FLOCKING TO RETAIL
Houston area sees a broad spike in retail center transactions.
Brixmor Property Group closed 2018 by clearing its inventory and preparing to restock its shelves.
Gone from its portfolio was Northwood Plaza, a north Houston shopping center anchored by a Food City grocery store, which was sold in a fourthquarter deal. That followed the earlier sales of the small Braes Link Center on Stella Link, the H-E-B shopping center on Bissonnet near Cedar in Bellaire, and centers in Spring and Clute.
“For us, it was proceeds we could redeploy for other parts of Houston,” Daniel Sutherland, Brixmor’s vice president of acquisitions and dispositions, said of the Houston sales. “We like properties that can grow year over year over year.”
In realigning its asset mix, Brixmor remains committed to a resilient Houston retail market that has rebounded from Hurricane Harvey and is experiencing robust leasing activity even as employment and population figures are projected to grow. Its Houston portfolio now stands 35 properties accounting for 4.2 million square feet, its thirdlargest market behind New York and Philadelphia. It has 425 centers nationwide.
The churn in its local holdings was part of a broader spike in retail center transactions last year.
According to Real Capital Analytics, Houston saw a record $2.95 billion in sales across 200 retail properties in 2018. The previous record was $2.1 billion in 2007.
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Houston-area sales included not only recognizable properties such as the Heights Mercantile collection of shops and PlazAmericas (formerly Sharpstown Mall), an 850,000square-foot center that opened as Houston’s first enclosed airconditioned mall in 1961, but lesser known neighborhood centers that are increasingly adding internet-resistant tenants such as dentists, veterinarians, fitness and nail salons.
“People need to go to these centers to get services,” said Wendy Vandeventer, a senior vice president with the retail investment sales group at JLL. “Things that you’ve got to do personally, physically that you can’t do online.”
Limited availability for new retail construction and an occupancy rate running at about 95 percent makes Houston retail property attractive to investors, said Ed Wulfe, CEO of Wulfe & Co, a Houston real estate brokerage that specializes in retail properties. Finding opportunities Though retail leasing remains robust, the strength is not uniform across the sector. The vacancy rate at neighborhood shopping centers closed the year at 8.3 percent, according to Colliers International. Singletenant retail and lifestyle centers, on the other hand, finished the year strong, with vacancy rates of just 1.6 percent and 1.9 percent, respectively. Theme/entertainment centers also fared well, ending the year with a 2.5 percent vacancy rate, and the long-suffering mall market posted a year-end vacancy rate of 4.7 percent.
Further retail strength is expected, as JLL is projecting that Houston will add 70,000 obs and 120,000 new residents n 2019.
Brixmor’s portfolio retooling ffered an opportunity for local nvestors to renovate aging hopping centers and update he tenant mix by adding stores and services that may be missing in a neighborhood. Houston-based Williamsburg Enterprises acquired Brixmor’s Klein Square, an 80,836-squarefoot center at 16812 Stuebner Airline in Spring, and Plantation Plaza, a 98,141-square-foot center at 101 Dixie Drive at Plantation Drive in Clute. Both deals closed
in October. Williamsburg plans to renovate and release both, which saw grocery tenants depart.
“We took two centers that were 40 percent occupied,” said Khaled Salem, Williamsburg’s CEO. “They’ll be fully leased with tenants that not only have a national presence, but also a very strong Texas presence.”
Salem was bullish, dismissing questions about the stranglehold online retailers appear to have on traditional retailers.
“We don’t think Amazon is going to completely destroy shopping center retail as we know it,” Salem said. “We think things will change and you have to change with the times. We think there’s always a way to repurpose and reposition these assets.”
A note of caution
A report from Bloomberg found that nationally, December sales of retail centers hit their highest levels since August and that retail real estate investment trusts, of which Brixmor is one, extended their net selling streak to a 16th month. The pace of sales is expected to slow this year, Bloomberg said, especially for strip centers.
Marshall Clinkscales Jr., an executive vice president at Colliers, said he already sees signs that the pace is slowing.
“Nobody sees us continuing to go up, up, up with rents and projects, but nobody sees us crashing either,” Clinkscales said.
Annual rents at neighborhood shopping centers — which vary by location and anchors in the center — range from about $28 to $46 per square foot, according to a fourth-quarter report from Colliers. Tenants are starting to back away from pricier space, Clinkscales said, and owners are starting to reduce rents to lure tenants in some areas.
For Brixmor, which was formed in 2011 by Blackstone Group after acquiring the U.S. operations of Australia’s Centro Properties Group, 2018 was a year to build up is cash reserves so it could buy more property.
Though it hasn’t yet released year-end numbers, the company said in a January news release that it sold 62 noncore shopping centers and other property last year with an aggregate value of $989.5 million. Brixmor reported net income of $147.3 million, or 49 cents a share, on revenue of $306.5 million for the period ended Sept. 30, fed in large part by $119.3 million in profit from the sale of property in the third quarter. It had income of $83.4 million on revenue of $314.5 million the year earlier.
Brixmor’s nearly $1 billion in property sales in 2018 are part of a strategy to limit the markets in which it operates and densify its portfolio within those markets, said Lindsay Dutch, a REIT analyst with Bloomberg Intelligence.
“They’ve taken a heavy hand to the portfolio in terms of selling some of the slower assets,” Dutch said.
The company is in the market for shopping centers with tenants that meet shoppers’ daily needs but still have upside opportunity through the lease-up of vacant spaces, raising rents to market levels, filling anchor spaces with new tenants that appeal to the community, or redevelopment.
Locally, the redevelopments could add mixed-use components such as apartments above retail or medical office space, Sutherland said. He said two area redevelopments are in the works and two more are being considered, though he declined to disclose locations because deals have not been finalized.
Recent projects include building the LA Fitness in its Krogeranchored center on Spencer Highway in Pasadena. The Braes Heights shopping center on Bellaire Boulevard at Stella Link is getting a new facade, landscaping and parking improvements.
Brixmor, which handles its own leasing in-house, has longstanding relationships with Kroger and other grocers, as well as off-price retailers such as Ross, T.J. Maxx, Marshalls, HomeGoods, Burlington and Kohl’s.
“We really strive to have that great synergy and great merchandise mix of strong local operators as well as strong national operators,” said Matthew Berger, Brixmor’s executive vice president and president of its West Region. “We want our centers to be the most relevant centers in the communities that they serve.”
Above: Brixmor Property Group recently added LA Fitness as a tenant at Crossroads Centre on Spencer Highway in Pasadena.
The Braes Heights shopping center on Bellaire Boulevard at Stella Link is getting a new facade, landscaping and parking improvements.
Benjamin Trego, with Arrow Services, works in a former grocery space owned by Williamsburg Enterprises that is undergoing renovations at Klein Square.
Brixmor Property Group will wrap up a major renovation of the Braes Heights shopping center on Bellaire Boulevard in the second quarter of 2019, according to the company.