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Retail Research

Market Report Second Half 2018

Houston Metro Area

Hiring Resumes and Harvey Impact


Lingers; Both Benefit Retail Spending Retail 2018 Outlook

Rebounding job market to benefit Houston retail. Flood 4.6 million sq. ft. Construction:
damage stemming from Hurricane Harvey one year ago has In 2018, deliveries will decline
will be completed
boosted job gains and retail spending in the metro. Hiring has from the previous two years when
also resumed in the oil and gas industry, brightening the market’s stock additions totaled 6.2 million
economic outlook. Retail sales grew by $4 trillion in the quarter and 5.5 million square feet.
following Hurricane Harvey, and they have continued to rise as
residents replace household goods and make home repairs.
Energy companies and related firms have also started adding 20 basis point Vacancy:
employees as oil prices climbed during the past 12 months. Retail vacancy ticks up to 5.9
increase in vacancy
Though employment growth in the sector is not expected to percent this year, remaining be-
reach prior levels, it is positive news for the retailer sector as wage low the 10-year average of 6.6
growth strengthens and consumer confidences rises. percent. The rate increased 60
basis points in 2017.
New building codes could impact future construction
pipeline. Retail deliveries reached a cyclical peak last year 2.5% increase Rents:
as more than 6 million square feet of space came online. Building on last year’s 4.1 per-
in asking rents
Completions will fall this year as the construction pipeline begins cent advance, the average ask-
to thin. New buildings codes could also slow construction in the ing rent will climb to $17.32 per
near-term as some developers will have to make adjustments to square foot this year.
proposed projects. Additional expenses related to the new code
could significantly delay some new buildings. Existing assets and
properties already underway will benefit as expanding retailers will
have fewer options for new locations.

Investment Trends
• A healthy economic outlook and higher cap rates than many
Local Retail Yield Trends
other markets attract buyers to Houston retail properties. With
Retail Cap Rate 10-Year Treasury Rate
an average multi-tenant retail cap rate of 7.7 percent, yields in
the metro are some of the highest in the country and the highest
12%
in the state.
Average Rate

9% • Hurricane Harvey’s impact on the retail market remains to be


seen. Many landlords of properties that flooded have been
6%
working with tenants over the past year to help them get back in
3% business. Rent concessions, capital for tenant improvements,
and other creative means have been used, but it is still unclear
0% how the storm could impact property valuations.
00 02 04 06 08 10 12 14 16 18*
• Unanchored strip centers with service-oriented tenants that are
Internet resistant are in high demand. Assets priced between $2
million and $5 million are heavily targeted with cap rates ranging
from 7.5 percent to 7.75 percent. Newer construction in highly
desired areas can trade at sub-7 percent yields.
* Cap rates trailing 12 months through 2Q18; 10-Year Treasury up to June 29.
Sources: CoStar Group, Inc.; Real Capital Analytics
Houston
2Q18 - 12-MONTH TREND

Employment vs. Retail Sales Trends


EMPLOYMENT:
Employment Growth Retail Sales Growth 3.2% increase in total employment Y-O-Y
10%
Year-over-Year Change

• The flooding from Hurricane Harvey prompted intense hir-


5% ing in the construction sector over the past year. Nearly
19,300 workers were added to payrolls in the segment, a
0% 8.9 percent year-over-year increase.

-5% • The metro’s jobless rate shrank 40 basis points over the
past 12 months to 4.5 percent in the second quarter.
-10%
08 09 10 11 12 13 14 15 16 17 18*

Retail Completions CONSTRUCTION:


Completions Absorption 4.6 million square feet completed Y-O-Y
10,000
• In the past 12 months, deliveries fell 28 percent when
Square Feet (thousands)

7,500 compared with the prior yearlong time frame.


• Developers are targeting the western half of the market
5,000
and nearly 2.8 million square feet of retail space is un-
derway in the area outside of Loop 610 from Cleveland
2,500
to Conroe to Cinco Ranch and down to Freeport.
0
08 09 10 11 12 13 14 15 16 17 18*

Vacancy Rate Trends


VACANCY:
Metro United States 30 basis point increase in vacancy Y-O-Y
10%
• Retail vacancy reached a cyclical low during the third
quarter of 2016 and has risen 80 basis points since to
8%
Vacancy Rate

5.8 percent at midyear.


6% • Submarkets experiencing robust supply additions have
also recorded vacancy increases over the past year. The
4% largest advance was recorded in the North submarket,
where the rate increase 130 basis points to 7.1 percent.
2%
08 09 10 11 12 13 14 15 16 17 18*

RENTS:
Asking Rent Trends
Metro United States 1.5% increase in the average asking rent Y-O-Y
Year-over-Year Change

8%
• One year ago, the average rent advanced 5.8 percent
4%
annually, but the rate of growth has slowed over the past
four quarters, reaching $17.16 per square foot.
0%
• The Inner Loop posted one of the strongest paces of rent
growth over the past year as the average increased 10.3
-4%
percent to $25.81 per square foot.
-8%
08 09 10 11 12 13 14 15 16 17 18*

* Forecast
Retail Research | Market Report

DEMOGRAPHIC HIGHLIGHTS

2018 JOB GROWTH* FIVE-YEAR POPULATION GROWTH** FIVE-YEAR HOUSEHOLD GROWTH**


Metro 2.5% 644,400 or 1.8% Annual Growth 246,000 or 1.95% Annual Growth
U.S. Average 1.6% U.S. 0.7% Annual Growth U.S. 1.1% Annual Growth

