MARKET REPORT

RETAIL
Houston Metro Area Q2/19
Stout Household Formation Driving Construction;
Western Suburbs Performing Well Retail 2019 Outlook

Density spurring strong rent growth. Household formation will remain CONSTRUCTION:
a key driver of the Houston retail market this year. The infusion of
Development ticks up this year after
nearly 50,000 new households will boost demand for retail space, keeping
3.8 million square feet was completed
vacancy anchored in the mid-5 percent range. Vast suburban sprawl is
encouraging many national tenants to increase their Houston footprint, 4.6 million SQ. FT.
will be completed
in 2018. Builders will heavily focus on
western suburbs and areas just north of
limiting space availability, particularly in strip centers and neighborhood
the core.
centers. Western suburbs like Katy will see an uptick in demand despite
a wave of supply throughout the year. Rent growth should also jump in
these areas as household density and buying power increase. Rental gains
VACANCY:
will be the most emphasized, however, in neighborhoods near the core
where household density is highest, like Montrose, Upper Kirby and areas The absorption of roughly 4.5 million
square feet will keep vacancy at 5.6 per-
surrounding the Texas Medical Center.
0 BASIS POINT
change in vacancy
cent for the second year in a row.
Builders remain active, expanding experiential concepts. Houston sits
only behind New York Price
CityPer Square
in retail Foot Trends
construction this year as more than
4 million square feet isSingle-Tenant
on tap. Grocery expansion will be prevalent with
Multi-Tenant
H-E-B adding four locations and LIDL entering the market. More expe-
24%
riential retailers like dine-in movie theaters and food halls will also make
RENTS:
Year-over-Year Appreciation

their way into the metro. While neighborhoods just north and east of the Gains will fall just shy of the previous
12%
five-year average, driving the average ask-
CBD will witness substantial development, western suburbs are expected
to receive bulk 0%of supply, specifically Katy. Here, roughly 740,000 square 3.0% INCREASE ing rent up to $17.97 per square foot. Last
feet is slated for delivery with restaurants accounting for a sizable piece of in asking rents year, rent growth was 3.6 percent.
-12%small shopping centers continue to proliferate as well.
the total, while

-24%
* 09 10 11 12 13 14 15 16 17 18 19*
Investment Trends
• Though investors remained relatively conservative over the past year,
Local Retail Yield Trends they were quick to act when the right deal was found. Suburban areas
Retail Cap Rate 10-Year Treasury Rate in western sections of the metro attracted a number of private buyers.
12% Meadows Place and Sugar Land were highly targeted areas as cap
rates for small neighborhood centers and strip centers sat in the low-7
9% percent band.
Average Rate

6%
• Older properties in inner-ring suburbs garnered significant interest
from private investors, many of them being entry-level buyers. Small
3% strip malls in need of a rejuvenated tenant blend offered favorable cap
rates to those willing to rehab the centers. Neighborhoods adjacent to
0% I-610 contain many of these assets.
01 03 05 07 09 11 13 15 17 19*
• A mix of private and institutional buyers homed in on Montgomery
County as recently built assets in quickly growing areas sparked inter-
est. Conroe, in particular, received considerable attention with small
shopping centers netting cap rates in the mid-8 percent range.

* Cap rates trailing 12 months through 1Q19; 10-year Treasury up to March 29

Sources: CoStar Group, Inc.; Real Capital Analytics
 Employment vs. Retail Sales Trends 1Q19 –
Price Per Square 12-Month
Foot Trends Trend
Employment Growth Retail Sales Growth Single-Tenant EMPLOYMENT
Multi-Tenant
15% 24%
2.5% increase in total employment Y-O-Y

Year-over-Year Appreciation
Year-over-Year Change

10% 12% • Houston organizations generated 75,600 jobs over the past 12
months with significant gains in the professional and business
5% 0%
services and manufacturing sectors. Each sector generated
roughly 17,000 new positions.
0% -12%
• The education and health services sector produced about 11,500
-5%
-24% jobs, further strengthening the metro’s large medical sector.
09 10 11 12 13 14 15 16 17 18 19* 09 10 11 12 13 14 15 16 17 18 19*
Additionally, 6,100 government workers were added.

