A tale of two sectors in a city on the rise

1. A tale of two sectors in a city on the rise
Research &
Forecast Report
HOUSTON | RETAIL
Q2 2018
Lisa Bridges Director of Market Research | Houston
Retail Trends
Commentary by Kelly Hutchinson, Senior Associate
Colliers First Quarter Retail Trends Report, stated that Houston’s
strong economy and steady population growth (2nd fastest growing
metropolitan area in the U.S.) are what have helped maintain
healthy retail occupancy and rent growth.
The Houston retail market remains relatively stable in the second
quarter, however there is a definite tale of two markets within
the retail sector. Houston saw negative absorption in the second
quarter and a statistically significant increase in overall vacancy
for the first time in several years. The continued weakness in the
“big box” retail sector, led by the bankruptcy of Toys R Us (18
closed locations in the Houston MSA), created negative absorption
in Community (two anchors), Power (three or more big boxes)
and Malls (both traditional and outlet). Smaller, neighborhood and
unanchored strip centers on the other hand had healthy positive net
absorption.
Despite this quarterly setback, Tex-X chief economist, Peter Muoio
ranks the city’s retail market the third strongest in the nation,
forecasting rents to rise and vacancy rates to fall across the metro
area by 2020 as demand will continue to outpace supply.
Houston’s projected population and job growth are brisk tailwinds
for retail real estate and are expected to fuel the expansion of
Houston’s retail real estate market for years to come even as the
industry continues to retrench nationwide.
What notable factors are behind this long term positive trend?
Primarily, Houston, the most diverse city in the U.S. and second
fastest growing, is powered by a skilled and well-trained talent
base, with an excellent quality of life and low-cost of doing
business. Forbes says Houston’s “secret sauce” is lower rents, easy
parking, no zoning, housing affordability, diversity, upbeat attitude
and openness to outsiders has made Houston a super city.
Summary Statistics
Houston Retail Market Q2 2017 Q1 2018 Q2 2018
Vacancy Rate 5.3% 5.4% 5.6%
Net Absorption (SF)
(million square feet)
1.4M 0.7M -0.6M
New Construction (SF)
(million square feet)
1.8M 0.8M 0.9M
Under Construction (SF)
(million square feet)
2.3M 2.9M 2.6M
Asking Rents
Per Square Foot Per Year
Average NNN $15.40 $15.35 $15.31
Neighborhood Centers $14.73 $14.58 $14.53
Strip Centers $18.32 $19.23 $19.51
The above asking rents are an average of all property types and classes that are currently listed with
an asking rate. This average does not include properties that are fully leased or that do not list an
asking rate. Please see page 2 of this report for an expanded discussion of retail rental rates.
Market Indicators
Relative to prior period
Annual
Change
Quarterly
Change
Quarterly
Forecast*
VACANCY
NET ABSORPTION
NEW CONSTRUCTION
UNDER CONSTRUCTION
*Projected

2. 2 Houston Research & Forecast Report | Q2 2018 | Retail | Colliers International
Retail Trends - continued
>> POPULATION GROWTH – Ranked #2 fastest growing metro area
in the U.S.
>> JOB GROWTH – After a dip caused by the oil downturn, job
growth is back to a very healthy 60-80k jobs per year pace.
>> AFFORDABLE COST OF LIVING – 5th lowest overall cost of living
among the top 20 metros.
>> THRIVING MILLENNIAL POPULATION – Millennials make up
approximately 28% of Houston’s population vs. a national average
of 13%. Millennials disproportionately drive experiential retail and
restaurant traffic. As Millennials age, their consumption of retail
products and services are anticipated to grow.
>> IMPACT OF THE BABY BOOMERS – Houston has a relatively
smaller population of “Boomers” than most major cities, however
this group continues to drive the healthcare expansion (now a
significant retail use).
>> ETHNIC AND RACIAL DIVERSITY – Houston has the 5th largest
immigrant population among the larger metros and is the most
diverse ethnic mix in the U.S. This population diversity opens
opportunity for niche retail and cross-cultural concept growth.
