5Qs for broker Kenneth Katz on Houston, the nation's retail build leader

Houston is hot! Well, temperature-wise, of course. But it’s been America’s most torrid retail construction market for a long time. A recent study of construction levels in major markets performed by StorageCafe found that Houston’s 12 million sq. ft. of retail real estate construction since 2012 was 24% greater than that of No. 2 San Antonio and 61% ahead of No. 3 Austin. We called upon Kenneth Katz, principal of top Houston retail real estate brokerage Baker Katz, to tell us more.

What’s making Houston such a retail hot spot right now? Are construction costs lower there?

No, construction costs are continuing to go up. We’re facing the same problems with interest rates that have been so paralyzing to so many people in the real estate business. But Texas is attractive to a lot of retailers, and Houston has always been such a desirable market.

How are you navigating development challenges?

I think that many property buyers using other people’s money are looking at the situation from a fee standpoint and may be convincing themselves to take a risk that rates are going to be lower in a couple of years. They can pick up properties at a slight discount and then refinance when rates come down. But most buyers are hesitant to do anything. They’re hesitant to step into a leverage situation that only works out if rates go down.

Retail rents are going up nationwide. Are chains who’ve promised Wall Street X-number of new stores this year more willing to pay higher prices?

There’s a lot of demand and not a lot of supply, so there’s a lot of upward pressure on rents. Big box retailers that used to pay $12 a square foot are now paying $25 a square foot and it’s not a big deal. They’ve paid such low rents for such a long time, and now if they don’t pay more they’re not going to be able to open new stores.

Several big box chains are experimenting with smaller footprints. Is that happening in Texas?

Not that I have seen. All of the chains that we represent here are still looking for the same size spaces they’ve always wanted. You can still find the space. It’s a little bit harder right now, but there still are plenty of spaces that turn over.

 Where is the retail development industry headed in the years ahead as it relates to interest rates, construction costs, leasing, and more?

Wages go up and they usually never go back down. It’s very hard to lower wages. But at some point, we’re going to reach an equilibrium. In Houston, we’re not land constrained. We’re still operating on the concept of urban sprawl. Communities continue to grow and grow and lots of people still are moving here. It’s good to be in Texas.