Houston’s retail market continues to expand adding another 1M SF to its construction pipeline

Research & Forecast Report

HOUSTON | RETAILQ1 2016

Lisa Bridges Director of Market Research | Houston

Houston’s retail market continues to expand even while the local economy is wavering due to lower oil prices. Approximately 3.7M SF of retail space is under construction and 81.5% of this space is pre-leased. Over 1M SF of new inventory delivered during the first quarter and most of the new product is pre-leased. A large majority of the new construction is located in suburban submarkets near new housing developments.

Several large tenants have recently announced plans to close and exit the Houston market, such as Sports Authority, Aeropostale, and Fresh Market, which has resulted in negative net absorption during the first quarter. Although 0.2MSF of negative absorption isn’t a significant amount, it is the first time the market has posted negative absorption since 2009. Retail leasing activity decreased 6.2% between quarters, recording 1.2M SF in Q1 2016 and the citywide average quoted retail rental rate fell 3.6% between quarters from $15.19 to $14.65 per SF NNN and annually by 2.1% from $14.95 per SF NNN.

Houston’s average retail vacancy rate remained under 6.0%, increasing to 5.9% over the quarter from 5.7% in Q4 2015, but it is still 10 basis points lower than the 6.0% recorded one year ago.

Over the last year and a half, thousands of energy jobs have been eliminated, but industries such as hospitality and healthcare added jobs helping to balance the job cuts which has resulted in little to no job growth for Houston.

Summary Statistics Houston Retail Market Q1 2015 Q4 2015 Q1 2016

Vacancy Rate 6.0% 5.7% 5.9%

Net Absorption (SF) 1.1M 1.2M -0.2M

New Construction (SF) 0.9M 1.1M 0.8M

Under Construction (SF) 2.7M 2.8M 3.7M

Asking Rents Per Square Foot Per Year

Average $14.95 $15.19 $14.65

Neighborhood Centers $14.42 $15.10 $14.44

Strip Centers $16.35 $16.83 $16.80

Market IndicatorsRelative to prior period

AnnualChange

Quarterly Change

Quarterly Forecast*

VACANCY

NET ABSORPTION

NEW CONSTRUCTION

UNDER CONSTRUCTION

*Projected

The Schireson Family purchased Riceland Pavilion in March 2016 from Wes Walters Realty. The sales price was undisclosed, however, the property was appraised for $31.6M or $213 per SF underwritten using a 7.0% cap rate according to REAL Capital Analytics. The 148,030-SF shopping center was 100% occupied at the time of sale. Major tenants include Office Depot, Old Navy, Petco, Spec’s Liquor, and Hibbett Sporting Goods.

The Richland Cos purchased the 30,049-SF Lakes on Eldridge shopping center for $7.5M or $250 per SF in January 2016. The property was 93% leased at the time of sale and some of the tenants include Bellar Pools, Tiny Treasures Childcare Center, and Edward Jones.

LAKES ON ELDRIDGE CENTRE

RICELAND PAVILION

2 Houston Research & Forecast Report | Q1 2016 | Retail | Colliers International

Vacancy & Availability

Houston’s average retail vacancy rate increased 20 basis points from 5.7% to 5.9% over the quarter. At the end of the first quarter, Houston had 16.6M SF of vacant retail space. Among the major property types, single tenant retail has the lowest vacancy rate at 2.1%, followed by theme/entertainment at 3.6% and power centers at 4.0%. The highest vacancy rate is among outlet centers at 9.9%, and the largest amount of vacant space by size is among neighborhood centers, which has 6.5M SF of vacant space.

Houston’s retail construction pipeline had 3.7M SF of projects underway at the end of the first quarter. The largest project under construction is the 450,000-SF The Shoppes at Parkwest located on I-10 and Katy Fort Bend Rd, in the Far Katy North submarket. The center is 100% pre-leased, and some of the tenants include Bed Bath & Beyond, buybuy Baby, DSW, Kirkland’s, and DXL. Phase I of the center is scheduled to deliver in July 2016. Phase II, which is scheduled to deliver in September 2016, is 78% pre-leased to Dick’s Sporting Goods, Golf Galaxy, Field & Stream, Mattress Firm and Chipotle.

Absorption & Demand

Houston’s retail market posted 216,000 SF of negative net absorption in the first quarter, mostly due to tenants relocating to newer centers and some national tenants leaving the market. According to Colliers in-house retail advisors, good quality, well-located retail space is still in high demand and developers are responding, especially in the suburban markets. As new segments of the Grand Parkway (SH 99) have opened, developers have announced plans to build shopping centers along Houston’s outer loop. NewQuest Properties recently announced plans to develop a 600,000-SF large-scale shopping center in the Tomball suburban market at the southwest corner of Highway 249 and the Grand Parkway. Tomball is one of Houston’s fastest growing northern communities which is now connected directly to West Houston and Northeast Houston with the expansion of the Grand Parkway.

