Houston’s retail market leads the nation in construction activty

Research & Forecast Report

HOUSTON | RETAILQ2 2016

Lisa Bridges Director of Market Research | Houston

Houston’s retail market continues to expands with 3.9M SF under construction. According to our data provider, CoStar Property, Houston ranks first in construction activity when compared to other U.S. markets. Northern New Jersey was second with 3.7M SF and Dallas/Ft. Worth third with 3.5 M SF.

Approximately 82.6% of the 3.9M SF of retail space under construction at the close of Q2 2016 is pre-leased. Despite the 1.8M SF of new inventory delivered in Q2 2016, Houston’s average retail vacancy rate remained under 6.0%, decreasing to 5.8% over the quarter from 5.9% in Q1 2016.

Last quarter we listed several large tenants, including Sports Authority, with plans to close and exit the Houston market. Since that time, Dick’s Sporting Goods was awarded the Sports Authority brand name and its existing leases in bankruptcy auction. No details about the Houston locations have been made public yet, but the company did state it plans to expand.

The grocery store wars continue with Kroger edging out HEB and Walmart in Q2, opening three new stores over the quarter.

According to the U.S Bureau of Labor Statistics, the Houston metropolitan area created 5,100 jobs (not seasonally adjusted) between May 2015 and May 2016, about an eighth of the historical average. Job growth occurred in the Arts, Entertainment & Recreation sector, followed by Accommodation & Food Services, and Healthcare.

Summary Statistics Houston Retail Market Q2 2015 Q1 2015 Q2 2016

Vacancy Rate 5.8% 5.9% 5.8%

Net Absorption (SF) 1.3M -0.1M 2.0M

New Construction (SF) 1.1M 0.8M 1.8M

Under Construction (SF) 2.0M 3.7M 3.9M

Asking Rents Per Square Foot Per Year

Average $15.07 $14.64 $14.69

Neighborhood Centers $14.37 $14.46 $14.44

Strip Centers $16.72 $16.99 $17.22

Market IndicatorsRelative to prior period

AnnualChange

Quarterly Change

Quarterly Forecast*

VACANCY

NET ABSORPTION

NEW CONSTRUCTION

UNDER CONSTRUCTION

*Projected

RioCan Real Estate Investment Trust sold Louetta Central, a 148,924-SF community shopping center to The Blackstone Group LP in May 2016. The center sold along with 48 other properties in a portfolio valued at $1.9 billion. Louetta Central was valued at $205 per SF and the center was 100% occupied at the time of sale by tenants Famous Footware, Kohl’s, Michaels, and Ross Dress for Less.

Whitestone REIT purchased the 131,575-SF Mission Bend shopping center from Investcorp for $15.1M or $115 per SF in May 2016. The property was 98% leased at the time of sale and some of the tenants include Dd’S Discount, Dollar General, and Harbor Freight.

MISSION BEND SHOPPING CENTER

LOUETTA CENTRAL

2 Houston Research & Forecast Report | Q2 2016 | Retail | Colliers International

Vacancy & Availability

Houston’s average retail vacancy rate decreased 10 basis points from 5.9% to 5.8% over the quarter. At the end of the second quarter, Houston had 16.4M SF of vacant retail space. Among the major property types, single-tenant retail has the lowest vacancy rate of 2.2%, followed by lifestyle centers at 3.1%, theme/entertainment at 3.7% and power centers at 4.7%. The highest vacancy rate is among outlet centers at 9.9%, and the largest amount of vacant space by square feet is among neighborhood centers with 6.2M SF of vacant space.

Houston’s retail construction pipeline has 3.9M SF of projects underway and 82.6% is pre-leased. The largest project under construction is the 374,000-SF Fairfield Town Center located on Hwy 290 and Cypresswood in the Cypress master-planned community development of Fairfield. The center is 84% pre-leased, and some of the tenants include Kirklands, HomeGoods/Marshalls, Party City, Ulta and Old Navy. Out parcels that have already been purchased and developed in the center include Rooms To Go, Chick-fil-A, Taco Bell, Whataburger, McDonald’s and Bank of America.