Retail Completions Local Retail Yield Trends

Completions Absorption Retail Cap Rate CONSTRUCTION
10-Year Treasury Rate
8,000
12%
3.9 million square feet completed Y-O-Y
Square Feet (thousands)

6,000
9%• Completions faltered after 5.4 million square feet was finalized
Average Rate

one year earlier. Multi-tenant structures accounted for half of all

4,000 6%
development during the past year.

2,000 3%• Construction was most prevalent in northern sections of the

metro like Spring and the Woodlands as a couple 100,000-plus
0 0% square-foot retail centers were delivered. Areas in Missouri City
09 10 11 12 13 14 15 16 17 18 19* 01 03 05 07
and Sugar Land also 09 11
witnessed 13 15
strong 17 19*
construction activity.

Vacancy Rate Trends

Metro United States VACANCY
12%
20 basis point increase in vacancy Y-O-Y
9%
• Market vacancy increased 20 basis points for the second
Vacancy Rate

consecutive year, pushing the measure to 5.7 percent.

6%
• Demand for the CBD’s limited inventory rose substantially,
3% pushing the area’s vacancy rate down to 4.5 percent — the second
lowest rate of any submarket in the metro. Strong net absorption
0% in the Southeast part of the market also kept vacancy in check.
09 10 11 12 13 14 15 16 17 18 19*

Asking Rent Trends

Metro United States RENTS:
8%
3.8% increase in the average asking rent Y-O-Y
Year-over-Year Change

4%
• Strong leasing activity metrowide supported steady rent growth,
bumping the average asking rent up to $17.65 per square foot. Last
0%
year, the reading advanced 1.1 percent.

-4% • Rental gains were most pronounced in the CBD and Southwest
submarket. Robust household formation is bringing retailers to these
-8% parts of the metro in strong numbers.
09 10 11 12 13 14 15 16 17 18 19*

*Forecast
Sources: CoStar Group, Inc.; Real Capital Analytics
Demographic Highlights

2019 Job Growth* Five-Year Population Growth** Five-Year Household Growth**

Metro 3.2% 621,600 or 1.7% Annual Growth 237,500 or 1.8% Annual Growth
U.S. Average 1.3% U.S. 0.6% Annual Growth U.S. 1.0% Annual Growth

1Q19 Retail Sales per Month

$4,246 Per Household

U.S. $3,971
1Q19 Median Household Income Retail Sales Forecast**

Metro $68,420 $1,522 Per Person Metro 25.4%

U.S. Median $64,259 U.S. $1,544 U.S. 16.9%
* Forecast ** 2018-2023

SUBMARKET TRENDS SALES TRENDS

Competition for Service-Centric Properties
Lowest Vacancy Rates 1Q19 Intensifies; Cap Rates Creep Lower
• Multi-Tenant: Transaction velocity picked up about 24 percent
Y-O-Y Average
Vacancy Y-O-Y % as service-oriented centers were highly sought after. A competitive
Submarket Basis Point Asking
Rate Change
Change Rent bidding climate pushed the average cap rate down 20 basis points to
7.2 percent.
Northeast 4.3% -70 $17.27 -1.9%
• Single-Tenant: Trading activity among single-tenant assets re-
CBD 4.5% -320 $28.14 15.9% mained on par with the previous year. During that time, the average
first-year yield dipped 30 basis points to 6.4 percent.
East 4.6% -40 $13.98 -0.4%
Outlook: Capable of generating high levels of foot traffic, restaurants are
seen by many investors as a new type of anchor tenant. Competition for
Inner Loop 5.0% 50 $25.09 2.0%
restaurant-anchored retail centers will heat up as the year progresses.