Rental Rates

According to CoStar, our data service provider, Houston’s citywide average quoted retail rental rate for all property types decreased 3.6% from $15.19 per SF NNN in the fourth quarter, to $14.95 per SF NNN in the first quarter.  According to Colliers’ internal data, Class A in-line retail rental rates can vary widely from $20.00 to $85.00 per SF, depending on location and property type.

Sales ActivitySources: Real Capital Analytics

Q1 2016

NO. OF PROPERTIES: 23

TOTAL SF: 0.8M

AVERAGE $/SF: $224

AVERAGE CAP RATE: 7.3%

Job Growth & Unemployment(not seasonally adjusted)

UNEMPLOYMENT 02/15 02/16

HOUSTON 4.4% 4.7%

TEXAS 4.4% 4.3%

U.S. 5.8% 5.2%

JOB GROWTHAnnual Change

# of Jobs Added

HOUSTON 0.3% 9.0K

TEXAS 1.5% 172.7K

U.S. 2.0% 2.9M

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

$14.00$14.20$14.40$14.60$14.80$15.00$15.20$15.40$15.60$15.80$16.00

Retail Rental Rate and Vacancy Percentage Houston, TX

Avg. Rent Avg. Vacancy

*Vacancy percentage includes direct and sublease space.

3 Houston Research & Forecast Report | Q1 2016 | Retail | Colliers International33

Leasing ActivityHouston’s retail leasing activity, which includes renewals, decreased slightly by 6.2% on a quarterly basis, recording 1,162,000 square feet in Q1 2016. Some of the tenants that signed new leases during the quarter are listed in the table below.

Market Summary

Q1 2016 Top Retail Lease TransactionsBUILDING NAME/ADDRESS SUBMARKET SF TENANT LEASE DATE

Jones Plaza Northwest 44,200 Fitness Connection Jan-16

Mason Park Far Katy South 38,890 99 Ranch Market Feb-16

1818 Gessner Rd Northwest 34,380 Auto Zone Mar-16

Center @ Rosenberg Far Southwest 34,050 Jumping Jaks Mar-16

Westfield Shopping Center-Cypress Pointe Far North 23,000 Epic Stores Mar-16

4545 S Sam Houston Parkway Near South 15,000 Service King Feb-16

Stafford Park Plaza Stafford 14,300 Taking Kidz Places Mar-16

River Oaks District Inner Loop 14,000 Saint Bernard Sports Jan-16

Loop Center Inner Loop 12,000 Dollar Tree Jan-16

Lake Country Plaza Northeast 11,740 Lone Star Athletics Jan-16

Market at Town Center Southwest 9,000 Kirkland’s Mar-16

Q1 2016 Retail Market Statistical Summary

PROPERTY TYPE RENTABLE AREA

DIRECT VACANT SF

DIRECT VACANCY

RATE

SUBLET VACANT

SF

SUBLET VACANCY

RATE

TOTAL VACANT SF

TOTAL VACANCY

RATE

1Q16 NET ABSORPTION

CLASS A RENTAL RATES (IN-LINE*)

Strip Centers (unanchored) 34,653,789 3,080,763 8.9% 32,272 0.1% 3,113,035 9.0% (5,747) $27.00-$45.00

Neighborhood Centers (one anchor) 71,099,840 6,440,993 9.1% 52,201 0.1% 6,493,194 9.1% 269,915 $28.00-$46.00

Community Centers (two anchors) 45,572,802 2,669,996 5.9% 37,909 0.1% 2,707,905 5.9% (356,123) $28.00-$45.00

Power Centers (three or > anchors) 24,950,698 986,112 4.0% 2,440 0.0% 988,552 4.0% 58,797 $28.00-$45.00

Lifestyle Centers 5,266,380 220,501 4.2% 33,789 0.6% 254,290 4.8% 81,588 $40.00-$85.00

Outlet Centers 1,594,333 157,623 9.9% - 0.0% 157,623 9.9% 5,975 $20.00-$40.00

Theme/Entertainment 533,474 19,370 3.6% - 0.0% 19,370 3.6% 80 $25.00-$35.00

Single-Tenant 75,642,000 1,554,552 2.1% 25,728 0.0% 1,580,280 2.1% (100,251) N/A

Malls 24,049,275 1,510,492 6.3% 29,663 0.1% 1,540,155 6.4% (170,548) N/A

GREATER HOUSTON 283,362,591 16,640,402 5.9% 214,002 0.1% 16,854,404 5.9% (216,314)

4 North American Research & Forecast Report | Q4 2014 | Office Market Outlook | Colliers International

Copyright © 2015 Colliers International.The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.

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4 North American Research & Forecast Report | Q4 2014 | Office Market Outlook | Colliers International

Copyright © 2016 Colliers International.The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.

Colliers International | Houston1233 West Loop South, Suite 900 Houston, Texas 77027+1 713 222 2111colliers.com/texas/houston

FOR MORE INFORMATIONLisa BridgesDirector of Market Research | Houston+1 713 830 2125lisa.bridges@colliers.com

115.6M SF

15.3M SF

Q1 2016 Highlights