Inflation Concerns See Retailers Clinging To Their Real Estate

Shaky consumer sentiment amid rising inflation may translate to companies holding fast to their Houston real estate, with local retail vacancy reaching its lowest level since the third quarter of 2018.

Houston retail demand was still healthy as of the close of Q2, according to new data from JLL, and average rents are now $19.31 per SF, a market high.

Vacancy hit a nearly four-year low of 5.4%, which JLL associated with companies holding onto their spaces in a cloudy economic climate.

"Total vacancy was at its lowest level since Q3 2018 as tenants held steadfast to their real estate amid macro-economic uncertainty," the report says.

"People expected for there to be a lot of displacement in the retail world due to Covid, inflation, etc.," JLL Vice President of Retail Advisory Services Chris Burns told Bisnow. "Some mom-and-pops fell out, but we saw that tenants tended to adapt and find ways to remain profitable."

A June national retail sales report from Marcus & Millichap also predicts investors will seek retail real estate to brace against possible future disruption.

"Well-located, necessity-centric retail properties that exhibited resilience during the health crisis should appeal to a broader buyer pool," the Marcus & Millichap report said. "Specifically, single-tenant net-leased assets should attract more capital, as these buildings require less management than other property types and provide investors with long-term cash flow."

The decrease in vacancy comes as consumer sentiment has fallen to 58% and prices for essentials like gasoline, shelter and food have risen sharply, per June 2022 consumer price index figures. Goods overall jumped 9% in the last 12 months, with new vehicles seeing a 12-month increase of 11% and apparel leaping 5%. The largest increases by far were for energy-related goods, with the price of gasoline seeing a nearly 60% increase.

Burns said low consumer confidence wasn't deterring retail tenants and landlords.

"We had one tenant with that in the back of his mind, but mostly, we are seeing bullish activity," he said. "For landlords, low consumer confidence has not had as much impact as construction costs."

JLL reported that while retail fundamentals have done well amid volatility, deliveries and construction have slowed. 

"There hasn’t been pullback in terms of tenants not wanting to look for opportunities. There is a lack of supply that has created a very competitive landscape," Burns said. "Rising construction costs have made putting deals together difficult.

Even so, the report points to long-term retail strength in Houston.

"Despite economic headwinds, Houston’s demographic and consumer landscape continues to drive retailer growth, including Dollar General’s new store concept, pOpshelf, which recently inked its ninth Houston location," the report says. "With a recent store opening, and one soon to break ground near Tomball, it’s a prime indicator of Houston retail expansion."

At 10.7K SF, the pOpshelf deal was listed as one of Houston's most notable recent retail leases.

Among retail property types, general shopping centers have some of the largest inventory in Houston, the lowest asking rents and the highest vacancy at 7.4%. Malls are still asking for the highest rent, $28.71 per SF, but that has fallen nearly 2.5% quarter-over-quarter — the largest dip in asking rents of any property type.