have been developed recently, Cy Fair Community College opened its campus on 200 acres at the corner of Barker Cypress and West roads in 2003. The college currently has an enrollment of approximately 10,000 students. Adjacent to the college, the Richard E. Berry Educational Support Center, which will serve Cy Fair Independent School District, is under construction. Upon completion, the center will contain a 16,000-square-foot staff development and conference center; a 456-seat auditorium/theater; and an athletic stadium designed to seat 11,000 people. This immense facility will be used year-round for district-wide staff development for teachers; extra- and co-curricular activities; performances and competitions; catering and banquets for honors, awards and celebrations; and graduation exercises. The residential growth combined with these two new projects creates the need for additional supporting retail and restaurants in the Barker Cypress Road corridor.

The theater business is getting ready to be more competitive in Houston, according to Cowand. Until recently, Alamo Drafthouse was the only concept of its type showing first-run films as well as food, beer and wine during the movie. With the entrance of Studio Movie Grill and Movie Tavern to the market, along with Alamo Draft House's expansion, that theater segment is now very competitive.

L.A. Fitness is under construction with its first four 40,000-square-foot-plus health clubs in the Houston market, which will directly compete with 24-Hour Fitness. Lifetime Fitness also recently entered the market. Its building spans approximately 150,000 square feet. Sound Fitness has entered the market with its first wave of stores ranging in size from 8,000 to 10,000 square feet.

According to O'Connor & Associates, Houston's retail vacancy rate as of the third quarter of 2005 was 13.63 percent. Regional malls boasted the lowest vacancy rate with a 9.56 percent vacancy factor. “These figures are a slight uptick from the previous year,” Cowand says. Community centers recorded their eighth consecutive quarter of increasing occupancy with third quarter vacancies of 13.67 percent.

Houston retail remains strong as evidenced by the sector's continued increase in occupancy and healthy absorption figures. With rental rates remaining fairly flat during the last year and continued strong residential growth, absorption should continue to be positive. “In addition, healthy employment growth (18,600 jobs gained in September alone and more than 50,000 jobs within the last year) will draw more people to Houston for jobs, increase retail expenditures, increase the need for additional residential development with the end result being the need for additional retail development as well as reduce vacancies in existing centers,” Cowand says. “The new year appears to be bright for retail.”

— Lyle Cowand is vice president — retail division at Caldwell Watson Real Estate Group.

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