TEXAS SNAPSHOT, SEPTEMBER 2005

Houston Retail Market

Houston’s solid market indicators — including above-average population and residential growth, as well as strong consumer spending — continue to drive new retail development citywide. The substantial buying power of the city’s residents propelled retail sales to more than $64 billion in 2004 (compared to $61 billion the previous year). Retail sales in Houston are expected to surpass $64 billion this year.

Of the total 7.1 million square feet of retail space currently under construction in the Houston area, the northwest leads all other submarkets with 2.1 million square feet under construction and an additional 2 million square feet of proposed new retail space.

Downtown has also been quite active. Since 2000, Houston’s downtown has undergone a dramatic makeover, highlighted by the introduction of light rail transportation on Main Street and the city’s hosting the NFL’s Super Bowl XXXVIII in 2004. More than 25 projects have been recently completed or are currently under construction on Main Street, including restaurants, nightclubs/bars, as well as residential and office projects with ground-floor retail.

Of all the development trends in the Houston area, open-air, mixed-use lifestyle centers lead the way. The open-air lifestyle center is a paradigm shift from the preceding power center era, where the key appeal was getting in and out as quickly as possible, thereby maximizing shopping efficiency. Conversely, a lifestyle center is designed as a place to spend leisure time. Customers come to these centers for the “experience” of leisure and to be entertained. Shopping, then, occurs as a direct result of that positive leisure experience.

Trammell Crow Company has partnered with the Morgan Group to develop a lifestyle center with 450,000 square feet of retail space on a 24-acre infill tract inside Loop 610, located between River Oaks and West University and adjacent to Greenway Plaza.

Town centers are another trend with growing local appeal. This concept involves (re)creating a traditional, small-town central market area by featuring local municipal government offices, retail shops, restaurants and movie theaters side by side. Two successful town centers are located in The Woodlands and Sugar Land’s First Colony, the two largest planned communities to the north and south of Houston, respectively. The Woodlands’ 34-acre Market Street and Sugar Land’s 32-acre Town Square have added a special boost to their respective images of unique self-contained communities. Additionally, Vista Equity Group is planning to develop La Centerra Town Center, a 19-acre project that will feature retail, commercial office space and a local courthouse. La Centerra Town Center will be located at the center of Cinco Ranch, a 7,000-acre master-planned community within the city limits of Katy, Texas, a rapidly growing and affluent trade area west of Houston. Construction of Phase I is set to begin this month.

Four other noteworthy retail development trends are the strong influx of larger, more upscale and mainstream fitness chains entering or continuing to expand in the market (24-Hour Fitness, LA Fitness, Lifetime Fitness, Bally Total Fitness); the traditional department store moving to freestanding space at good interior (versus regional) intersections (JC Penney, Sears, Kohl’s); the continued competition between San Antonio-based H-E-B and Wal-Mart in the south Texas grocery front given H-E-B’s ever-expanding and evolving prototype; and the beginning shift on the part of many banks, which have been the market’s darlings, from paying hefty ground leases in the recent past to the pursuit of buying their own space.

Retail vacancy through second quarter reached 14.1 percent for all product types, 60 basis points higher than the 13.5 percent of the previous quarter. The increase was due primarily to the continuing lackluster performance of strip centers and malls. Malls recorded the highest jump of 145 basis points to 12.1 percent vacancy, followed by strip centers up by 114 basis points to 13.5 percent. By comparison, the 14.2 percent vacancy for neighborhood centers and 15.8 percent for power centers remained relatively unchanged from the previous quarter.

The most notable new anchor additions in the last year or so are Nordstrom, Kohl’s, Gander Mountain, Lifetime Fitness, LA Fitness and Fry’s Electronics, among others. Wild Oats, Books-A-Million and Staples are currently circling and studying the market.

NewQuest Properties has been the most active retail developer on a broad scale. Property Commerce, Weitzman Group, Trammell Crow Company, Moody Rambin, Gulf Coast Commercial and General Growth (via their mall expansions) have also been very active in Houston.

Fort Bend County, the Highway 288 corridor (from the Medical Center to Pearland), and the far northeast Houston sector are projected to have significant growth over the next decade as well. There are currently two significant retail developments planned for Pearland. Poag & McEwens’ 800,000-square-foot lifestyle center, Promenade Shops at Shadow Creek, is expected to be completed in early 2006. CBL & Associates Properties is developing the 700,000-square-foot Pearland Town Center, to be anchored by Dillard’s and Foley’s (each with 150,000-square-foot stores), with expected delivery by 2007.

— Matt Keener, Senior Vice President, Director of Retail Brokerage, Trammell Crow Company

©2005 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.