executive summary
Rising retail rents
The Houston retail market has seen both asking and actual rent increases every quarter except since the pandemic, with the sharpest increases occurring in Q1 2024. Strong sales in both restaurants and retail, ease of doing business, and the area's growing population have consistently led Houston to rank among the “best” retail markets. Demand for space faces the headwinds of limited new inventory, causing sharp increases in the rents tenants are paying to secure deals.
While landlords are achieving record rents, powerful tenants and their brokers are seeking and receiving concessions such as higher renovation allowances than ever before. Our team has also worked diligently to expand landlord participation levels to include grease traps, partition walls, and other tenant renovations. Despite the increased concessions, rising rents remain a challenge for tenants entering or expanding in the market. Most restaurants require sales of 5% to 8% of occupancy costs (total rent + utilities) to be profitable. This means that if a 3,000 square foot restaurant pays $5 more rent per square foot, it would need to achieve $300,000 more in sales to achieve the same occupancy costs. Because of this scenario, restaurants are following the lead of retailers and shrinking their typical storefront footprint.
Another trend that has recently surfaced is the increasing frequency of annual rent increases driven by national inflation rates. This pro-landlord movement has particularly hit local tenants, while national, creditworthy tenants seem to be consistently avoiding increases. Landlords are achieving annual increases of 2% to 3% or more in certain markets and projects. We are closely monitoring the impact of this upward rent trend as the first 2-3 years are critical to establishing and stabilizing any brand new site, regardless of credit or unit count.
Houston's silver lining
While rising rent, labor and ingredient costs are a reality in the local market, there is a silver lining for retailers and restaurants. Houston rents are well below the average rents in California, New York and Chicago in-markets, and labor cost inflation is significantly lower in Houston. So, even for brands with higher sales in other markets, when you add up all the costs of operating a business, Houston's unit economics are often much more attractive.
Houston's population is steadily growing, with demand expected to outstrip supply for the rest of the year and beyond. We believe these emerging trends will create a “survival of the fittest” not seen since COVID-19, creating opportunities for those patiently waiting for well-located space. However, until new construction inventory and second generation vacancies increase, we are unlikely to see a reversal in the trend in rent growth. Until then, demand and performance appear to normalize these emerging trends, maintaining Houston's position as one of the leading retail markets in the United States.