During the peak of COVID-19, economists reported “retail is dead,” and to some extent they were right. However, the Houston retail market has proven to be the exception to this trend. Emerging from COVID-19, Houston led the U.S. economy in total retail absorption last year at 2.0 million square feet. In Q1 2022, Houston ranked 4th nationally for retail absorption with 643,861 square feet and an additional 775,943 sf in the pipeline. Houston is a hotbed for retail in the present environment with vacancy ranging from 5% to 8%.
There are three factors contributing to Houston’s retail success:
- Texas’ open-for-business environment during the pandemic spurred companies to open secondary or flagship locations in the state and, more specifically, Houston. The lower cost of doing business along with a business-friendly climate continue to make the state attractive.
- At 652 square miles, Houston is the largest of its peers (in population totals) and a prime candidate for growth in suburban markets, including Katy, Waller, and the “lands” (Pearland, The Woodlands, and Sugar Land).
- The influx of people migrating from outside Texas has created a positive net increase in total population that has continued to enhance the business climate and fuel suburban market growth.
Although the Houston retail market fared well during the pandemic and grew last year, there are still many economic impacts at play in the ever-changing business landscape.
With the Fed scheduled to raise interest rates multiple times before the end of the year, expect to see a shift in the micro and macro economy. From gas prices, soft goods, to food and beverage, consumers are experiencing the ever-increasing pinch of inflationary prices. The wealth gap will likely expand, which will consequently cause discount and luxury retailers alike to increase their presence due to the bifurcated demand.
As people continue to migrate to the state, home builders cannot provide housing units fast enough to meet demand. Consequently, we are advising retail developers to add an additional 10% of square footage to retail projects (provided their parking arrangements can accommodate the addition) due to the growing consumer base.
Finally, adaptive reuse is a trend that is here to stay. Developers are competing for highly desirable land sites and today’s consumer craves a nostalgic experience that can be curated by adaptive reuse. These properties have become in high demand for occupiers and investors alike in a market that historically has been late to the party in comparison to the East Coast and Midwest. However, adaptive reuse does come with its own set of challenges as construction costs keep rising.