The strength of Houston’s retail market is a double-edged sword.
The leasing process is lengthening as near-record rental rates mean tenants struggle to find space they can afford and landlords may hold out for the ideal concept to fill empty spaces.
But as people keep moving to Houston, retailers do, too, keeping vacancy low despite expensive rent and high-profile bankruptcies, brokers say.
National tenants trying to grow their brand are willing to pay more rent in Houston since the region can get them exposure and they typically perform well enough to make the price tag worthwhile, Baker Katz broker Lunden McGill said.
“If they’re going to pay more than they’re used to, Houston’s going to be a market that they’re going to do it in,” McGill said.
Despite quarterly fluctuations, retail rents have stabilized at elevated rates since 2024, the Greater Houston Partnership reports. The average triple-net rent was $20.51 per SF in the third quarter, just below the recent high of $20.79 in the first quarter of 2024 and virtually unchanged from year-ago levels.
“The leveling of rents suggests a more mature phase of the cycle, with pricing holding near record levels despite a more cautious leasing environment,” the GHP report says.
Leasing activity decreased in the third quarter, from 2M SF to 1.8M SF, but new supply delivered plunged further, according to a Partners Real Estate report. Supply and demand being in lockstep has kept vacancy flat and low at 5.6%.
About 700K SF came online in the quarter, down about 24% from the previous quarter and down 41% from the previous year, according to the Partners report. Neighborhood retail centers, typically 30K SF or less, near recently developed residential subdivisions account for the majority of new construction.
The rental rate discrepancy between submarkets in the Houston area is large, with average rent above $28 per SF in the Inner Loop and at $17 per SF in the Southeast, Partners said.
The biggest tenants to move in last quarter were indoor pickleball concept The Picklr taking about 67K SF in The Woodlands and EoS Fitness moving into 51K SF in Katy.
A significant proportion of retail activity has been driven by experiential concepts backfilling junior boxes vacated by brands like Joann and Party City, McGill and fellow Baker Katz broker John Frazier said.
“What we have had, largely by virtue of those closings, is an inventory of boxes that work well for tenants like Altitude Trampoline Park and Momentum,” Frazier said.
Utah-based Momentum Indoor Climbing gym announced plans this summer for its third Houston location at a 38K SF former Bel Furniture in Memorial City.
Other experiential tenants backfilling spaces in the Houston area this year include Dave & Buster’s and Ace Pickleball Club moving into a long-vacant former Gander Mountain in Sugar Land, trampoline park Sky Zone Houston moving into a former Conn’s, and Crunch Fitness backfilling a 28K SF Bed Bath & Beyond, according to a midyear report from Weitzman.
But having the ideal space available doesn’t make leasing an easy process for the tenants.
“Even though there are more boxes available than traditional in-line, small-shop retail across our market, it’s still pretty competitive,” McGill said. “It’s causing tenants to have to really step up from a rent standpoint.”
High rents and other volatile market conditions have led real estate decisions to stretch out.
“It just takes a little bit longer to get comfortable when rents are higher,” McGill said.
Landlords of retail centers in high-demand areas like Baybrook may sit on a vacant space for six months to wait for the perfect tenant who will pay high rents. Average triple-net rents in Houston have grown from $15.91 per SF in 2018 to more than $20 per SF since late 2023.
Some concepts require large upfront investments. Momentum’s build-out of its Memorial City location is projected to cost $2.2M, according to a filing with the Texas Department of Licensing and Regulation.
Tenants may negotiate lower rents by forgoing large tenant improvement allowances and paying for build-outs themselves, McGill said. That investment can be worth it for tenants that know how well they already perform in Houston.
Houston’s population influx provides a long runway for retailers’ growth. The greater Houston area’s retail market has been stable for well over a decade, not dropping below 90% occupancy since 2013, according to Weitzman.
“A lot of these tenants are expanding right now. … They’re underwriting based on existing performance,” Frazier said. “It’s a lot easier. They can make more confident decisions here because we perform really, really well.”
Texas is also leading the country in retail construction, fueled by strong inbound migration, which could help ease pressure on rents, the brokers said.