Tight Houston Retail Market Stokes Fierce Competition And Mismatched Expectations

Houston’s retail market fundamentals look great. Occupancy has been about 95% for nearly a year, rents are rising, and space is in high demand.

Yet those excellent numbers come with a host of problems.

A mismatch between landlord and tenant price expectations is making deals harder to pencil, while store brands that need significant acreage face buyers who can’t let go of the high land prices they saw three years ago, panelists said at Bisnow’s Houston Retail and Mixed-Use event at the Westin Houston Memorial City on Tuesday. Add in severe weather, and it’s been a tough year for many Houston retailers. 

“In my perspective from my clients … it used to be that Houston was such an affordable city,” Partners Real Estate partner Joan Collum said. “In the last 10-plus years, we’ve seen the price of land go up, and as we’ve had our highs and lows, it seems that land prices never come down.” 

As Collum has searched for 10 to 12 acres for her client Floor & Decor to open a new store, she encountered sellers that had land under contract years ago for a high price. Even though it didn’t sell, a number is stuck in their minds, she said.

But Crystal Allen, managing director of Houston retail for Transwestern, said with qualifiers, she is seeing some prices lower.

“The number that was in their head, I’m starting to see that shift down a little, in some instances,” Allen said. “Hopefully, that continues.” 

Texas, particularly Houston, is the strongest market for many retail clients, she said. The same is true for Floor & Decor, which sees its highest sales in Texas out of almost 300 stores, Collum said.

That pushes executives to strike deals despite elevated prices.

“Every time we take a deal to committee, the phrase is, ‘Well, it’s Texas. We’ll do good business,’” Collum said.

Houston’s propensity to flood is also an issue when searching for space. Floor & Decor would prefer to reuse an existing building, but Hurricane Harvey led to policy changes that are still impacting the feasibility of using previously flooded spaces, Collum said. 

“In certain areas, the flood control district’s requirements are such that we cannot reuse the building because you can only put 50% of the taxable value into that building,” she said. “Our building, ground up, is about $10M, so that’s made it difficult.” 

Houston’s weather has taken its toll on the restaurant industry this year, said David Littwitz, owner of Littwitz Investments. Storms cut off power to Houston restaurants multiple times, spoiling inventory. People are also less likely to eat out when they are busy fixing up their homes, Littwitz said. 

This has kept restaurant business flat even as Houston moved up in the rankings of food cities nationwide, and occupancies remain elevated, creating competition for space that is only getting more expensive, he said.

“High interest rates have made it a challenge. High insurance costs through triple-nets have made it a challenge,” Littwitz said. “The flip side of that, though, is that there is no shortage of people who want to open a restaurant in this town.”

Just because someone can open a restaurant doesn’t mean they can operate successfully, he said. This could create interesting opportunities for some clients come early next year, Littwitz said.

“I think there will be some more people closing, where the fourth quarter just doesn’t quite do it for them,” he said. 

Some retail tenants have gotten over their skis, which can lead to their downfall, Collum said. Tuesday Morning, which filed for bankruptcy and closed all stores last year, expanded too much to compete with other Class-A retailers, she said.

“When you do that, the rent goes up, your size goes up, your occupancy cost goes up, and they’re not doing the volumes,” Collum said.

Many big-box stores occupy strong real estate, though, and shuttered stores won’t take long to fill up. Allen said she was surprised by how quickly Bed Bath & Beyond spaces filled up, given their size.

“There’s been so many tenants still wanting these spaces that the rents have actually gone up for these spaces and for what these box tenants traditionally would pay,” she said.

It has led to a major shift since some tenants will only pay in the low teens per SF. But many big-boxes have traded in the high teens per SF, she said. That could be sustainable and permanently change the Houston retail landscape, or it might be a blip, Allen said.

Tenants are asking for more tenant improvement allowances than they have in many years, Collum said.

“Now they want a $250K, $300K landlord contribution, and it’s hard to make those numbers work,” she said.

Wage growth is outpacing inflation, so it is becoming more difficult to get deals to pencil, Cheyenne Construction Group President Brent Richardson said. But deals are still moving forward, and he hopes the macroeconomic environment will brighten soon.

“Once we see a lessening of inflation, that’s going to slow down that wage growth,” Richardson said. “As the market stabilizes, that gap between buyer and seller expectations is going to narrow.”

That should increase transaction volume for Houston retail, which is expected to pick up late this year or in the first half of 2025, he said. 

Panelists agreed that despite the challenges, they are lucky to be working in Houston, where continuous population growth sustains retail demand.

“Overall, it's a healthy market,” NewQuest Properties Development Partner Josh Friedlander said. “For every tenant that drops out, there's a new tenant that wants to take the space.”