The long-term curve for Houston retail remains positive. Big box retail
will continue to struggle in the near term as multi-channel retailing
continues to erode the need for these large space concepts. Big boxes
lease up in a significantly shorter time in areas with population density
and high growth. Houston has both, and couple that with a historically
proven track record of redeveloping and leasing up problems, Houston
sustains itself in face of these negative factors. Grocery expansion
following population growth and the associated small space retailers
will remain strong for the foreseeable future. For a more detailed
exploration of these topics, please check out our white paper at
https://knowledge-leader.colliers.com/kelly-hutchinson/houston-
retail-factors-to-success/.
Vacancy & Availability
Houston’s average retail vacancy rate increased 20 basis points
between quarters from 5.4% in Q1 2018 to 5.6% and increased 30
basis points annually from 5.3% in Q2 2017. At the end of the second
quarter, Houston had 15.8M SF of vacant retail space on the market.
Among the major property types, single-tenant retail had the lowest
vacancy rate of 2.0%, lifestyle centers at 2.4%, followed by theme/
entertainment at 2.8% and community centers at 5.0%. Outlet malls
saw the largest increase over the quarter from 2.6 to 12.5% and malls
vacancy rate increased from 4.6% to 5.5%. Neighborhood centers
have the largest amount of vacant space by square feet and are 8.8%
vacant.
There is currently 2.6M SF of retail space under construction of which
69% is pre-leased. The majority of the projects under construction
are located in the outlying suburban submarkets adjacent to rapidly
growing residential developments. The largest project under
construction is the 240,000-SF Metropark Square located north of
Houston in the City of Shenandoah, Montgomery Co, TX. AMC and
Dave and Busters are among the tenants in the new development.
Sales Activity
Source: Real Capital Analytics
Q2 2018
NO. OF PROPERTIES: 50
TOTAL SF: 1.7M
AVERAGE $/SF: $264
AVERAGE CAP RATE: 7.1%
Job Growth & Unemployment
(not seasonally adjusted)
UNEMPLOYMENT 5/17 5/18
HOUSTON 4.8% 4.2%
TEXAS 4.1% 3.7%
U.S. 4.1% 3.6%
JOB GROWTH
Annual
Change
# of Jobs
Added
HOUSTON 2.6% 79.2K
TEXAS 2.8% 344.7K
U.S. 1.6% 2.4M
Change in Sales (Year over Year)
-80.0%
-60.0%
-40.0%
-20.0%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
Q2 '14 Q2 '15 Q2 '16 Q2 '17 Q2 '18
Average Price Per SF
0
50
100
150
200
250
300
Q2 '14 Q2 '15 Q2 '16 Q2 '17 Q2 '18
Houston U.S.
Average CAP Rate
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
Q2 '14 Q2 '15 Q2 '16 Q2 '17 Q2 '18
Houston U.S.

3. 3 Houston Research & Forecast Report | Q2 2018 | Retail | Colliers International33
Absorption & Demand
Houston’s retail market posted 556,245 SF of negative net absorption in the second quarter, a significant decrease from the 680,964 SF
of positive net absorption posted in the previous quarter. Some of the negative absorption can be attributed to the closing of “Big Box”
stores located in Community Centers, Power Centers and Malls. Houston area Toys R Us stores closed all locations during the second
quarter. The other source of negative absorption was from single tenant or free-standing retail such as branch banks, many closing
branches closing due to a continued shift by consumers to on-line banking. Among the tenants that expanded into new locations during the
second quarter are Kroger, HEB, Marshalls and Pluckers Wing Bar. These expansions are an indication that grocery stores, restaurants and
discount retailers still pull in a healthy amount of foot traffic.
Rental Rates
According to CoStar, our data provider, Houston’s citywide average quoted retail rental rate for all property types decreased slightly
between quarters from $15.35 per SF NNN in Q1 2018 to $15.31 per SF NNN. These average rental rates are typically much lower than
actual deal rates since they include all retail property types and classes, the majority of those properties are not well leased and are listed
with discounted asking rates. According to Colliers’ internal data, Class A in-line retail rental rates can vary widely from $30.00 to $85.00
per SF, depending on location and property type.
