Texas’ Early Reopening Has Helped Houston’s Retail Sector Recover Faster Than Other Cities

Houston’s brick-and-mortar retail stores were among the hardest hit at the onset of the coronavirus pandemic, as public health fears and lockdowns forced owners to temporarily shutter.

Texas allowed businesses to reopen earlier than many other states, and avoided additional lockdown measures throughout the rest of 2020. Retail brokers say that Texas Gov. Greg Abbott’s decision to fully reopen the state in March this year has boosted Houston’s retail sector even further, which could lead to a particularly tight market by the end of the year.

“I've got centers that sat quiet for a year with the Covid situation, and [now] we have active deals working on every space to where we should get to 100% in the next month,” Wulfe & Co. Senior Vice President Kristen Barker said. “I think in general, the activity level has really picked up.”

Like most other cities, Houston’s retail sector took a hit during the earliest days of the pandemic. In the first quarter of 2020 before the impact of the pandemic began to show, retail absorption was 1.4M SF. That fell to negative 42K SF in the second quarter of 2020, demonstrating a severe slowdown in leasing activity, according to JLL data. 

However, the slowdown didn’t last for long. In the third quarter, absorption reached 736.3K SF, and it came roaring back in the fourth quarter of 2020 to 1.5M SF. Moving into 2021, leasing activity has remained positive: Absorption in the first quarter was around 1.1M SF, and it was 543.7K SF in the second quarter, JLL said.

Vacancies increased as a result of the pandemic, but are starting to come down. From a citywide vacancy rate of 5.7% in Q1 2020, Houston’s retail sector peaked at 6.4% vacancy in Q3 2020, before coming down to 6.2% in Q1 2021 and remaining at that level in Q2. 

All the while, retail asking rents have edged upward. Even as absorption and occupancy fluctuated, asking rents rose from an average of $17.72 per SF in Q1 2020 to $18.66 per SF in Q2 2021, JLL found.

Houston had a strong retail market before the pandemic, and for all the disruption, has not experienced hardship on the scale seen in other cities. Retail experts that spoke to Bisnow said that Houston’s success on the retail front is a reflection of Texas’ early reopening efforts and lack of multiple hard lockdowns.

“People were able to go out, they were able to dine outside, even early on during Covid. I felt like it was less restrictive in Texas and in Houston compared to the other cities. We're just not as dense, so we're not on top of each other,” JLL Managing Director, Land Advisory Services Simmi Jaggi said.

In June, Newmark released its Opportunity Index report, using a variety of data sources to rank the largest U.S. metropolitan areas according to economic and property-specific metrics. It ranked Houston second in the U.S. for overall retail performance, tied with Tampa, Florida.

“Perhaps intuitively, retail real estate has performed best in areas that had fewer pandemic-related restrictions on social distancing and gatherings,” the report said. 

When it came to population mobility during the pandemic, Houston was consistently ranked in the top five U.S. cities. The city was ranked first for mobility as it relates to retail and recreation, second for the workplace and residential properties, third for grocery and pharmacy, and fourth for transit stations.

The Houston-The Woodlands-Sugar Land metropolitan statistical area’s lack of density — around 7.1 million people, spread out across nine counties and about 10,000 square miles — has contributed to the speed of Houstonians’ return to shopping and dining in person. 

But Texas’ overall approach to reopening has been the real differentiating factor. The trend started early: Following the initial wave of lockdowns in March and April 2020, the governor allowed Texas businesses to reopen at reduced capacity at the beginning of May last year, faster than other U.S. states like California and New York. That expanded to 100% capacity on March 10 of this year.

Barker noted this all helped keep Houston retailers in business through the pandemic, minimizing the wave of closures seen across the country.

“We really mitigated the damage to our tenants in Houston,” Barker said.

And now they are moving beyond survival. The combination of the vaccine rollout and Texas’ reopening in March is driving retail tenants to get moving again on expansion activity, she said. 

“I think people are just out shopping and eating, and that encourages the tenants to move forward on their expansion plans,” Barker said.

