Real Estate Panelists States “Houston is the Place to Be”: Predict Several Bright Spots Ahead for 2011

HOUSTON, Texas (December 15, 2010) —  The underlying theme from BoyarMiller’s annual commercial real estate breakfast forum, held Thursday, December 9, 2010, was “cautious optimism.” Whether developing land for residential use, brokering industrial space, working with retailers to lease properties in the Bayou City or helping clients find office space, the speakers agreed the outlook is better for 2011 than 2010, with all panelists predicting a moderate increase in activity next year.

Held at The Houstonian Hotel, BoyarMiller’s program featured: Joel Marshall, senior vice president of Trendmaker Development Company; Welcome W. Wilson, Jr., president and CEO of GSL Welcome Group; Ewing King, Principal of Read King Commercial Real Estate; and Brandi McDonald, managing director & senior vice president Tenant Advisory Services of Transwestern.

Marshall began the presentation with a discussion of land development and the housing industries, reminding the audience that mortgage rates are at an all-time low and expected to remain so for the near future. “It’s a buyer’s market right now,” he said. And, there is plenty of inventory, with Marshall citing that home listings continue to rise while closings stay flat. He added that the good news is Houston’s home depreciation rates are much lower than other major markets in the state. At -0.05%, Houston’s home prices should remain constant, compared to Dallas, where home prices are depreciating at -1.45%, and San Antonio, the highest in the state, with a depreciation rate of -3.58%.

Lot development and master planned communities in Houston are “in about the best shape in the country in VDL (vacant developed lots) inventory,” Marshall said. “There are quality lots in quality locations.” Housing starts in master planned communities are on the rise and, when considering the long-term outlook for single-family housing, Millennials – the subsection of the population aged 18-28 – say their ideal place to live is a suburb, even more so than older generations.

Like rising housing starts, Wilson reported that industrial projects are on the rise as well, with 219,000 square feet under construction. Wilson explained that industrial market vacancies are down from last year and Houston’s vacancy rate is in better shape than the majority of the country, measuring just below 6% compared to a national average of 9% at the end of the third quarter, 2010.

Wilson cited optimistic industrial sales transactions in 2010, with 13 industrial sales transactions since January 1, totaling $75.5 million, while 15 sales in 2009 only totaled $26.5 million. Of those transactions, making up the 2010 increase, are furniture retailers, who are occupying a larger percentage of Houston industrial space inventory. Also contributing to the positive forecast in the industrial market is activity at the Port of Houston (PoH), which reported trade of $154.4 billion in the first nine months of 2010, up 26.8% from the same 9-month period last year. Wilson stated the PoH is poised to do even better as the new Panama Canal locks are completed, giving larger ships a gateway to ports on the southern and eastern side of the U.S., including Houston.

Looking to the retail markets in 2011, King predicted that “Houston’s strong, long-term outlook is expected to continue attracting retailers seeking to expand market share in one of the fastest growing metro areas in the U.S.” Detailing this outlook are retail occupancy rates, which are the highest that they’ve been since 2005, at 92.2%, led by inner loop properties. Also impacting the market are rental rates, which had bottomed out and are gradually climbing again.

While much of King’s report was positive, he did present challenges in Houston’s market conditions including:

  • Investment Sales – Gap exists between Class A and B projects.
  • Distressed Properties – A sizeable bid/ask gap still remains on foreclosed properties with very little transactional volume on these assets, which continues to hinder banks’ willingness to lend money on real estate deals.
  • New Development – Difficult at best as debt for new construction requires significant pre-leasing with a strong development yield and considerable equity.

King added that retail markets face additional challenges from a national perspective including, “uncertainty and policy making…weak consumer confidence…job growth…financing… and the empowerment of opportunistic tenants.”

Rounding out the forecast with a snapshot of the office market, McDonald stated, “Houston is in a relatively strong position…the bottom of the market is behind us but the next peak is outside visual range. It’s hard to predict when it’s going to spike again.”

She added, “Absorption was modestly positive for the first time in four quarters.” The trend of typical “flight to quality” in the Class A building market that often occurs in a down economy is questionable with more of an apparent “flight to prudency” in a Class C sector which has seen consistent growth. “Rates have not fallen the way the industry thought they would,” she said.

“Houston, related to its peer cities, is in strong position related to office space vacancy,” McDonald said. “It’s just not as bad as it could be,” which McDonald attributes to the fact that Houston is not over built. “We’ve had a dip in vacancy, but not a big deal compared to 2003.”

The biggest challenge McDonald predicted for the coming year is rental rates, with most expected to continue trending downward. An analysis of all submarkets indicated class A rates have fallen in by $2.00 per square foot in the Central Business District, $2.50 in Greenway Plaza, $1.50 in Energy Corridor and $1.00 in the West Loop. Class A rates are expected to gradually trend down in class A product in the Far Northwest and Greenspoint, while the Westchase District is expected to remain stable.

Regarding tenant lease terms, McDonald suggested that late in 2011:

  • companies with a stable business plan that need to renew their existing lease go long on their term;
  • companies that are downsizing are better off restructuring their lease;
  • companies that are expanding should go long on their lease; and
  • companies that need to sublease go ugly early, because “it is ugly out there on the sublease front and if you have a live prospect, close the deal.”

Amid the challenges, McDonald saw positive growth for 2011 overall, stating, “Houston is the place to be.”