BoyarMiller Forum Predicts Ongoing Pain In Commercial Real Estate For 2010 And Beyond

HOUSTON, Texas (December 14, 2009) — Houston’s commercial real estate market, hammered by the credit squeeze, recession and plummeting natural gas and oil prices, isn’t likely to see many bright spots – if any – in 2010 a panel of local experts predicted at BoyarMiller’s real estate forecast. Continued slow demand, downward rent pressure and increasing concessions are expected.

The gloomy picture painted by “Houston Commercial Real Estate Markets: What’s Ahead for 2010,” part of an ongoing series of breakfast forums held by Houston law firm BoyarMiller, is expected to extend into 2011 and beyond in some areas.

In industrial real estate, the current deadlock between buyers and sellers will continue through 2010 and last until such time that more lenders begin to re-emerge, Welcome Wilson Jr., president and CEO of GSL Welcome Group, LLC, told Houston business leader attendees. “Predicting the bottom of real estate values hinges on how we solve the CMBS troubles and capital opening up,” he added.

Overall, absorption will continue to be flat and rental rates are not expected to grow in 2010. Very little construction is expected next year, Wilson said. “Where Houston will be next year depends on what the national recovery looks like, the continued recovery of overseas markets – particularly Asia – and the price of oil and natural gas.”

The Houston industrial market totals over 482 million square feet and currently has approximately 3.27 million square feet under construction. Compare this to the 8.1 million square feet under construction at this time last year, and consider that two-thirds of current construction is in just two pre-leased developments, and the drastic contraction in the industrial construction is obvious, Wilson said.

The forecast for Houston’s office market is equally bleak. Rudy Hubbard, managing director of Transwestern, said weak market fundamentals and a lack of liquidity in the credit markets have surpassed sales activity in all metro markets.

Houston’s office vacancy rate for the third quarter of 2009 is 13.2 percent, which is below the national average of 14 percent. Other key indicators cited by Hubbard included:

• Office rents have declined from $22 to $21.30.
• Absorption rates are mirroring local employment trends, and for the first time since 2003 have slid into negative numbers.
• Office investment sales in metro Houston total $109 million through third quarter 2009 compared to $981 million for the same period in 2008.

“There will be $1.4 trillion in loans maturing in the next three years,” Hubbard said. “This is the equivalent of 140 billion $10 million deals.”

This means in 2010, prices and occupancy will continue to fall as layoffs end, but downsizing continues, rents will drop further and construction projects started in 2007-2008 will be completed. In 2011, rent levels should stabilize and foreclosure rates decline as the credit market heals, Hubbard predicted. By 2012, more rapid job growth will increase absorption rates, rents should start to climb as space starts to fill, and property values should increase. These same trends should continue in 2013, according to Hubbard, plus prices will continue to increase due to rising fundamentals and falling capital rates.

Hubbard added, “There will be great opportunities for investors over the next few years to buy distressed assets at prices significantly below replacement cost. This new wave of investors should have a positive impact on the Houston economy.”

In the retail sector, “it’s stressful to be a borrower, and it’s even more stressful to be a broker,” said Lance Gilliam, managing director of Moody Rambin Interests. “But it could be worse, we could live somewhere other than Texas.”

Gilliam said the problem in retail is lack of income. “We need consumer income to fuel and generate retail sales, retail sales to pay rent, and rent to fund debt service or to be capitalized to create value for a sale.

“Until income and confidence is restored, we have a problem. Few credible sources suggest that consumer spending is poised to rebound,” he said. In the past few weeks, a few signs of life appeared in consumer spending and retail sales. Although there is skepticism about the strength of any rebound, there is greater hope now than earlier in the year, he added.

As for retail construction, Gilliam said that, with few exceptions, nothing new should be built even if the capital markets would fund it because to do so would likely cannibalize existing retail and restaurant sales, further weakening existing tenants’ ability to meet their current lease obligations.

“Today, buyers and tenants are almost always predicating their decisions on the belief that we haven’t seen the worst of this adjustment in real estate values. Sellers and landlords are hoping we have,” said Gilliam. “There is a wide gap between what buyers and tenants are willing to pay and what sellers and landlords are willing to take. Until those two philosophies reconcile, completing deals with the confidence that our clients have made a ‘good deal’ will be difficult.”

Similar obstacles lie ahead in land development and housing, and according to Joel Marshall, senior vice president at Trendmaker Homes, 2010 will look a lot like 2009. He said not to expect a rebound in residential real estate until 2011.

“We’re going to be down at these levels for a while. It’s going to be hard for us to see price appreciation and activity increases until some things change. We have to have jobs – and then consumer confidence will come back – and we have to fix the appraisal process, which because of changes made by Congress is keeping values down from the levels they should be in many cases, particularly for new home builders,” Marshall said.

For people who have jobs and are considering buying a home, now is the time, said Marshall, because long-term, 30-year fixed rates are as low as they’re going to be in the lifetime of the people who are in the home buying market right now. “If people are thinking about buying a house with a 30-year mortgage, they’re not going to get a cheaper rate than what it is today. And it will be a full percentage point higher next year. It’s an unbelievably attractive time to take out a mortgage,” he said.

Other key points made by Marshall included:

• Houston is projected to deliver 18,000 new houses this year, and the only reason we’re doing that level of volume, he said, is because in spite of our job losses we’ve still had population increases. This is vastly different from what Houston experienced in the 1980s when it lost population and entire neighborhoods were boarded up. “We’re not going to experience that this time. We don’t have a lot of excess inventory of existing homes out there, but we’re getting pretty close to equilibrium and in some areas there’s actually a shortage of inventory,” he said.
• New homes are still in an oversupply situation and are selling for less than last year, but this won’t last very long, and the buying opportunity for new homes within the next three to six months is as good as it’s going to be.
• New home inventory levels have dropped at nearly every price point, with the exception of under $100,000 and over $500,000.
• Houston has only recently started absorbing more lots than are being delivered. But that oversupply of lots is geographically isolated, primarily in subdivisions in the far northeast and far northwest. On the west side of town there’s no oversupply of lots of any size.

Marshall added that the residential real estate market may have to step back and consider whether consumer behavior has changed to where buyers no longer want bigger houses.

“People used to buy the absolute maximum house that they can afford. We’re not seeing that now; they’re buying less house than they can afford,” he said.

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