Retail growth in Houston is no longer hampered by the coronavirus pandemic, but franchise owners keen to tap into the city’s traditionally consumer-friendly restaurant market and rapidly growing population still face a major hurdle : lack of space.
After months of well-publicized national restaurant issues due to the pandemic and resulting closures, the franchises that have survived are eager to start claiming their place in booming cities again. — and many are watching Houston. Again high demand and few turnkey spaces have left Houston real estate experts scrambling to place new brands in the city.
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Workers preparing meals in a quick service restaurant.
“We’re running out of places to put people,” said Wade Greene, Principal and Director of Retail Services for Colliers Houston, of his retail team’s struggle to keep pace with inbounds on the market. Marlet.
The pandemic, including the new omicron variant, lingers on as a disruption, but as operations begin to return to something resembling normal, retail brokers in Houston are facing a flood of eager restaurant franchise owners to enter the recovering market. For Green, the market is the most competitive he has seen since he started at Colliers.
Greene sees many potential new franchisees, some of whom were laid off from profitable engineering or oil and gas jobs last year, who are now looking to get into the restaurant business. With so many potential candidates, corporate restaurants are becoming more demanding, asking for personal financial statements in addition to letters of intent from candidates. Likewise, landlords, worried about last year’s losses, are becoming more selective about who they rent and are eyeing higher rents.
Before the pandemic, Greene says Houston was one of the nation’s top retail markets, with occupancy levels reaching 96%. Although those numbers dropped during Covid-19, the city almost completely rebounded. A Third Quarter Colliers Report cites vacancy at 5.7%.
At least part of this momentum is due to the expansion of the restaurant franchise. Texas and Florida, the second and third largest states in the country, are leader in the country in terms of new establishments, according to Restaurant Dive, with franchises flocking to take advantage of a business-friendly environment, strong population growth and lax Covid-19 restrictions. More than 51% of the state’s food spending comes from restaurants, Restaurant Dive said, while its booming population meant only 14% of restaurants in the state closed during the pandemic, just shy of the above an average year.
Additionally, the Texas Legislature passed half a dozen pro-restaurant bills earlier this year, including initiatives allowing take-out alcohol at restaurants and grocery stores, the tax-free paycheck protection for franchisees and liability protection for businesses operating during the pandemic.
Houston is now the gateway to breaking into the huge Texas market, Greene said, overtaking Dallas, which reigned supreme as the Texas city’s go-to franchise a decade ago. A mix of cultural appeal, sustained growth, affordability and strong pre-existing quick service sales means the brands are looking to repeat the success other companies have already found in Houston.
Houston’s ethnic diversity is often cited by franchisees as their reason for coming to Houston, and Greene said the wide variety of people in Houston means a concept selling meals with international flavors could be more successful in Houston than everywhere else. It goes beyond restaurants. Greene pointed to one of his clients, a British cricket-focused entertainment concept that would normally struggle to break into the US market amid popular golf and football concepts. He is looking for his first US location in the multicultural city of Houston.
Beyond Houston’s ethnic diversity, with a quarter of Houstonians born overseas, brokers like Chris Reyes, partner at Shop Cos. highlight the diversity of workers in Houston. Houston is increasingly moving away from a single trade area city dominated by oil and gas, and with its huge medical center, the city has more customers at a higher income level than other markets. Add in Houston’s geographic size, and Greene said he offered franchisees eight or 10 ways to roll out their Houston entries.
“The days of us being this booming oil town are over,” Reyes said. “People are really starting to see Houston as more global.”
With more than 7 million residents and counting in Houston’s MSA, its size attracts newcomers, though the overwhelming number of neighborhood options can also make it difficult for franchisees to choose the perfect spot for their first location. pivot.
“It’s very easy to get lost in Houston throwing darts at the wall,” Greene said. “You have to be very mindful of what makes the brand successful. This franchisee’s first move into a new market is probably the most important decision he will make.
Even if a cult, urban concept wants to dive into downtown Houston and has the ability to pay those rents, the lack of available space can make it physically impossible.
Trendy Inner Loop neighborhoods like the Heights, Upper Kirby, Rice Village and Montrose continue to be hard to break into, and popular suburbs like Katy and The Woodlands are joining them. Today, Greene’s clients are turning to emerging or previously underserved neighborhoods, like the highly residential Garden Oaks and the growing southwestern neighborhoods of Fulshear and Aliana.
“We have great concepts that are looking for space in the city, and there’s just a lack of quality spaces to match quality tenants,” Greene said.
The rise in the number of people working from home in the sprawling city has led more franchises to look to the suburbs, where their clientele will spend most of their time, according to University of Houston associate professor Yoon Koh. which studies company restaurants with a focus on how they are coping amidst Covid-19.
Koh said customers were unlikely to travel more than 10 miles for a meal. As restaurants create larger kitchens for online ordering and larger delivery apps, she said, the more affordable rents in suburban locations become attractive.
Houston is generally considered more affordable than other cities its size, but retail rents are climbing to levels not seen in the city in years. Rents have returned to around $40 per SF in working-class suburbs, though still only a fraction of those seen in cities like New York, where rents are in the hundreds of dollars per square foot.
Reyes speculated that Houston rents could eventually top 2017 or 2018 highs, noting the high land prices developers are seeing.
To help create more attractive leases through Covid-19, landlords have given more improvement allowances to tenants than before. Although it may be tempting to recoup some losses through higher rents, there is a limit. Owners need appealing dining concepts to bring visitors to their developments, and experts warn overcharging could be a mistake in an industry where an operator might need to hit $1.5m in sales volume monthly. Moderate rent increases might make more sense financially in the long run for a landlord, Greene said.
When it comes to space requirements, quick service restaurants constantly require drive-thrus, which has only become more in demand in the wake of Covid-19, as well as expensive kitchen necessities like a range hood or a grease trap. Although second-generation dining spaces that already offer these features can save franchisees money, Greene said that once owners revamp kitchen and bathroom features and renovate to suit their brand, they could spend more money than if they had gone to a shell space.
This has prompted businesses to get creative with transforming self-contained, non-restaurant spaces into quick service. Greene cited a chicken concept that turned a dry cleaner into its first Houston location.
More of that could be on the way. Reyes calls retailing in Houston a safe bet. Despite a shortage of space, franchisees and other restaurateurs who are able to leverage relationships and rush to a prime location are eyeing a market he says is doing even better before the pandemic hits. Moreover, he does not believe that will change soon.
Franchises look to open multiple locations in a matter of weeks or months, and it’s not uncommon to expand up to 10 franchises in a market.
“It will take a lot for this train to stop,” Reyes said.
