Retail market holding steady
Despite oil’s downturn, one of city’s top brokers sees brighter times continuing
W HEN Southern Methodist University banned alcohol on campus in the late 1980s, student Nick Hernandez and his fraternity brothers started renting empty warehouses in Deep Ellum to keep the parties going. That was just before the east Dallas neighborhood became an entertainment hot spot with restaurants, tattoo shops and residential lofts.
“There was absolutely nothing in Deep Ellum. But then somebody opened a bar and somebody opened a restaurant because all the SMU kids were down there every weekend,” said Hernandez, now one of Houston’s top brokers of local retail space.
That experience, combined with being
brought up in a family that owned Mexican restaurants in Kerrville and Austin, helped Hernandez later make the decision to go into the real estate business, specializing in finding space for restaurants and retailers.
Hernandez, a Houstonbased managing director for the Transwestern commercial real estate firm, has also been involved in nearly every mixed-use project that has come down the local development pipeline.
He recently spoke with the Chronicle about the city’s retail market and the impact of low oil prices and other world events. Edited excerpts follow.
Q: So what’s happening in Houston’s retail market? Why is it doing so much better than other sectors of commercial real estate?
A: It’s primarily a simple supply and demand curve. We went from the early 2000s up until 2007 building 6 to 10 million square feet of retail a year, to almost immediately going to right around a million a year. The million square feet is primarily Wal-Mart, H-E-B, Kroger and smaller strip-center space. That continued on until probably 2013 or 2014, so Houston continued to be a strong performing retail market. And retailers wanted to expand here, so space kept getting tighter and tighter. Now we’re at an all-time high occupancy-wise and rents are at an all-time high, so we’re beginning to see development.
Q: What’s been the impact of low oil prices?
A: Our restaurant clients say that their sales are off 10 percent. Their foot traffic is consistent with what it used to be, just the spending has decreased. The higher-end guys say primarily it’s in the wine. So if someone’s walking in a restaurant with an expense account and they’ve got a group of 10 people and they used to start off with a $200 bottle of wine and kept that rolling through the night. Now it’s a $100 bottle of wine rolling through the night.
Q: You’ve helped find tenants for River Oaks District, Houston’s newest luxury shopping venue. I went there late last year, shortly after it opened, and there weren’t many people shopping. It made me wonder how it’s going to make it.
A: With luxury brands they don’t need to ring their cash register very often in a day to make their numbers. Unfortunately we didn’t have a lot of the restaurants open and those are the people who generate traffic on a much more regular basis. If you look at the kind of sales volume the restaurants are doing that are open now, and we’re not even halfway finished with the restaurants that will be in there. The movie theater is doing tremendous business. Equinox was their No. 1 presale in the country. Steak 48 is tracking at monster volumes, maybe the highest volume in the city, and Hopdoddy is performing extremely well. I can tell you the two stores directly in front of Hopdoddy, the sales have changed so much you really can’t wrap your head around it.
Q: How do national or international retailers perceive Houston? A: What I think has changed dramatically is the global perception of Houston over the last 10 years as a true gateway market in retailers’ minds. That didn’t happen before. We will get wind of a world-class restaurant in San Francisco, and 10 years ago you’d cold-call and them and they’d laugh at you. They’d never go to Houston. And now Houston is on everybody’s list.
Q: But I would think the energy downturn would create some headwinds, no?
A: We haven’t experienced that in the retail sector. Obviously it has to affect sales, but it’s part of the deal. And if you look at the way Houston has weathered the storm to this point, it’s pretty strong. I think retailers understand that there are cycles in the economy wherever you are. And there will probably be times Houston is going gangbusters, and the rest of the country is not just like it was pre-oil crisis when the rest of the country was in recession and Houston was on fire.
Q: What restaurant or retailer do you think Houston is still lacking?
A: Restaurants are tough because honestly, this might be the strongest restaurant market in country outside of New York. I wish we had a Beretta store. I love the Beretta store in Dallas. I cant wait till we get an Amazon store.
Q: What’s an Amazon store like? A: It’s primarily books.
Q: What was the last really cool retail concept you saw?
A: The neatest one I’ve heard about lately is Sonos.
Q: What’s that? A: Sonos is the system where, like my house is completely wired with speakers all over. I have an app that controls every speaker, every radio. You can play any selection of music you want and they have all kinds of different speaker systems. They felt the need to open a brick-and-mortar store, which speaks to fact that the internet is great and all, but people want to experience the brand, touch it and feel it.
Q: Any other trends you’ve noticed that haven’t hit Houston yet?
A: Two big things everyone’s talking about are nitrogen ice cream and poke restaurants. Not Pokemon, but the tuna. There are a lot of really crazy, interesting entertainment concepts that are popping up: indoor ski hills, indoor putt-putt golf with microchipped balls. We’re getting bowling concepts now. Lucky Strike was on the very front end of that, but now you’re looking at people like Punch Bowl Social. Indoor zip lines. There’s just a big push in enter- tainment retail now.
Q: What do you think people might be getting wrong today, whether it’s a new development or a restaurant concept?
A: I don’t know what people are getting wrong, but I can tell you terrorism worries me a lot. If it happens here, it would change people’s psyche as it related to shopping and dining. Of course, the economy is always a worry, but it’s cyclical. It will come down and go back up. It always does. From a city perspective, congestion worries me. We’re getting to a point where you just can’t take any more land to build more freeways. So a mobilization solution has got to happen for Houston to grow to be a successful world-class city.
Q: Are a lot of people in your industry talking about terrorism?
A: It’s kind of like the unspoken worry. I can tell you that when I wake up in the morning, the first thing I do is look at the price of oil. I look at the 10-year Treasury, and I look to see there hasn’t been any terrorism. That’s the first thing I do when I pick up my phone.