The impact of today’s economic downturn and credit crunch is significant and global, but it is in no way the worst in history, especially for Houston. Although it was hit harder than other markets in the 1980s, Houston is ahead of the rest of the nation in terms of avoiding a recession. Compared to the rest of the country, current demand for retail space continues to be high and the city has a relatively low vacancy rate of about 10 to 12 percent.
Today, Houston’s economy is still largely based on energy, but to a significantly lesser extent than in years past. Houston’s growing population and strong economy continues to fuel a reasonably healthy retail market. Two things can be attributed to this: a relatively low unemployment rate and low cost of living. In 2008, as most of the country was experiencing downsizing, Houston had a net gain of approximately 57,000 jobs in the region.
Because of that, residents continue to shop. While their habit of shopping hasn’t changed, the habit of buying has changed – or at least slowed down a bit. Nonetheless, retailers consistently say Houston is one of the strongest performing markets in the country for them. In fact, sales tax revenue is up 4 percent versus last year. Compare that to Austin, which has seen a 12 percent decline in sales tax revenue year-over-year.
All of these factors have helped Houston’s retail perform better than retail in most other markets. Besides retailers who have liquidated such as Circuit City, Mervyns and Linens ‘N Things, no major retailer has completely abandoned the market. However, the number of leases being signed has fallen about 50 percent. On one hand, the “junior” anchor market has softened and landlords are making significantly more aggressive deals. Retailers like buybuy Baby, Best Buy, and Ross are taking advantage of low rent prices and expanding in the area. On the other hand, spec space hasn’t softened as much as we will likely see in 2010.
When driving through Houston, all of the cranes and building equipment create the illusion that retailer activity is still thriving. Most projects that are now under construction were started three years ago and several have come to a screeching halt. Many of the developments in the area fall into two categories: projects started in mid-2007 that have not stabilized like the 500,000-square-foot CityCentre, a lifestyle center featuring a theater, boutique hotel, retail and residential components, and projects that were proposed but never started like the 850,000-square-foot planned Boulevard Place and 398,000-square-foot Grand Parkway Corner.
In light of bad times, Houston is helping many retailers survive. Under these economic conditions, that’s positive. Although new construction is tailing off, Houston is not overbuilt like it was during the last major downturn in the 80s. As a result, Houston is somewhat insulated and the value of retail, in the long run, will increase.
Jason Baker is an X Team International partner and Co-Founder and Principal of Baker Katz in Houston.
