Retail real estate sector shows signs of downshift
Houston’s office market is stabilizing and investors’ appetite for commercial real estate is growing, but cracks are starting to show in the city’s long-robust retail sector, analysts said.
National retailers are closing stores and more fallout could be seen among banks and medical facilities, said Jason Gaines, a senior vice president with NAI Partners, a real estate services firm that hosted a Wednesday morning panel on commercial real estate.
“One thing that I could see happening ... is some of the banks starting to give back some of their real estate,” Gaines said. “They’re intentionally saying, ‘Don’t come here. Do your banking on the phone, on the internet.’ ”
At another real estate panel near the Galleria, brokers with CBRE voiced a mostly optimistic tone of recovery from the fading energy slump in an event themed “slower is not sluggish.”
“The worst is behind us,” CBRE managing director Cody Ambrister said.
The health of Houston’s
commercial real estate market in recent years has been a mixed bag.
The office and multifamily markets continue to struggle, while retail and industrial space have held up much better.
Vacancies left by downsizing energy companies during the recent downturn have been partially offset by growth in industrial real estate, especially warehouses, fueled by steady demand for consumer goods and a retail sector that until now has remained relatively healthy.
“Consumer goods picked up the slack where energy let off,” said Faron Wiley, first vice president at CBRE.
Ambrister said that trend amounted to “transforming the industrial landscape” in Houston.
The grimmest outlook surfaced regarding the market for office buildings, which CBRE senior vice president Kristen Rabel called “not robust by any means” but also headed for slow growth.
As Houston recovers from the energy slump, which took out struggling oil and gas companies as well as thousands of highpaying jobs, businesses in the market for office space are taking advantage of lower rental rates in the city’s skyscrapers, many of which have room to spare.
“Tenants are definitely focusing on sublease space. It’s foolish for them not to,” NAI vice president Alex Taghi said.
Areawide, available sublease space has fallen from its peak of 12 million square feet in the third quarter of last year to 11.1 million square feet earlier this year, NAI data show. Before 2014, sublease space had been averaging 3.3 million square feet.
Rabel said contracts on more than 4 million square feet of sublease space are set to expire in 2018, raising questions of how landlords will compete to fill the new vacancies.
While the worst of the slump appears to be over, last month Canadian pipeline company Enbridge said it would leave downtown and relocate more than 700 employees to the Galleria area.
Other top energy players, including Shell Oil Co. and Exxon Mobil Corp., have left downtown as well.
Brokers say a shift is taking place in the central business district, where towers once rated as top-class are becoming outdated as new skyscrapers go up.
Bank of America is planning to leave its longtime downtown home to move into a new building under development nearby.
Law firms, Taghi said, are also driving demand for new space.
The new skyscraper at 609 Main has attracted three law firms: Kirkland & Ellis, Hogan Lovells, Orrick and Herrington & Sutcliffe.
“Law firms are going to leave a lot of the buildings we’d always considered Class A towers,” Taghi said. “They want the bells and whistles to attract talent.”
Some landlords are spending big to compete with the nicest and newest properties.
Brookfield Property Partners is in the midst of a sweeping renovation and makeover of its Allen Center office complex downtown.
“It’s all about recruitment and retention,” Taghi said. “You’ll start seeing a lot of money dumped into these older buildings just to remain competitive.”
In the hotel market, new properties are forcing competition.
Revenue per available hotel room continues to fall in Houston, as it has since 2015, CBRE senior vice president Rahul Bijlani said. He attributed the decrease to supply, not demand, after a large number of hotels opened in the years following the shale oil boom.
With about 85,000 hotel rooms, Houston still has about 19,500 in the pipeline, Bijlani said, though he doubted that all of them will be built.
“Hotels should make a comeback in the second half of this year,” he said. “It’s safe to say the worst is behind us.”
In the industrial market, a relatively strong performer of late, some areas are soft.
“The north and southwest submarkets are still pretty shaky,” NAI’s Chris Caudill said. “We’re still seeing landlords giving pretty decent concessions to tenants. I think that trend is going to continue over the foreseeable future.”
In retail, all eyes are on national news of teetering franchises poised to fold under the pressure of e-commerce, though Houston’s market has soundly resisted the gloom and doom that has spread elsewhere.
“The fundamentals are still very strong,” CBRE vice president Russell Janicek said, also noting that there are “more pending closures upon us.”
There’s already been some fallout among medical users, such as walk-in clinics and emergency centers, Gaines said.
There could be more as many of the newer medical facilities were expensive to build out and may not have the customer base to sustain them all.
Gaines said he’s less concerned about restaurants, despite a recent space of closings.
“Restaurants are kind of a shell game,” he said. “When one fails, another will go in and replace it.”