South 5.2% 100 $16.44 -0.8%

Northwest Employment
5.3% vs. Retail
0 Sales Trends-2.8%
$17.93
Price Per Square Foot Trends
Employment Growth Retail Sales Growth Single-Tenant Multi-Tenant
Southeast 15% 5.7% 0 $15.55 7.8%
24%
Year-over-Year Appreciation
Year-over-Year Change

West 10% 6.1% 30 $22.31 4.3% 12%

Southwest 6.2% -10 $16.56 9.5% 0%

5%

North 6.5% 60 $14.97 8.9% -12%

0%

Overall Metro 5.7% 20 $17.65 3.8% -24%

-5%
09 10 11 12 13 14 15 16 17 18 19* 09 10 11 12 13 14 15 16 17 18 19*

* Trailing 12 months through 1Q19 over previous time period

Pricing trend sources: CoStar Group, Inc.; Real Capital Analytics
Retail Completions Local Retail Yield Trends
Completions Absorption Retail Cap Rate 10-Year Treasury Rate
8,000
 1Q19* Retail Acquisitions CAPITAL MARKETS
By Buyer Type
By DAVID G. SHILLINGTON, President,
Cross-Border, 34.9% Marcus & Millichap Capital Corporation
Other, 2.2%
• International pressures weigh on domestic outlook; Fed remains
patient. Amid ongoing trade disputes between the U.S. and China
and slowing growth throughout the European economy, the global
Private, 47.2% Equity Fund economic outlook has become more cautious. Market volatility,
& Institutions, 11.9%
combined with muted sentiment, has sponsored a flight to the safety
of Treasurys, pushing the 10-year yield below 2.6 percent. While
Listed/REITs, 3.7%
domestic growth has moderated recently, the waning impact of the
tax cut stimulus will likely trim forward estimates further. As a result,
Retail Mortgage Originations the Fed decided to cease reducing its balance sheet reduction through
By Lender quantitative tightening by September and removed the potential for
rate increases through the remainder of the year. The bond market
100%
has begun to price in a much more dovish Fed, with flattening interest
Percent of Dollar Volume

75% CMBS rates reflecting more caution. Fed officials will likely focus on the
Reg'l/Local Bank intersection of a global growth slowdown and continued labor market
50% Nat'l Bank/Int'l Bank strength to refine their plans moving forward, keeping interest rates
Financial/Insurance stable for the foreseeable future.
Pvt/Other
25%
• Malls, legacy big-box players cloud otherwise optimistic retail
landscape; underwriting remains conservative. Uncertainty
0%
surrounding legacy retailers and the ongoing shift of consumer
14 15 16 17 18
purchasing preferences to online sources have begun to weigh on
* Trailing 12 months through 1Q19 retail sentiment, with lenders proving more cautious and conservative
Include sales $2.5 million and greater than in prior years of the cycle. Active lenders include local, regional
Sources: CoStar Group, Inc.; Real Capital Analytics and national banks, and insurance companies, with a primary lender
focus on net-leased assets and premier mixed-use structures being
highly desirable. Meanwhile, outlying malls and non-credit tenants
will undergo much more scrutiny. This has created a two-tier market
National Retail Group structure, with loan-to-value (LTV) ratios in the 55 to 75 percent
Scott M. Holmes range depending on borrower, asset and location factors. Mezzanine
Senior Vice President, National Director | National Retail Group and bridge loan structures have been more frequently used in this
Tel: (602) 687-6689 | scott.holmes@marcusmillichap.com environment, with owners undertaking capital improvements at high-
er leverage ratios on the short-term debt before seeking long-term
Prepared and edited by
Brandon Niesen financing options once their operations have been proved.
Research Associate | Research Services

For information on national retail trends, contact:

John Chang
Senior Vice President, National Director | Research Services
Tel: (602) 707-9700 | john.chang@marcusmillichap.com

Houston Office: Memphis Office:

Price: $250

Ford Noe Regional Manager Jody McKibben Vice Pr

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Houston, TX 77056 Memphis, TN 38137
(713) 452-4200 | ford.noe@marcusmillichap.com (615) 997-2860 | jody.mckibbe

Indianapolis Office: Miami Office:

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,
Josh
express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level Caruana
employment Vice President/Regional
growth Manager
is calculated based on Scott
the last month of the quarter/year. Sales data Lunine Vice Presid
includes transactions valued at $1,000,000 and greater unless otherwise noted. This is not intended to be a forecast600 E. 96th
of future Street,
events andSuite
this500 5201
is not a guaranty regarding a future event. This is not intended to Blue Lagoon Drive, Suite
provide
Indianapolis, IN 46240 Miami, FL 33126
specific investment advice and should not be considered as investment advice.
(317) 218-5300 | josh.caruana@marcusmillichap.com (786) 522-7000 | scott.lunine@
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