Shopping Centers and the Retail Armageddon: Q&A with Jason Gaines of NAI Partners
HOUSTON – (Realty News Report) – With the explosion in online buying, the retail sector was forecast to be in the tank by now. Bricks and mortar stores were passé; buying on the web was the fashion of the day. But the retail apocalypse hasn’t happened yet. To find out why – and to determine the health of the Houston retail real estate sector, Realty News Report spoke with Jason Gaines, Senior Vice President and Retail Division Leader with NAI Partners. Jason spent 15 years in the retail fee brokerage business, primarily in the Houston area market, and primarily in landlord representation leasing and has been consistently recognized as one of the leading retail producers in the Houston Market, as a “Top Producers” and “Power Broker.” During his career, Jason has executed in excess of 800 retail leases, totaling more than 4 million square feet. Additionally, Jason has sold 13 shopping centers and multiple tracts of land.
Realty News Report: What’s the retail situation like in Houston nowadays? Under stored? Overbuilt?
Jason Gaines: I think there’s a lot of people who have been wondering if and when the retail apocalypse is coming! But for the time being, the retail sector in Houston is a very stable environment. There’s more than just the “Amazon story” going on – the shrinking of brick and mortar stores. I believe the pending demise of the retail industry is a little overblown. Certainly, we’re seeing brick and mortar retailers struggling, but they not struggling with all the catastrophic stuff people thought they would be. What has played out in the retail industry since 2008 has been self-policing by the industry and by developers. There have been less spec projects than in the past. There is nothing wrong with building spec. But the scale of spec space in 2005, 2006, 2007 was different. Someone would go up to the next exit and build 200,000 SF of spec space and lenders and retail community thought that space could be absorbed. Today there’s been some restraint. Developers have gotten smarter and know they don’t have to put so much space on the ground. In addition, existing projects – problems at retail properties that were struggling in 2009, 2010, 2011, have been fixed. They’ve worked through the market and lately there is not a lot of retail space that has been added, so these projects have been able to fill up.
Realty News Report: What are some of the hottest areas for retail?
Jason Gaines: Right now, for ground up projects, the biggest story is the Grand Parkway. We’re seeing a lot of new projects coming out of the ground, from the northeast and 59, swinging to Cypress, to Katy and into Richmond. There’s got to be millions of square feet of new retail along the Grand Parkway. One of the major categories is the grocery guys, who are setting up shop every third exit or so. That’s the hot market. And in infill neighborhoods, it’s anything that is small in scale. We’re talking 10,000 SF in select infill neighborhoods inside the Loop and inside of Beltway – it’s less about huge square feet, but more about ambitious projects in terms of rental rates. The Infill markets are strong. We’re seeing more retail development along freeway locations along I-10, too, because there has been tremendous growth along I-10. It used to be that most of job centers fizzled out at the Energy Corridor. But now there are a lot of manufacturing jobs beyond Katy. Amazon is out there. Rooms To Go has a big operation in the area, which has pulled jobs far, far west. In the next 5-10 years, we’re going to have jobs out come first, then the houses come and then all the retail.
Realty News Report: How has the Grand Parkway changed the retail equation for Houston?
Jason Gaines: It’s where new development is occurring. The largest chunk of new construction is along the Grand Parkway. In Houston and in Texas, retailers are comfortable with freeway locations. We’re a freeway state. Retailers feel most comfort when they can come out to Grand Parkway. Retail construction along the Grand Parkway is driven by major category killers – Walmart Target, Costco — and developers are reacting to that.
Realty News Report: What do predict for Houston’s retail sector in 2019?
Jason Gaines: I don’t see anything in the cards that next year is going to be a different story than we’ve seen in last five years. Since 2012, Houston’s retail industry has been strong and stable. New development hasn’t put too much stress on existing projects. There’s been some explosive growth in rents over last 10 years, and some retailers are starting to struggle with retail rates, especially with the rental rates we’re seeing on Class A real estate. That growth is putting some stress on retailers, who are 25% more now in rent than a decade ago, and those businesses aren’t doing 25% more business. Retail is a funny business. Office building tenants don’t pay rent commensurate with the business they are doing, but in retail, they do.
Realty News Report: What’s the latest retail trend in Houston?
Jason Gaines: A change in the configuration of retail offerings. The design of a project has become much more user driven than before, or at least designed in anticipation of the natural business types/sizes/requirements that the developer expects. The simplest example is in past you’d build a shopping center with an anchor reserve designed to suit, this got the project off the ground and the anchor committed. Then the developer would build two immediately adjacent “rectangles” on each side to lease, and make the tenants adapt. But the days of putting down maximum square footage, saying, ‘Here’s your 75,000 SF. Sign the lease’ are over. Now retail developers are much more attuned to create tenant specific access, common area adaptations, and features key tenants desire. Great examples include things like ambulance access for emergency room operators, drive thru lane reserves for national food users, and strategically placed pre-installed grease trap interceptors in natural restaurant spots. This has helped on all sides of the equation, where the developer delivers what the retailer needs to commit to the site, and also saves money to all involved not having to make site modifications after the fact.
Realty News Report: Will the rise in interest rates affect retail development?
Jason Gaines: With rising interest rates so far, we’ve not seen cap rates rising tremendously. But with next rise in the Fed rate and the expectation of borrowing going up, it could time for some adjustment in cap rate expectation vs. the cost of borrowing.
Realty News Report: Are investors more comfortable with Houston now?
Jason Gaines: Yes. Our market is pretty stable. It’s not a Houston thing, it is indicative of major markets in Texas. We’re pretty well occupied, and the market is pretty stable. Buyers feel comfortable buying here. Houston is in the top tier of places to buy project. Some potential buyers weren’t comfortable with Houston’s lack of zoning and low regulation and they didn’t buy here. But many others did. National and international investors are very excited and very comfortable about buying and owning in Houston.