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Houston’s Mission: Control

Retail development amidst the ongoing emergence of an iconic national city
Jason Baker and Kenneth Katz, co-founders and principals at Baker Katz

By Jason Baker and Kenneth Katz, co-founders and principals, Baker Katz

The first of a three-part exclusive series

To the extent that it can be said about the nation’s fourth most populous city, Houston has been flying under the radar. While Houston is far from an obscure metropolis, its emerging status as one of America’s truly iconic cities seemingly has yet to take hold in the public consciousness.

That is beginning to change, however, as growing national awareness of Houston’s status as a Gateway City on par with New York, Los Angeles and Chicago is starting to grow amongst retailers, investors, and a large swath of the general public.

The accolades have been coming fast and furious, from Business Insider’s Best City in America, to the Top City for Global Trade from Global Trade Magazine, Forbes’ Top Blue-Collar Hot Spots, and Top Destination City from U-Haul International. Houston also came in at No. 2 on the list of Best Cities for Good Jobs published by Forbes in 2013. Buoyed by very low unemployment (4.6% as of April 2014) and a strong economy, Houston’s eye-opening job growth is all the more impressive in comparison to other big cities that felt the full impact of the last recession. Not only did Houston manage to avoid the worst of the recessionary blues, by 2013 it had actually added two-and-a-half jobs for each job lost in the downturn.

It is not a coincidence that Houston’s diverse and dynamic economy is matched by a diverse and dynamic population — and that population is increasing at a rate that is difficult to wrap your mind around. Already on pace to overtake Chicago as America’s third largest city, Houston is adding more than 125 people every day from migration alone. And what they find when they arrive runs counter to some of the outdated (mis)perceptions about Texas. While it might not come as a surprise to many that Houston is home to the second highest number of Fortune 500 company headquarters in the nation, many more might not be aware of the fact that Houston is a truly international city with a rich cultural heritage and a thriving arts and entertainment scene: only New York City has more theater seats!

From a retail development standpoint, the activity in Houston in recent years reflects the city’s trajectory as an evolving, dynamic and complex market. Over the course of three articles, we will take a close look at how Houston’s retail development landscape is changing, focusing on specific trends that are impacting Houston in a big way: the rapid growth and evolution of the grocery sector, the way that retail is changing to reflect the consumer demands of an increasingly populous and influential Hispanic market, and the transformative changes underway in infrastructure redevelopment and urban infill.

Grocery Games
Today the Houston market is filled with competing grocers — from local players like H-E-B, to national brands like Trader Joe’s and Whole Foods. There is also a major increase in “cross-pollination,” with more discount stores offering grocery options and more traditional grocery stores offering a wider range of non-grocery items. Today, Wal-Mart and Target are big grocery players, and Kroger Marketplace is adding clothing and furniture.

To some extent, the changes taking place in Houston’s grocery marketplace reflect larger national trends, with smaller format niche operators expanding at the expense of some of the larger, more traditional established grocery chains. The speed with which this movement has happened in Houston, however, is eye-opening. In just the last 24 months, four new national brands have opened their doors in Houston: Sprouts, Trader Joe’s, Aldi and Fresh Market. Such an influx of chains that were not in the market previously is unlike anything in Houston’s past, and it is a clear sign that something big is going on. With Houston’s continued emergence on the national stage, this is almost certainly related — at least to some extent — to the fact that those grocers feel like they cannot afford to not have a presence in such a significant market.

What is especially interesting about the timing here is that, with four successful and highly competitive chains, the fight for market share going forward is bound to be fierce. It will also likely take some casualties: there is a sense among the Houston brokerage community that the existing grocery players and all four new names will not all be in it for the long run. It will be interesting to see how that shakes out, however, as the tenancy deals will likely continue to be choice for quality grocery concepts. In Houston, like elsewhere, grocers are often a retail loss leader, with landlords seemingly willing to do almost anything to land a big name.

One of the interesting contrasts between the Houston grocery landscape of the past versus the new and emerging market today is size. As it turns out, everything isn’t necessarily big in Texas. While traditional, large-format grocers have always tended to run even bigger than usual for their Houston locations, the niche newcomers are maintaining their smaller sizing.

To a certain extent, the smaller format concept works to the advantage for these Houston newcomers. Because — somewhat ironically for a place with the nickname of “Space City” — space is especially hard to come by in the Houston Beltway these days. With quality real estate at a literal and figurative premium and relatively high population growth, the niche grocers are having an easier time identifying and securing quality locations. The larger format grocers have a much tougher road to hoe, and Kroger and H-E-B have struggled to find high-quality affordable opportunities closer to the urban core of the city.

In many respects, the continuing changes in Houston’s grocery landscape are symbolized by the story of Rice Epicurean. Rice Epicurean is the most recent incarnation of an original Houston grocery store chain that began in 1937 as Rice Food Market and had 45 Houston-area stores at one point in the 1970s. Downsizing and rebranding over the years ultimately led to Rice Epicurean, a niche concept specializing in fresh and gourmet items. But when Fresh Market came to town, it took over and began operating on the sites of five Rice Epicurean locations — part of a real estate play by the Rice Epicurean owners, as they also own the majority of the shopping centers in which the stores reside. One of the five Fresh Market locations closed within the first year of operations.

Not all local grocers will necessarily struggle in Houston’s Brave New World of grocery games, however. Texas original H-E-B is highly regarded in the industry as one of the best traditional operators in the country. Progressive Grocer named H-E-B “Retailer of the Year” in 2010, and the chain currently operates 350 stores across the State of Texas. A private company, H-E-B has been praised for its variety, quality and service, and for the fact that no two stores are entirely alike. Interestingly, this Texas original has been successful not by sticking to its guns, but by adapting and evolving — a strategy that will likely be important for any grocer that wants to carve out space in Houston’s competitive and rapidly evolving grocery marketplace in the years ahead.

Co-authored by Jason Baker and Kenneth Katz, co-founders and principals with Houston-based Baker Katz, an X Team International partner and full-service commercial real estate brokerage firm specializing in retail tenant representation, investment sales, and project development and leasing. To learn more, visit Bakerkatz.com


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