Report forecasts strong demand for area retail space

Employment growth and a rising population are expected to fuel retail demand in the area this year despite tepid job gains in the energy sector as the industry slowly recovers.

A recent report by commercial real estate firm Marcus & Millichap reported lower vacancy rates and higher rent in the first quarter, and it forecasts that trend to continue throughout the year. It expects greater investments from buyers throughout the country as demand outpaces supply, particularly in fast-growing areas such as Sugar Land, Katy and The Woodlands.

“Investors are taking a close look at Houston retail because how well our market has held up despite the drop in oil prices,” said David Luther, first vice president and district manager in Marcus & Millichap’s Houston office.

The firm projects developers to build 3.6 million square feet of retail space this year, down from the 5.1 million added last year. But it expects retailers to absorb 4.1 million square feet, driving the average vacancy rate below 6 percent.

Already, 1.4 million square feet of retail space opened in the first quarter. Baybrook Mall’s 270,000-square-foot expansion accounted for the largest project.

Another 2.8 million square feet of retail space is under construction throughout the area. Twothirds is pre-leased, an indication of the strength of the market, Luther said.

“The fundamentals are very strong,” he said.

The overall strength of the local market sets Houston apart from other U.S. cities, where many major retailers are closing stores. Luther said shopping center landlords with more experiential or serviceoriented tenants face less risk than those with stores selling soft goods and other items easily bought online.

“It’s very important for shopping center owners and investors to classify these tenants,” he said.

The average rental rate rose in the first quarter to just over $17 a square foot, the highest rate in a decade.

Luther said the Grand Parkway development has created considerable retail demand. But he cautioned that some retailers might not be able to afford such high rent until more residential developments are occupied.