For a while, Houston retail landlords could set a price and wait for a line to form. The latest quarterly numbers suggest that line just got shorter. Vacancy climbed to 5.7%, up 30 basis points from the prior quarter, and net absorption swung to negative 499,168 square feet — a sharp reversal from the positive 705,022 square feet the market posted the quarter before.
Leasing activity told the same story from a different angle: 1.5 million square feet of retail space got leased during the quarter, down 21.5% from the 2.5 million square feet a year earlier. And yet — asking rents didn't blink. Average rents rose to $21.47 per square foot, up 1.2% quarter-over-quarter and 5.8% year-over-year, with Inner Loop space commanding a premium $32.35 per square foot. The construction pipeline cooled too, down 6.8% quarter-over-quarter to 4.2 million square feet, with roughly 69% of that space already pre-leased before it's even delivered.
A market can keep raising the price of the house even after fewer people show up to see it — for a little while. Rents moving up while leasing volume and absorption move down isn't a sign of strength, it's a sign the market hasn't repriced yet.
The good news first: that pre-leased construction pipeline means Houston isn't staring down a supply glut — most of what's coming out of the ground already has a tenant attached. The caution: landlords pricing new deals off last year's rent comps are negotiating against a market that just posted its first negative absorption quarter in a while, and tenants who've felt stuck accepting whatever terms were offered finally have real room to push on concessions and tenant-improvement allowances, especially outside the Inner Loop — the Southeast submarket posted the steepest declines and is the most likely place to find a landlord willing to negotiate. Inner Loop retail, by contrast, is still commanding premium rent and isn't where the new leverage shows up.
Houston retail isn't in trouble. It's just no longer a seller's market everywhere, all the time — and the owners who notice that first are going to close more deals than the ones still pricing off last year's comps.