Is Retail the New Premier Asset Class?

While office and industrial may be ending their run, retail is poised to take their place in investors' hearts.

Marcus & Millichap Houston/The Woodlands manager Dave Luther (here with colleague Andre Satchell) spoke at Bisnow’s Retail Summit Friday, telling the crowd that a larger percentage of those investors are out-of-towners—last year, 50% of his sales were to Texas buyers, 25% went to Californians (especially exchange investors, which are being aggressive and quick), and 25% were foreign (especially Chinese) and other states. He's got his eye on some emerging submarkets, including the East End--where he has some redevelopment listings. Dave sees one downside: Investors are starting to get nervous about value-add turnaround time. (Will they be able to get renovations done and push rents before the market peaks?)

UCR Houston managing partner Ed Page (left, with Frankel Development Group’s Bruce Frankel) doesn’t know what normal is in retail anymore. Before 2008, there were lots of power centers and malls under construction. Now there are virtually none, and instead outlets have three times the square feet they did then. Outlets aren’t just growing; they’re moving in way closer to existing regional malls and luxury retailers are getting in the game. Ed says some brands are starting to open outlet stores in traditional shopping centers (which he thinks will be confusing to consumers). One of Ed's most active clients is Public Storage, which is doing 10-plus deals a year in Houston, and can get competitive with multifamily buyers.

Transwestern managing director Nick Hernandez is leasing a Houston game changer, the River Oaks District, our first walkable luxury mixed-use center. When developer Oliver McMillan told him they wanted to ask for $200/SF (and over $38 net), he told them they were crazy. He immediately had to apologize; tenants are paying, and the project is 70% pre-leased. It’ll celebrate its grand opening Sept. 2. Nick thinks 2016 and 2017 will see a slew of retail deliveries.

Read King principal Jeff Read (left, with NewQuest’s Dean Lane and Wolff’s David Hightower) says the two biggest retail hot spots are parallel corridors about five miles west of the previous retail hub: a four-mile stretch west of the Grand Parkway (including Katy and Cross Creek Ranch) and South Cypress. Both have multiple developments in the dirt. He says grocery-anchored and daily needs shopping are still king, and almost every shopping center in Houston today has a medical piece. That’s why he opened Read King Medical in ’09—that year half his deals were medical, and he’s expecting an uptick in 2015. (Shop and a shot. It just makes sense.)

Evergreen Commercial Realty principal Lilly Golden (snapped with Houston Group’s Lawrence Schanzmeyer) has been particularly active in Katy and says it wasn’t an “it” market when she began, but it’s been one of the fastest-growing retail markets in the country. Retailers like it because it’s a homogenous market and its daytime population has been rapidly increasing with new office development. Lilly leases Katy Ranch and is focusing more on increasing visits and keeping people there longer. That’s translated into more community involvement, like putting Katy-centric tenants (including a cheerleading academy) in the back of the project.

NewQuest partner Dean Lane (reading up by the fireplace in the Houstonian) was awarded a 34-acre tract in Katy last week, and says he competed with eight apartment developers and no retailers, which meant he had to put it under contract $2 higher. (In ’08, he was paying by the acre or less than $2/SF. Now Grand Parkway land is $6 to $8.) That makes it harder to develop, and demonstrates why so little has gone into the dirt lately.

Weingarten CFO Steve Richter (right, with Wilson & Franco CEO Mike Wilson) says Weingarten is enjoying the highest occupancy in its history, 95% overall and 98% in boxes over 10k SF. The portfolio’s posting 13% rent growth this year, while TI and lease terms have stayed stable since ’09. Steve says 27% of his small shop leases in the last 12 months were restaurants, 28% were service and 3% were medical (that’s growing). Mike has been working with Costco--he’s saved it $750k in taxes since 2010--and says it’s opened eight stores in Texas in the last four years (including in The Woodlands on Friday), and has four more planned in Houston.

Here’s our sponsor WaterLogic’s Charlie Racusin, Troy Goodell, Leslie Keen, Paul Marks and John O’Donnell. The firm saved Weingarten $534k and 117 million gallons of water on 38 properties in less than three years. It’s also working on retail properties with Wulfe & Co, MetroNational, Simon, Unilev, Levcor, Moody Rambin, CBRE, MC Management & Development, and Barnhart Interests.

Our sponsor WLS Lighting Systems used the French lighting balloon product by Airstar to light the Bisnow Dallas Networking Event this year. Space Lighting, an affiliate company of WLS, is located in Deep Ellum and has a multitude of cool event lighting products to help spice up, and light up, outdoor gatherings. 

We’ve got more coverage coming up on Wednesday! Don’t miss it.