Retail leasing rates are steadily rising in Katy, and commercial realty groups say several factors—such as income level, demographics and daytime traffic counts—justify the higher rents, but some say the rate hike is squeezing out small businesses.

“In general, Katy as a whole is a big destination for retailers,” said Court Richardson, senior associate for the retail leasing division of Stream Realty. “It’s a combination of great demographics and strong income. Cinco Ranch was one of the only master-planned communities expanding during the [economic] downturn.”

Retail traffic

Rental rates are specific to a particular market, Richardson said.

Retail leasing rates in Katy can range from $1.65 per square foot at Clay Road Shopping Center at 19214 Clay Road, to $35 per square foot at LaCenterra at Cinco Ranch as of March 2017, according to LoopNet.com, a commercial leasing website. While the rates vary, there is logic behind the numbers, Richardson said.

One factor involved in calculating retail leasing rates is daytime traffic, Richardson said.

Traffic counts rose more than 100 percent from 2006 to 2012 at the intersection of I-10 and Pin Oak Boulevard, the exit that leads to The Shoppes at ParkWest and Katy Mills, according to the Texas Department of Transportation’s Houston Regional Traffic Count Map.

At Grand Parkway and Cinco Ranch Boulevard, where a motorist would exit to get to LaCenterra, traffic counts increased 70 percent in the same six-year period.

The reason for the influx of traffic, Richardson said, is that more people are moving to Katy, and demographics show that they are wealthy and educated.

Jazz Hamilton, first vice president with the retail brokerage services group at CBRE Commercial Real Estate, said retail rental rates have been steadily on the rise in Katy as the economy has grown.

“It goes back to consumer confidence and disposable income,” Hamilton said. “Katy used to be a blue-collar market, but it’s shifted. Your densities have doubled and your incomes have gone up.”

Katy currently operates in a landlord’s market, which means space is in demand with more than 93 percent occupancy in Katy’s Class A—top tier, newly constructed—buildings, Hamilton said.

“It’s all based on sales and volumes,” he said. “A lot of landlords try to track the trends. Whether it’s a mom and pop or national chain, if they can’t pay the rent, because we’re in a landlord’s market, there are three other businesses who want to get in that space.”

Growing pains

While rent, income and population have all increased in Katy, the leasing rates could drop as space becomes available, said Matt Keener, executive vice president at CBRE.

“It’s really about supply and demand,” he said. “Retailers are demanding space. When there’s a lack of supply, rents go up. The good news is rents should be leveling out. In Katy in particular, you’ve had a lot of new product and additional phases to existing shopping centers. At 99 and I-10, there are seven new projects underway.”

LaCenterra at Cinco Ranch opened in March 2007 with 165,000 square feet of retail space and about 96,000 square feet of Class A office space. Population growth was ramping up at the time and has remained on a steady uptick since then, according to the U.S. Census Bureau.

Despite three recent business closings at LaCenterra—Bonefish Grill, Restless Palate and Sweet Boutique—Woody Mann, president of Vista Equities Group, which owns the development, said the shopping center is burgeoning, largely due to the number of residents who have moved to the area.

“With the recent Westpark Tollway expansion, it is now easier than ever to live in Katy, and we anticipate that the area will continue to thrive as it has over the previous decade,” Mann said. “The future of LaCenterra will continue to develop as a mixed-use space.”

LaCenterra recently announced its fourth phase of development, which calls for 410,000 square feet of mixed-use retail in spring 2018.

Other major retailers in Katy include The Shoppes at ParkWest and Katy Mills, both near the intersection of I-10 and Katy Fort Bend Road.

Katy Mills, an indoor shopping mall, has been in Katy since 1999 and offers more than 150 retail stores. It is located near the Katy Boardwalk project, which will add 60,000 square feet of retail space to the area.

ParkWest officials said they, too, have capitalized on the location of their shopping center and the thriving Katy market.

“The expansion of Interstate 10 and completion of Grand Parkway have spurred immense residential growth in this trade area over the last few years,” said David Stukalin, president of the Retail Connection’s Houston office and a spokesperson for the shopping center.

ParkWest brokers are leasing for the third phase of the shopping center, which will include 150,000 square feet, Stukalin said.

Sarah Tober, communications director for the National Federation of Independent Business, said a survey the Austin-based company conducted last year showed that the No. 5 challenge among small-business owners was property taxes, which she said could be a factor in why rents are rising. If a landlord’s taxes go up, the cost could be passed on to the leaseholder via rent, she said.

“I think rent is a real and prevalent issue,” she said. “Small-business owners are hit on a lot of different levels. We’ve seen property tax, franchise tax and inventory tax become big issues. A lot of times landlords tack on the property tax hikes to their small-business owners, and ultimately the costs are passed down to the customer.”

Small business struggles

Although Katy area shopping centers have a high occupancy rate and no shortage of traffic volume, some small businesses in the area have struggled to keep up with the rising rental rates. 

Eric Salmon, owner of Red Oak Grill, said his rent nearly doubled since he opened his restaurant on South Mason Road in 2006, prompting him to close the doors late last year.

“That’s a lot of money to do business,” Salmon said. “It’s just not feasible for the mom and pop stores.”

The struggle to keep up with rising rent also exists for those who need office space, said Cyril Thomas, who founded The Hive on Fenhurst Drive in Katy to offer smaller, less expensive space for businesses struggling to get started or stay afloat.

“I definitely think the higher rents are squeezing out the mom and pop businesses,” he said. “There comes a point where you can’t run a business out of your house but you can’t afford anything else because of the sheer sizes.”

The Hive offers spaces that are 80 square feet to 600 square feet and lease for about $599 to $1,200 per month. Thomas said he believes it is important for small businesses to have options and to work in an environment where they can collaborate with other entrepreneurs.

Thomas said that he is in the process of opening a restaurant but has stalled the project for nine months.

“It’s just so expensive,” he said. “It just floors me what the lease spaces are going for.”

Richardson said there is an ongoing dialogue among many of Katy’s small business owners about the cost of doing business. 

“There is a concern about rising rents,” he said. “At some point, higher rents aren’t sustainable. Landlords are starting to be somewhat sensitive to the fact that you can’t keep raising rent when the margins aren’t enough for them to make any money.”

Lance LaCour, president and CEO of the Katy Area Economic Development Council, said the vacancy rate in the Katy area is below 4 percent for retail, about 12 percent for industrial and 15 percent for office space.

“Retail is doing well,” he said. “That’s where you see most of our growth. The general public is interested in retail, but they’re also interested in higher-paying jobs.”

Retail in Katy shows no signs of slowing business down, Richardson said.

“There’s a little bit of a herd mentality,” he said. “If you have a great lineup of tenants, other tenants want to come. Income, population, density and, to some degree, daytime traffic drive that.”