2Q18 RETAIL SALES PER MONTH

$4,250 Per Household


U.S. $3,925
2Q18 MEDIAN HOUSEHOLD INCOME RETAIL SALES FORECAST**

Metro $64,470 $1.483 Per Person Metro 28.2%


U.S. Median $60,686 U.S. $1,507 U.S. 20.0%

* FORECAST **2017-2022

Lowest Vacancy Rates 2Q18 Buyer Pool Increases as Investors Turn


Attention Back to Growing Houston
Y-O-Y
Vacancy Asking Y-O-Y %
Submarket
Rate
Basis Point
Rent Change • Multi-Tenant: Transaction activity increased 18 per-
Change
cent over the past 12 months, with investors focusing
on Class B/C opportunities selling between $1 million
and $10 million.
Northeast 3.9% -30 $17.24 4.5%
SUBMARKET TRENDS

• Single-Tenant: The average price per square foot slid


CBD 4.0% -120 $24.27 5.2% 3.2 percent over the past year to $271, while the aver-
SALES TRENDS

age cap rate fell 10 basis points to 7.1 percent.


Inner Loop 4.6% 80 $25.81 10.3%
Outlook: West Houston remains a target for investors as
East 4.7% -10 $14.45 1.5% strong demographics and property operations lure buy-
ers to the area.
South 5.1% -100 $14.75 -14.2%

Southeast 5.4% -90 $14.72 5.4%


Price Per Square Foot Trends
Northwest 5.6% 0 $18.48 7.7% Single-Tenant Multi-Tenant
Year-over-Year Appreciation

West 5.6% 100 $21.41 -1.2% 20%

10%
Southwest 6.3% 40 $15.06 -1.4%

0%
North 7.1% 130 $14.11 -5.7%

-10%
Austin County 13.8% 110 $10.05 10.7%

-20%
Overall Metro 5.8% 30 $17.16 1.5%
08 09 10 11 12 13 14 15 16 17 18*

* Trailing 12 months through 2Q18 over previous time period.


Pricing trend sources: CoStar Group, Inc.; Real Capital Analytics
Retail Research | Market Report

10-Year Treasury vs. 2-Year Treasury By DAVID SHILLINGTON, President,


Yield Spread Tightens Marcus & Millichap Capital Corporation
10-Year Treasury 2-Year Treasury
Fed raises benchmark rate, plans for additional increases.
8%
230 bps

The Federal Reserve recently increased the federal funds rate by


280 bps 25 basis points, lifting the overnight lending rate to 2 percent at the
6%

260 bps
conclusion of its September meeting. The Fed noted inflation has
Rate

20 bps
4% broadly reached its target, while household spending and corporate
investment remain robust. The Fed indicated an additional rate
2%

CAPITAL MARKETS
hike this year and projects as many as three increases in 2019.
0%
04 06 08 10 12 14 16 18* Lending costs rise alongside Fed rate increase. As the Fed
lifts rates, lenders have been tightening margins to compete for
loans. Despite these efforts, borrowing costs remain on an upward
Retail Mortgage Originations by Lender trajectory, which is tightening returns and pushing some investors
to seek greater yields in secondary markets. However, though
100%
buyers may try to push back on pricing due to increased loan costs,
some sellers remain convinced that the strong economy and sturdy
75% NOI performance substantiate aggressive pricing and a widening
National Bank
Percent of Total

International Bank expectation gap is the result. If interest rates rapidly surge upward,
50% Regional/Local Bank
CMBS
this gap could quickly widen, slowing transaction activity.
Insurance
25% Financial The capital markets environment remains competitive. As the
Private/Other
Fed tightens policy, global investors have been acquiring Treasurys
0% in order to capture a considerable yield premium, keeping the
13 14 15 16 17 10-year Treasury near 3 percent. Portfolio lenders are providing
debt for retail assets, with leverage typically capped at 60 to 65
* Through Sept. 26 percent. The sector has become increasingly nuanced, with deals
Sources: CoStar Group, Inc.; Real Capital Analytics more scrutinized due to e-commerce competition. Ten-year loan
structures will range between 4.95 and 5.25 percent, depending
on tenancy, location and sponsorship. Continued consumer
National Retail Group spending underpins U.S. growth, supporting retail demand and
driving a 10-basis-point decline in vacancy to 4.9 percent this year.
Visit www.NationalRetailGroup.com

Scott M. Holmes
Senior Vice President, National Director | National Retail Group
Tel: (602) 687-6700 | scott.holmes@marcusmillichap.com

Prepared and edited by


Jessica Hill Houston Office:
Market Analyst | Research Services
Ford Noe Regional Manager
For information on national retail trends, contact: Three Riverway, Suite 800
Houston, TX 77056
John Chang (713) 452-4200 | ford.noe@marcusmillichap.com
Senior Vice President, National Director | Research Services
Tel: (602) 707-9700
john.chang@marcusmillichap.com

Price: $250

© Marcus & Millichap 2018 | www.MarcusMillichap.com

The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no
representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level employment
growth is calculated based on the last month of the quarter/year. Sales data includes transactions valued at $1,000,000 and greater unless otherwise noted. This is not intend-
ed to be a forecast of future events and this is not a guaranty regarding a future event. This is not intended to provide specific investment advice and should not be considered
as investment advice.
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Experian; Moody’s Analytics; Real Capital Analytics; TWR/Dodge Pipeline;
U.S. Census Bureau