Texas Real Estate Business

MAY 2017

Texas Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in Texas.

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38 • May 2017 • Texas Real Estate Business www.REBusinessOnline.com I N T E R F A C E C O N F E R E N C E C O V E R A G E HOUSTON — As brick-and-mortar retailers such as Sears, Macy's and hhgregg continue to shutter stores throughout the country at a furious pace, Houston developers are rapidly warming to the idea of anchoring their shopping centers with restaurants, fit- ness centers and entertainment-based businesses. Retail executives throughout the Houston area convened at the Inter- Face Houston Retail conference on April 18 to discuss the impact of this trend and others on the metro's retail real estate market. In Houston, the rampant growth of e-commerce contributed to 1.3 million square feet of big-box space being re- turned to the market in 2016, accord- ing to CBRE. In addition, the first quarter of 2017 saw net absorption of only 182,00 square feet. The end result is that developers are being forced to repurpose shopping centers anchored by traditional big- box retailers. As such, they are increas- ingly turning to businesses that offer a lifestyle product or service to fill the void. Larry Levine, president of Houston- based development firm Levcor Inc. and a conference panelist, noted that big-box closures actually represent good opportunities for property own- ers in urban pockets. "When the retail environment changes, you want to be able to adapt to it right then and there," Levine told and audience of more of 225 industry professionals at the Royal Sonesta Ho- tel. "In you're in the heart of Houston and you've got great space and your Sears store goes out of business, that's a win-win." The big losers, Levine added, are shopping center developers in the suburbs, because they lack the popula- tion and foot traffic to attract a food-, fitness- or entertainment-oriented an- chor. Total Wine and Dick's Sporting Goods are among the companies that have backfilled big-box space vacated in Houston, according to CBRE. What makes these firms different from Fresh Market or Sports Authority they replaced is their mass-merchan- dising approach to retail. According to Levine, these types of stores are less vulnerable to the e-commerce assault for two reasons: their price points are low enough to compete with online re- tailers, and people want to be able to see and handle the products they sell firsthand. "I think there's still a need for the mass merchandisers — Ross Dress for Less, T.J. Maxx — those guys won't be hurt as bad by the Internet," he said. "These places acquire their products so cheap that it makes people want to come in to get the deals. Plus there will always be products that the Internet can't really provide." Other emerging retailers include Austin-based dine-in theater Alamo Drafthouse, which is currently plan- ning four new locations in Houston, and Florida-based fitness chain Or- angetheory Fitness, which has grown to 12 Houston locations over the past couple years. Still, these lifestyle retailers don't come without problems. Panelist Dean Lane, a partner at retail development and brokerage firm Newquest Proper- ties, points out that while lifestyle re- tailers generate ample traffic for their co-tenants, the parking issues they cre- ate diminish their appeal. "A lot of tenants have changed their tune," said Lane. "Today, they would prefer to have a restaurant, gym or place of entertainment around them, as long as it doesn't interfere with their parking. Grocery stores, in particular, are always in fear that these retailers will steal their parking." While there is a changing of the guard in Houston retail, the metro's strong population growth has bol- stered demand for space, driving the vacancy rate down to a two-year low of 5.3 percent, according to CBRE. Houston also has ample land still available for retail lease, according to panelist Charles Scoville. "The 4.5 million square feet of retail space [under construction] is largely being built in places where communi- ties are underserved, like along Grand Parkway," says Scoville, COO of Houston-based developer Read King. "Retail is still a function of the right space in the right location, so there continue to be opportunities for us as markets change and evolve. We just have to find those niches." — Taylor Williams FOOD, FITNESS, ENTERTAINMENT WILL SAVE HOUSTON SHOPPING CENTERS, SAYS PANEL From left to right: Dean Lane, partner, Newquest Properties; Larry Levine, president, Levcor Inc.; Charles Scoville, COO, Read King; Tom Lile, president, Gulf Coast Commercial Group; Marc MacConnell, senior vice president of retail, Arch-Con Construction; David Luther, first vice president/district manager, Marcus & Millichap. HOUSTON — While it's not an ideal time to be a multi- family property owner in Houston, it is a good time to be working on behalf of one. With their clients sitting on excess supply, apartment locators — middlemen who match tenant preferences to properties — are being increasingly called upon to deliver tenants. Locators work on commission, typically earning about 20 percent of the first month's rent for their services. But in Houston's soft market, that figure is rapidly rising. Ricardo Rivas, chief investment officer at Allied Orion Group and one of several panelists who spoke at the Inter- Face Houston Multifamily conference on March 28, noted that while locators are costly, the services they provide in a down market are crucial. "They [locators] are our best friends right now," Rivas said to 175 industry professionals who gathered at the Royal Sonesta Hotel. "We reach out to them, we throw them parties and we give them big incentives to bring ten- ants over." Todd Marix, a senior managing partner in HFF's Hous- ton office, was another panelist who addressed the rising operating costs that landlords are facing. In his view, fees paid to apartment locators are quietly doing major dam- age to property owners' net operating income (NOI). "Concessions are the most visible measurement of weakness," Marix said. "What gets lost in the discussion, in terms of the threat to NOI, is locator percentages, espe- cially when that rate goes from flat to a certain percentage, and then that percentage goes from 75 to 100 and so on." The excess supply has also heightened demand for ex- perienced property managers, another group command- ing higher pay. Because tenants have ample options, they most likely won't renew their leases if they aren't satis- fied with the customer service their property manager provides. Managers with track records of keeping tenants happy and in place are fielding more lucrative job offers. Competition among landlords for experienced manag- ers is a byproduct of these soft market conditions, accord- ing to Jenifer Paneral, regional vice president at property management firm Pinnacle. "Keeping people happy on the site is really important," she said. "We're seeing a lot of competition for great em- ployees. That's one of our biggest challenges — to keep talented people in place and not get into a bidding war on salary." The competition for managers and leasing agents is particularly stiff for newly developed, Class A properties in lease-up. But without quality people at these positions, Paneral said, tenant retention is much harder to come by. Minimizing the amount of time that a unit is vacant is crucial to limiting costs, Paneral added, particularly for companies with large portfolios. "If we reduce vacancy by even one day in our 10,000- unit Houston portfolio,our monthly revenue increases by $333,333, with average rents at $1,000 per month," Pan- eral said. Rivas and Marix both noted that as more units have come on line, the pressure to staff them with quality managers has increased. Not only has this situation led to pay raises for managers, but also for groundskeepers and maintenance workers, cutting further into landlords' profits. "It's almost like expansion in pro sports," Marix said. "When you expand, you dilute the product, and the tal- ent level isn't quite what it was when you started. It's a real challenge to get good on-site folks, almost like payroll warfare." — Taylor Williams APARTMENT LOCATORS, PROPERTY MANAGERS CASH IN ON RENT SLUMP

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