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Will Houston’s Retail Center Market Get Overbuilt? – The Q&A with Jason Gaines of NAI Partners

Jason Gaines

Jason Gaines

HOUSTON – The retail scene in Houston is hotter than an August day in the Panhandle.  The office market is awash in space, the multifamily sector is seeing too many units and too few tenants, but retail is hot. With occupancy at an impressive 95 percent, the retail sector continues to experience boom times. It’s no wonder NAI Partners, one of Texas’ largest independently owned commercial real estate services with offices in Houston, Austin and San Antonio, recently reactivated its retail brokerage. NAI hired retail veteran Jason Gaines as senior vice president to develop and lead its newly reinstated retail division. Jason – who joined NAI Partners from Hunington Properties — joins Hannah Kaplan, also from Huntington Properties, in the retail endeavor.  After Gaines was on the job at NAI for a mere four days, Realty News Report decided to discuss the retail situation with the industry veteran. And since we know Houston’s habits, we asked Gaines: Will Houston’s retail market get overbuilt?

Realty News Report: NAI Partners has engaged you to lead their new retail division. Why is NAI Partners moving back into retail?

Jason Gaines: NAI is a global brand, one of the truly nationally recognized name brands with brokers active in all disciplines of real estate in major and metro markets. NAI is significant player in office and industrial. We had a retail presence in Houston for number of years but we got away from that are although we never surrender it. NAI now wants to be able to have a very specific platform for all clients, so we can handle all their real estate needs. We want every discipline covered with every specialty, so if one of our office clients owns a retail piece, we have people on the street doing deals that can handle it.  NAI is a full service brokerage company, which is one of the things that attracted me here – the ability to leverage off other producers in industrial and office groups. I’ve only been at the helm for four days and already I’ve seen the flow of ideas and leads coming to and from the industrial and office team. I never had that interaction before, since I was at a purely retail brokerage firm.

Realty News Report: Some say there is a shortage of retail center space in the Houston area? Why aren’t more centers being built?

Jason Gaines: Houston has a population of more than six million and the retail sector is 94.2 percent occupied. That’s almost an unhealthy vacancy factor. A healthy vacancy is something in the 7-9 percent range.  Today, many tenants are looking for 3-5 locations and they are not finding 3-5 areas in town that meet their requirements. That’s a lack of economic benefit to the Houston area because that capital investment is going somewhere else. Retail is different than industrial and office, because retail real estate is location dependent rather than facility dependent.  Location is paramount. Almost by definition, a lot of retail sites are not going to fill a tenant’s needs. You can’t go to shopping center A and then go to a site catty corner to that and expect the same results. It may be the wrong side of street, or maybe it doesn’t have the presence a new retailer needs. Retailers are picky and they will say ‘no’ to 9 out of 10 sites you show them. If the ‘perfect’ site doesn’t exist, they would rather not do a deal. I am primarily a landlord rep broker and I know what they need and will only bring them locations they make sense to them. As a broker, it’s hard once you’ve had a ‘no,’ to change it to a ‘yes.’ Location is their livelihood and they have to make certain they found the specific real estate they need.

Realty News Report: Retail has never been stronger. How would you describe the Houston’s shopping center market as we reach the midyear point of 2016? What’s your prediction for next year?

Jason Gaines: I can tell you that in general terms across board, occupancy is staying about the same. I don’t see a whole lot of movement, But 5% of just about anything in this world may not be worth owning. National tenants, whether a build to suit or a spec project, are making a 30-year commitment to a site. It’s more expensive than a local business. They are in it for the long haul and at the end of a 20-30 year lease, they understand that there will be macro issues such as changing traffic patterns, or access, or whatever.  As for 2017, we don’t see it changing a whole lot.  Occupancy will be high. One of the things that has changed is development. In 2004, 2005, 2006 and 2007 you would hear of development that was very ambitious — unsecured spec development on a grand scale, say a 40-acre site with 150,000 square feet of box space, and 60,000 of small retail and pads. Retail projects in last 3-4 years have become much smaller; we’re not seeing spec projects on a grand scale any more. We are rarely seeing more than 40,000-50,000 square feet of retail development, and a very small part of that might have one spec spot. We just don’t see developers willing to throw down big development project, I think most of developers doing retail now have become more capable of keeping an eye on how much retail they putting down on ground that could put them on red.”

Realty News Report: Are investors or REITS buying existing shopping centers?

Jason Gaines: We’re seeing all kinds of investment capital come to Houston. And there are lots of people adept at playing the 1031 exchange game and that’s taking some retail off the market. REIT investment seems to have stopped a little. Investment trusts have a very specific level of asset class and keep in a specific framework. There is only a finite number of properties that fit their requirements. Right now in Houston, there is lots more money chasing deals than there are available properties. There is an incredible amount of private investment funds chasing the same retail properties so there is a lot of competition in the retail quality category. More people are moving investment capital to retail because it is non-management intensive. A lot of the responsibility for day-to-day management is put on the tenants themselves, Owners are merely running an asset, and the retail tenant is running 100 percent of the billable areas.

Realty News Report: Two big retailers Fresh Market and Sports Authority have closed their Houston stores. Is that having an impact on the market?

Jason Gaines: This is not new. Eight to 10 years ago, with Circuit City and Linens ‘n’ Things and others, there was a number of bankruptcies in the “box world” on top of a major shift in real estate by retailers like Wal-Mart and K-Mart. There were hundreds of thousands of square feet vacated by box stores. It was a period when filling those boxes was real problem. But retailers and others took the space. The recent Fresh Market and Sports Authority vacated space comes at a time when the market is so much tighter now. Those locations are Class A-plus real estate for the most part and Class A or A-plus sites and there are a whole of other retailers who would be happy to take those spots, other retailers who want to be in Texas –coming from California, the Midwest, the South. Those retailers see this is an opportunity.

Realty News Report: Many of the new Class A multifamily projects and high-rises that have been construction have ground-floor retail, perhaps 5,000 to 20,000 SF. Is that retail space successful?

Jason Gaines: It’s a different kind of retail asset class. At a retail shopping center, the only thing you have to worry about are those stores and making sure those retail stores are in some kind of harmony with each other. Today it makes sense for apartments and retail be together, putting eight stories of apartments on ground level retail.  But how much of that project is apartment income vs. retail income?  Retail is a minute part of the asset as a whole.  It’s there, more or less, to serve that lifestyle. Retail is sort of a ‘feeding center’ for the multifamily real estate. It’s an amenity for that lifestyle and owners may get 5 or 10 cents more a square foot rent for apartments above because of that retail. You’re offering an amenity that attracts a renter to pay a 5, 10 or 15% rent premium. That’s your goal in most all of these projects.

Realty News Report: Will retail be overbuilt?

Jason Gaines: Absolutely! We’ve seen it in the past and we’ll no doubt see it in the future. It’s not so much being overbuilt, as it is being oversupplied. Right now there is a lot of retail development in the very inner city — the core areas where there is the highest density and most spending power — and in master planned communities.  But in the inner city there are so many other uses for the scarce land and that tends to inflate the price of the dirt and the cost of doing business. That will control the retail building. Inner city sites can become obsolete for retail because of the price — at $110 a square foot, retailers can’t make money. At high desire locations such as The Woodlands, Cinco Ranch, there are limitations. They put inhibitors on how much retail development offered and retailers pay a premium to play.

August 15, 2016 Realty News Report Copyright 2016

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