Houston’s Retail Performance During The Holidays Was A Mixed Bag

Early reports of how Houston's retailers performed during the 2020 holiday season are starting to roll in, and the news is mixed.

Large national and regional retailers deemed essential businesses, value-oriented big-box stores and tenants in suburban retail centers appear to have weathered the anticipated storm, according to brokers and landlords.

In contrast, smaller mom-and-pop businesses and restaurants in Houston's urban core struggled in December as the coronavirus pandemic continued to affect foot traffic and keep workers away from the office towers within Houston's Inner Loop.

Tenants are still in the process of reporting monthly sales numbers to their landlords, and brokerage data is still pending, but as 2020's deferred rent comes due, it's likely that more retail pain is coming in the first half of 2021.

The performance of Houston’s retail sector during December was all over the board, according to Wulfe & Co. Senior Vice President Kristen Barker. The firm leases about 8M SF of retail space in the greater Houston area.

Value-oriented big-box retailers like Ross continued to enjoy strong sales over the holidays, as those companies have not been at risk of losing much business to online retailers, Barker said. Others, like Best Buy, are still trying to reformat their stores in a way that can be competitive with e-commerce juggernaut Amazon.

Sales of luxury goods also did well over the holiday period, and gyms and fitness tenants were active in the market during December, looking for big-box space or adequate square footage to open new facilities.

“There are gyms that are active right now. We're getting ready to sign a new gym lease. And there are a lot of backfill opportunities for those vacancies and other gyms that are looking,” Barker said.

Streetwise Retail Advisors Managing Partner Ed James said that many of the national retailers deemed essential businesses, such as grocery, pet supply and hardware stores, enjoyed record sales throughout 2020 including the holiday season. Streetwise oversees about 1.5M SF of retail space in Houston. 

“From a retail standpoint, I would say the theme is, the bigger boys benefited. The people who got branded as essential retailers really benefited,” James said. “The losers, of course, have been restaurants, entertainment, health clubs, anything with a social aspect to it has gotten absolutely hammered."

Not all restaurants struggled equally. Early feedback indicates Wulfe & Co.'s restaurant tenants with ample patio space did well, as did those that have embraced a takeout delivery or curbside food model, Barker said.

“The ones that had the patio seating opportunities, that did the takeout, they tended to get through it a little bit better than some of our restaurants that weren't able to pivot like that, and are still kind of suffering through everything,” Barker said.

Barker noted that, in particular, suburban restaurants did much better than their urban core counterparts, which she attributed to the fact that most Downtown Houston office workers continued to work from home during December.

“The suburban has been doing a lot better because people are working out of their homes, so they've seen stronger sales,” Barker said.

Satya Inc. CEO Sunny Bathija said the performance of tenants in his firm’s 16 suburban retail centers across greater Houston has also been mixed, but the majority experienced decent sales during the holiday season.

“I can tell you that 70% to 80% of our tenants did well. They did not struggle. But there were a few sectors which still had struggle, especially with children’s activities, like children's health clubs or children’s play school,” Bathija said.

Around 20% to 30% of Bathija’s retail tenants in Houston are continuing to have some financial issues, but the firm is still trying to work with those tenants and figure out a repayment schedule for deferred rent from last year, he said.

Bathija said the confidence of many of his tenants went up during December, and most have some optimism about 2021.

“I don't think there'll be too many people, at least in the suburban retails, who are going to go and fold up,” Bathija said.

While some retail businesses thrived in 2020, others did not. Houston’s smaller mom-and-pop retailers have been particularly hard-hit. Many of those businesses were not deemed essential in the earliest days of the pandemic and had to close for several weeks in March and April.

James said that without the financial buffer enjoyed by larger corporations, it has been much harder for those businesses to survive.

“Their revenue has been impaired, but the rent hasn't gone away. They may have done a short-term deal with the landlord to deal with the pandemic. But now, going into [2021], the landlords are [saying], 'Hey, I want money, we already gave you a deal,'” James said.

Barker said that prior to the holidays, mom-and-pop tenants were more likely to be the ones saying that the holiday season would determine whether they could continue in 2021. However, she hasn’t heard of any pending closures yet as a direct result of lackluster December sales.

“We did have a bunch [of closures] before the end of the year. I haven't had any of my tenants close yet in January. I guess it's just too soon,” Barker said.

James said it is rare to hear national or strong regional tenants say that a strong or weak holiday season will determine the future of a particular store.

“Their sales may be down and they may say, 'Hey, we're going to give it a go, but man, our sales are down.’ And you have to watch it, but they have the wherewithal to wait to see if this is going to come back,” James said.

About 6.4% of Houston’s 363M SF of retail space was vacant during the third quarter of 2020, up from 6.1% during Q2 and 5.6% during Q3 last year, according to JLL’s Q3 2020 retail report. Figures for Q4 2020 are not yet available, but Barker said landlords have generally not sought to lower asking rents.

“I do not see the rent reductions that I think tenants expect. Landlords are holding the line on their rents, especially for prime locations,” Barker said.

Retail stores across the country took a hit in 2020, as e-commerce became the preferred way to shop for many risk-averse customers. Subsequently, many retailers deferred new leasing activity or expansion plans. But since the announcement of viable vaccines in the fourth quarter, Bathija has noticed significantly more leasing activity across his portfolio.

“I think just in December, I must have signed eight or 10 new leases,” Bathija said. “This whole thing has started after the vaccines were announced.”

But retailers must also face the reality of paying back deferred rent from the first few months of the pandemic. Barker noted that much of the rent relief was transferred into 2021 as an amortized payback, meaning that for many retail tenants, higher rents will start being due this month.

That coincides with several Houston-area counties being forced to roll back their in-store occupancy from 75% to 50% this week, after the region crossed Texas’ hospitalization threshold. As a result, Barker anticipates further fallout in the retail sector.

“I think there's going to be a lot of phone calls to landlords in the first quarter asking for more relief. And I don't know that our landlords are in a position to offer any more than they already have,” Barker said.

James said he agreed that the sector is going to see tenants that still require assistance in 2021 and that both landlords and tenants will need to make some decisions about whether those leases continue or whether it’s time to close.

“We already lost some people; there are people who went out of business already. So people do have some vacancy. People don't want more vacancy. Retention is going to be a big issue, we just don't know how big yet,” James said.