Market Summary
Q2 2018 Select Retail Lease Transactions
BUILDING NAME/ADDRESS SUBMARKET SF TENANT LEASE DATE
Deer Park Triangle NASA/Clear Lake 53,300 Joe V’s Smart Shop Apr-18
Four Corners Shopping Center Far South 12,500 Family Dollar Store Apr-18
Pinecroft Center I Montgomery County 12,000 Bassett Furniture Apr-18
Pearland Town Center Far South 7,000 Altar’d Interiors Jun-18
11 Gemini St NASA/Clear Lake 7,000 Nasa Kids Academy Apr-18
23692 Highway 59 N Montgomery County 6,800 The Draft Apr-18
Price Plaza Far Katy North 6,700 Mambo Seafood Jun-18
Pearland Town Center Far South 5,600 Victoria’s Secret/Pink Jun-18
Q2 2018 Retail Market Statistical Summary
PROPERTY TYPE
RENTABLE
AREA
DIRECT
VACANT SF
DIRECT
VACANCY
RATE
SUBLET
VACANT
SF
SUBLET
VACANCY
RATE
TOTAL
VACANT SF
TOTAL
VACANCY
RATE
2Q18 NET
ABSORPTION
CLASS A RENTAL
RATES (IN-LINE*)
Strip Centers (unanchored) 35,834,161 2,895,662 8.1% 10,804 0.0% 2,906,466 8.1% 161,282 $27.00-$45.00
Neighborhood Centers (one anchor) 71,381,645 6,267,332 8.8% 76,390 0.1% 6,343,722 8.9% 268,202 $28.00-$46.00
Community Centers (two anchors) 47,614,673 2,317,313 4.9% 76,160 0.2% 2,393,473 5.0% (198,680) $28.00-$45.00
Power Centers (three or > anchors) 28,392,341 1,454,508 5.1% 11,625 0.0% 1,466,133 5.2% (331,271) $28.00-$45.00
Lifestyle Centers 6,052,121 145,457 2.4% - 0.0% 145,457 2.4% 67,473 $40.00-$85.00
Outlet Centers 1,330,725 165,860 12.5% - 0.0% 165,860 12.5% (131,624) $20.00-$40.00
Theme/Entertainment 499,468 13,859 2.8% - 0.0% 13,859 2.8% 3,879 $25.00-$35.00
Single-Tenant 72,744,169 1,306,412 1.8% 116,705 0.2% 1,423,117 2.0% (187,071) N/A
Malls 23,599,518 1,280,409 5.4% 12,397 0.1% 1,292,806 5.5% (203,456) N/A
GREATER HOUSTON 287,448,821 15,846,812 5.5% 304,081 0.1% 16,150,893 5.6% (551,266)

4. 4 North American Research & Forecast Report | Q4 2014 | Office Market Outlook | Colliers International
Copyright © 2015 Colliers International.
The information contained herein has been obtained from sources deemed reliable. While
every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No
responsibility is assumed for any inaccuracies. Readers are encouraged to consult their
professional advisors prior to acting on any of the material contained in this report.
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4 North American Research & Forecast Report | Q4 2014 | Office Market Outlook | Colliers International
Copyright © 2018 Colliers International.
The information contained herein has been obtained from sources deemed reliable. While
every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No
responsibility is assumed for any inaccuracies. Readers are encouraged to consult their
professional advisors prior to acting on any of the material contained in this report.
Colliers International | Houston
1233 West Loop South, Suite 900
Houston, Texas 77027
+1 713 222 2111
colliers.com/houston
FOR MORE INFORMATION
Lisa Bridges
Director of Market Research | Houston
+1 713 830 2125
lisa.bridges@colliers.com
115.6M SF
15.3M SF
Q2 2018 Houston Retail Highlights
Kelly Hutchinson
Senior Associate | Houston
+1 713 830 2146
kelly.hutchinson@colliers.com