Absorption & Demand

Houston’s retail market posted 1,957,629 SF of positive net absorption in the second quarter. According to Colliers in-house retail advisors, good quality, well-located retail space is in high demand and developers are responding, especially in the suburban markets. Some of the larger retailers that opened new locations during the second quarter include Walmart in the Montgomery County submarket, Kroger Marketplace in the Far South submarket, HEB in the NASA/Clear Lake submarket, Kroger in the Near Northeast submarket and in the Channelview submarket, and Showbiz Cinemas in the Lake Houston submarket.

Rental Rates

According to CoStar, Houston’s citywide average quoted retail rental rate for all property types increased marginally from $14.64 per SF NNN in the first quarter to $14.69 per SF NNN in the second 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

Q2 2016

NO. OF PROPERTIES: 23

TOTAL SF: 0.8M

AVERAGE $/SF: $224

AVERAGE CAP RATE: 7.3%

Job Growth & Unemployment(not seasonally adjusted)

UNEMPLOYMENT 05/15 05/16

HOUSTON 4.4% 4.8%

TEXAS 4.3% 4.2%

U.S. 5.3% 4.5%

JOB GROWTHAnnual Change

# of Jobs Added

HOUSTON 0.2% 5.1K

TEXAS 1.4% 169.4K

U.S. 1.7% 2.4M

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 | Q2 2016 | Retail | Colliers International33

Leasing ActivityHouston’s retail leasing activity, which includes renewals, decreased by 9.0% on a quarterly basis, recording 1,386,500 square feet in Q2 2016. Some of the tenants that signed new leases during the second quarter are listed in the table below.

Market Summary

Q2 2016 Top Retail Lease TransactionsBUILDING NAME/ADDRESS SUBMARKET SF TENANT LEASE DATE

Brazos Town Center Far New Territory 38,800 24 Hour Fitness Apr-16

The Shoppes At ParkWest Far Katy North 38,000 Bed Bath & Beyond Apr-16

Commons At Willowbrook Cypresswood 22,000 HomeGoods Jun-16

Southwest Plaza Southwest 16,000 Harbor Freight Tools Jun-16

Northtown Plaza Near North 16,000 dd’s Discounts Jun-16

Federal East Plaza Pasadena/Galena Park 13,200 Boot Barn Jun-16

Spectrum Plaza Spring Creek 11,450 BodyUSA Jun-16

20210 N US 59 Hwy Kingwood 10,700 Mattress One Jun-16

Main Street Crossing Shopping Center Far Katy South 10,000 Ace Hardware May-16

Westchase Shopping Center Westchase 10,000 Kirkland’s Jun-16

Tomball Market Place Far Tomball 9,600 Elite Billiards Jun-29

Q2 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

2Q16 NET ABSORPTION

CLASS A RENTAL RATES (IN-LINE*)

Strip Centers (unanchored) 34,199,107 2,766,602 8.1% 31,910 0.1% 2,798,512 8.2% 376,508 $27.00-$45.00

Neighborhood Centers (one anchor) 71,077,659 6,183,622 8.7% 48,750 0.1% 6,232,372 8.8% 335,721 $28.00-$46.00

Community Centers (two anchors) 45,976,616 2,601,853 5.7% 37,909 0.1% 2,639,762 5.7% 392,973 $28.00-$45.00

Power Centers (three or > anchors) 26,197,900 1,224,368 4.7% 3,740 0.0% 1,228,108 4.7% 312,303 $28.00-$45.00

Lifestyle Centers 5,180,735 162,200 3.1% 33,789 0.7% 195,989 3.8% 34,801 $40.00-$85.00

Outlet Centers 1,594,333 149,216 9.4% - 0.0% 149,216 9.4% 8,407 $20.00-$40.00

Theme/Entertainment 499,468 18,508 3.7% - 0.0% 18,508 3.7% 862 $25.00-$35.00

Single-Tenant 76,593,486 1,673,882 2.2% 40,848 0.1% 1,714,730 2.2% 484,023 N/A

Malls 23,932,672 1,596,076 6.7% 4,913 0.0% 1,600,989 6.7% 8,531 N/A

GREATER HOUSTON 285,251,976 16,376,327 5.7% 201,859 0.1% 16,578,186 5.8% 1,954,129

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

Q2 2016 Highlights