A city without zoning, Houston has become a poster child for urban sprawl, plagued with deed restrictions and high property values. What saved the city from a lack of planning is its evolution into decentralized villages rather than a centralized mass, easing the burden on freeways. Weingarten Realty President Drew Alexander concedes that there is more conscientious development today than 20 years ago, thanks to community planning groups.

But a lack of land-use controls — once embraced by developers — has made retail development an overly competitive and risky business. For that reason, Alexander's firm has pulled out of the Houston development arena.

Yet, the region continues to blossom in conjunction with residential growth along new and improved freeway systems that are bringing outlying areas closer to employment centers.

And while demographics and infrastructure continue to bolster retail markets inside the loop, land-use restrictions and supply of vacant land are defining what's hot and what's not in the suburbs, notes Marcus & Millichap's Brad Bailey. Infill locations and well-established suburban areas with no vacant land left are the most attractive locations for investors, he says, noting that in areas with lots of vacant land “someone could change the scenario in a few years.”

Consequently, master-planned communities provide the safest haven for retailers in suburban markets, according to Ed Page, a principal at the retail brokerage Page Partners, who notes that The Woodlands in north Harris County and Sugarland's First Colony in Fort Bend County are the strongest suburban retail markets. Both communities are under-way on town centers projects.

Mike Hale, who is heading up Trademark Co.'s $90-million, 480,000-square-foot Woodlands project, says that Market Street is designed as an open-air environment, with plazas, public art, and children's areas amid specialty shops, restaurants and entertainment.

The 34-acre project is anchored by an HEB hybrid store, a cross between HEB's Central Market gourmet food brand and traditional grocery, and includes a five-screen cinema, 60,000 square feet of office space and a 591-space parking garage. Phase I, which includes 70 percent of the project, is scheduled to open in June 2004, with the remainder opening in 2005.

Located at U.S 59 and Highway 6, Sugar Land Town Square, a 32-acre lifestyle development at the center of the 9,700-acre First Colony development, includes 167 luxury apartments atop 130,000 square feet of street-level retail space; 600,000 square feet of Class A office space; on-street and garage parking; and a 300-room Marriott Hotel. Unlike the two-story Woodlands project, Sugar Land Town Center aims for a vertical, urban feel, with buildings of six, eight and nine stories, says Steve Ewbanks, executive vice president for developer Sugarland Properties, Inc.

The pedestrian-oriented project features upscale retailers, restaurants, and entertainment venues built around a 1.4-acre plaza.

“This a place where people can go, get out of the house, run into neighbors and socialize,” says Ewbanks. The hotel and convention center opened for business this month. Phase I of the overall project, which includes all but a portion of office space, will be completed by next summer.

Also, an ambitious highway construction program is driving residential and retail growth south to Pearland, north to the 290/Cypress Branch area and Louetta, and west to Katy.

The next area posed for development is Cinco Ranch in the suburb of Westheimer. Cinco Ranch development is tied to construction of The Grand Parkway, which will form a third loop around the city, and expansion of the I-10/Katy freeway from eight to 20 lanes all the way to the Brazos River. Houston developer Interfin Corp. and Simon Property Group, which entered the Houston market by acquiring The Galleria last fall, are at the forefront of development.

According to Interfin's Matt Waller, Interfin sold 529 acres at the intersection of the Grand Parkway and the Katy Freeway to Simon, which is building a mall that will open in 2005. Interfin retained 560 acres next door for development of a master-planned community that will include a 500,000- to 700,000-square-foot pedestrian-oriented retail complex, residential component and industrial space.

Meanwhile, the city is experiencing a renaissance in its CBD, and more residents are moving back into the inner city. The CBD's redevelopment got under way in the mid-1990s with conversion of 23 historic structures to residential use with ground-floor retail and the opening of night clubs and restaurants.

However, progress slowed over the past three years, notes Nick Hernandez, a broker with Page Partners, because the city began reconstruction of streets, public areas and streetscapes in a 100-plus-block area. During this down period, the city also completed construction of a new major-league ballpark and performing arts center and started expansion of the convention center from 1.1 million square feet to 1.89 square feet and 7.5-mile stretch of light rail that will connect the University of Houston and medical center to Brady's Landing on the north side of downtown and Reliant Stadium (formerly the Astrodome) south of the UH campus.

Additionally, downtown saw its first major office building in years rise at 1000 Main Street, with 900,000 square feet of Class A space and 46,000 square feet of retail on the ground floor. The 190,729-square-foot retail component in Houston Center, formerly known as The Park Shops, is getting a makeover.

With these improvements in place, Hernandez expects downtown residential development to get back on track and predicts an explosion in traditional retail development activity there during the next 18 months. “The construction hurt the revitalization process,” he says, “but now it's coming to an end, the mess is getting cleaned and activity will bounce back.”

Laura Van Ness, director of business development for the Central Houston Association, Inc., an organization that promotes development in the CBD, agrees. “We're seeing a little bit of soft retail, but retailers are waiting on completion of construction and more residential,” she says, noting that about 2,500 residential units are currently available, under construction or planned in downtown.

Midtown, an area that includes the medical center and the Museum District, remains the largest resilient retail market inside the loop, but all well-located projects from the Memorial area to the Galleria have strong fundamentals, according to Lance Gillian, a partner with Moody Rambin Interests. He notes, for example, that Town & Country Village, at the intersection of Memorial and Beltway 8, is 100 percent leased.

Jay Sears of Newquest Properties notes that inline retail rental rates in the Houston area range between $17 and $30 triple net, but rents inside the loop are in the $26 to $30 range. Overall occupancy has remained flat at about 88 percent, down from 93 percent a year ago.

Bill Forrest, senior realty advisor for Sperry Van Ness in Houston, expects occupancy to drop another 2 percent by yearend, with the delivery of nearly 2 million square feet of new retail space. The average rent, however, ticked up slightly to $18.33, compared to $18.22 per square foot a year ago.

And sales have never been stronger. Page notes that quality properties are selling at 7 percent to 8 percent capitalization rates, with prices in the $230- to $340-per-square-foot range.

Market Profile/Houston

DEMOGRAPHIC OVERVIEW

  • Total Population 2003 Houston: 2 million
  • Unemployment Rate Houston: 6.9%
  • Per Capita Household Income Houston: $20,101
  • Median Home Price Houston 2003: $124,960
  • Median Home Price Growth Over 2002 7.7%
  • Median Household Income: $36,616

SOURCE: U.S. GOVERNMENT, DEPARTMENT OF LABOR, BUREAU OF ECONOMIC ANALYSIS

RETAIL OVERVIEW

  • Average Retail Vacancy Rate 2003: 10.4%
  • Average Retail Property Cap Rate: 10.2%
  • Average Asking Rents For Triple-Net Lease Properties Houston $15.35
  • Total Retail Completions 2003: 1.9 million sq. ft.
  • Median Sales Price $120 per square foot

SOURCE: MARCUS & MILLICHAP