Streetwise Retail Advisors Managing Partner Ed James said that both Texas and Florida have benefited from policies that allowed reopening while the vaccination rollout was in full swing.

“We noticed an uptick in activity near year-end, and then [in] about March of 2021, we saw sales in our portfolio jump from February to March significantly,” James said. “Now, some tenants who were struggling pre-Covid are still lagging behind, but even those operators are seeing higher sales beginning in the second quarter.”

Barker said that at this stage, most types of retailers are on the move and looking to lease space. Wulfe & Co. has been receiving inquiries from groups of varying sizes, ranging from mom-and-pop tenants, all the way up to large national chains. Fitness tenants in Houston have been starting to expand again after struggling throughout most of 2020. 

She also noted that tenants looking for pad sites in large retail developments have also ticked up, reflecting the growing popularity of drive-thrus, which have proven to be a form of insurance against business disruptions. 

James said Streetwise has also been seeing strong demand from just about every category and tenant size. 

“While it’s not all back yet, the enthusiasm is strong … occupancies are rising and we will see tenants struggle to find space as we approach 2022,” James said. 

Some groups, like big-box tenants, have been a little more lethargic as they continue to re-evaluate their place in the retail ecosystem, according to Barker. With the exception of grocers, those retailers have felt the pinch of rising e-commerce sales for years, which only intensified during the pandemic.

“I think that they were going through that reassessment before Covid hit. You had a lot of big-box tenants trying to figure out their footprint, downsizing [and] figuring their online presence, and how to kind of morph the two,” Barker said.

Jaggi focuses on land transactions in the Houston area, and she said that in the last six months, she has seen big-box retailers specifically in the grocery and junior anchor categories become active again, which is stimulating retail developers to make offers on land tracts to accommodate expansions.

Much of that activity is occurring farther out in Houston’s suburban areas, following explosive single-family home sales in many of the city’s master-planned communities. 

“It's definitely piggybacking off of the master-planned communities, because it's just a function of density,” Jaggi said.

Jaggi noted that because single-family home sales and development grew so rapidly while retail was sitting on the sidelines in 2020, retail developers are now looking to catch up and meet pent-up demand in the market, particularly in suburbia. 

“I think we're just going to see an increase in appetite and an increase in demand for these sites. Because as the health of the retailer continues, the demand for growth is going to continue, which is going to translate into land sales,” Jaggi said. 

Retail developers have already purchased more land in 2021 than they did in the entirety of 2020. In the greater Houston area, land sales for retail use totaled 19,531 acres in 2020, according to JLL. But in just the first two quarters of 2021, land sales for retail use shot up to 27,483 acres. 

Those figures are despite increasing competition from industrial developers, who are also looking to service retailers with warehouses and logistics facilities to cater to e-commerce demand, and who have been willing to pay as much as 30% to 50% more than usual for those sites.

“A lot of the sites that we had earmarked for a traditional kind of power center are now being looked at for industrial projects,” Jaggi said. “The need to get the goods to the consumer faster [has] just increased dramatically. We saw that with the industrial activity, and we're still continuing to see that.”

The brokers that spoke to Bisnow said that they expect retail vacancy to fall throughout the rest of 2021, as more retailers lease up space.

The city may quickly run out of readily available retail space. About 1.6M SF of retail has delivered in 2021 year-to-date, and another 2.2M SF is under construction, according to JLL. With so much demand anticipated in the second half of the year, Barker is concerned that it won’t be enough. 

“That might create a situation where we've got high occupancy rates, and it'll put an upward pressure on rental rates for tenants,” Barker said.

The last piece of retail expected to experience full recovery is entertainment, such as live performances and movie theaters. Barker said that one of her clients is a movie theater operator, and it has been hesitant to pursue financing for ground-up theaters, as sales for new movie releases are still about 80% of where they were pre-pandemic. 

James said he thinks the outlook for movie theaters will improve, but they will continue to face competition from online streaming services that now release new films.

“Movie theaters volumes should improve, but competition with online releases of new movies could blunt that comeback,” James said.