Houston Retail Market Report | Q1 2024

Rising retail rents

The Houston retail market has seen an increase in both asking and achieved base rents each quarter but one post pandemic, with the sharpest surge occurring during the first quarter of 2024. The combination of strong sales in both restaurants and retail, ease of conducting business along with the area’s expanding population growth keeps Houston consistently in the top tier of “best” retail markets. The demand for space has been met with the headwind of limited new inventory, triggering rapidly increasing rents which tenants are paying to secure deals.

While landlords are achieving record rents, strong tenants and their brokers have been asking for and receiving more concessions, such as higher improvement allowances, than in prior years. Our team has also pushed hard on expanding the level of landlord participation to include grease traps, demising walls and other tenant improvements. Despite increased concessions, rising rents still pose challenges for tenants entering or expanding into our market. Most restaurants need sales of 5% to 8% of their occupancy cost (gross rent + utilities) to be profitable. This means if a 3,000-square-foot restaurant pays $5 per square foot more in rent, it would need to achieve $300,000 more in sales to realize the same occupancy cost. This scenario is why we are seeing restaurants follow the path of retailers in reducing the size of their prototypical footprint.

Another trend that has surfaced recently is the higher frequency of annual rent increases brought on by the national inflation level. This landlord-friendly movement is especially hitting hard on local tenants while national credit tenants appear to be consistently avoiding the escalations. Landlords are achieving anywhere from 2%-to-3%-annual increases and higher in certain markets and projects. We are carefully watching to see the effect of this escalating rental rate trend since the first two or three years are so critical for establishing and stabilizing any brand’s new site, regardless of credit or number of units.

Houston’s silver lining

While higher rents and labor and food costs are a real thing in our local market, there is a silver lining for retailers and restaurants. Rents in Houston are still well below the average rents of markets within California, New York and Chicago, and rising labor costs are significantly lower in Houston. So even for brands with higher sales in other markets, the unit economics in Houston is often far more attractive when adding up all costs to do business.

Houston’s constant population growth will continue to support demand that will outweigh supply through the rest of this year, if not beyond. We believe these new trends will create a “survival of the fittest” that we have not seen since COVID-19, creating opportunities for those that have been patiently waiting for well-positioned space. But it is unlikely we will see any change in the course of rising rents until we see increases in new construction inventory and second-generation vacancy. Until then, demand and performance have seemingly normalized these new trends with Houston maintaining its status as one of the nation’s premier retail markets.

Houston | Q1 2024 | Retail | Market Statistics