BoyarMiller Breakfast Forum: The Houston Commercial Real Estate Markets - What's Ahead for 2011
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BoyarMiller Breakfast Forum: The Houston Commercial Real Estate Markets - What's Ahead for 2011
- 1. www.boyarmiller.com Houston Commercial Real Estate Market: What’s Ahead for 2011 Breakfast Forum December 9, 2010
- 2. www.boyarmiller.com Homebuilding & Land Development Markets Joel Marshall Trendmaker Development Company Senior Vice President
- 28. www.boyarmiller.com Industrial Market Welcome W. Wilson, Jr. GSL Welcome Group President & CEO
- 47. www.boyarmiller.com Retail Market Ewing King Ewing King Commercial Real Estate Principal
- 48. State of Local Economy
- 49. Houston, Texas: Population Growth Over the past decade, Houston has welcomed 1.13 MM people ranking 3rd in the nation in population growth.
- 50. • Houston continues to have better employment than the rest of the country with the largest 5 year gain among U.S. Cities according to the U.S. Bureau of Labor Statistics. • While the National Unemployment Average is 9.6%, Houston maintains an unemployment rate of 8.7%. Unemployment Rate - Houston vs. U.S Largest 5 Year Employment Gain (June 2005 - June 2010) U.S. Bureau of Labor Statistics (as Reported by the Houston Business Journal) – July 28, 2010
- 51. Houston - A Corporate Center for Business Fortune 500 Companies Headquartered In Houston Company/Rank Revenues ($000,000) Company/Rank Revenues ($000,000) ConocoPhillips (6) 139515.0 CenterPoint Energy (275) 8281.0 Marathon Oil (41) 49403.0 Smith International (277) 8218.6 Sysco (55) 36853.3 Kinder Morgan (315) 7185.2 Enterprise GP Holdings (92) 25510.9 Calpine (338) 6564.0 Plains All American Pipeline (128) 18520.0 Enbridge Energy Partners (364) 5905.4 Halliburton (158) 14675.0 Cameron International (399) 5223.2 National Oilwell Varco (182) 12712.0 EOG Resources (434) 4787.0 Continental Airlines (183) 12586.0 Spectra Energy (437) 4725.0 KBR (193) 12105.0 El Paso (447) 4631.0 Waste Management (196) 11791.0 Group 1 Automotive (457) 4525.7 Baker Hughes (243) 9664.0 FMC Technologies (467) 4405.4 Anadarko Petroleum (260) 9000.0 Frontier Oil (488) 4237.2 Apache (271) 8614.8 Source: Fortune, April, 2010 With 25 Forbes Fortune 500 companies headquartered in Houston, our city ranks 3rd in the nation. Key fundamental drivers that keep Houston ahead of the rest of the country include: • The Texas Medical Center – Largest medical complex in the world. • Port of Houston – ranks #1 in the United States in volume of foreign tonnage and is poised to increase that margin with the completion of the Panama Canal expansion in 2014. • Oil & Natural Gas - Houston is home to more than 5,000 energy related firms and is considered the Energy Capital of the world. • Business Friendliness – State income tax exemption and other fundamentals have made Houston the largest metro area with the highest level of entrepreneurial activity. The Texas Medical Center
- 52. Houston Retail Markets at a Glance
- 53. Retail Breakdown Houston’s strong, long- term outlook is expected to continue attracting retailers seeking to expand market share in one of the fastest growing metros in the U.S. Approximately two- thirds of Houston’s retail inventory is made of neighborhood and community centers
- 54. Houston Retail Statistics Market Occupancy Retail occupancy rates are the highest they’ve been since 2005 at 92.2% led by inner loop properties. Average Market Rents, currently at $14.38 psf, appear to have bottomed out and are gradually climbing again. Despite the recent downturn, current retail rents are still above the 8 year historical average. Market Rents
- 55. Appearing to have avoided the perils of significant overbuilding, Houston has absorbed over 5 million square feet of retail property in the past year, while completions have decreased from the peak of over 8 million square feet in 2008 to just under 2 million square feet in the last 12 months. Positive absorption numbers are a testament to an increase in leasing activity, Houston’s attractiveness to retailers and limited development. Absorption Completions and Net Absorption
- 56. • Holiday sales account for over 20% of Annual Retail Sales. • With only 0.4% year over year retail sales growth in 2009, Holiday Sales are back in 2010 with Black Friday sales well exceeding expectations. • Cyber Monday hit an all time record, exceeding over $1 Billion in sales, and increasing over 16% from last year’s sales. Holiday Sales
- 58. Discount and Value Oriented retailers are the most active tenants in today’s market. Retailers have exhibited a “Flight to Quality” mentality with the past two years providing opportunity for those typical Class B tenants to get into Class A space at relatively same rental rates. Retail Trends Concerted effort by retailers to increase profitability and cash flow by resetting their balance sheets and focusing within their stores on: • Reducing the size of stores • Increasing efficiency/reducing operating expenses • Limiting capital expenditures on new units • Managing inventory levels • Remodeling and reformatting • Emphasis on increasing internet sales
- 59. • Investments Sales – Gap exists between Class A and B projects – the market will pay a premium for Grocery anchored centers which are the most desirable “top of the food chain” retail product. Cap rates have trended downward throughout the year for these “trophy properties” while the market will pay a lot less or not bid at all on Class B product. • 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, Debt for new construction requires significant pre-leasing with a strong development yield and considerable equity. Emerging Trends
- 60. Challenges Still Facing Us
- 61. • National uncertainty and policy making. • Weak consumer confidence. • Job growth. • Financing. • Empowerment of opportunistic tenants. Challenges Ahead
- 62. What’s Ahead
- 63. Houston-area Market Leaders 1. Wal-Mart Supercenter 50 stores 28.5% market share 2. Kroger 101 stores 25.6% market share 3. H-E-B 45 stores 14.7% market share 4. Randalls 36 stores 6.5% market share 5. Fiesta Mart 33 stores 5.6% market share Source: Shelby Report of the Southwest, January 2008 edition and Trade Dimensions. Counties included are Austin, Brazoria, Chambers, Fort Bend, Galveston, Harris, Liberty, Montgomery, San Jacinto and Waller. Future Grocery Anchored Developments 2010 & Beyond
- 64. Outlook 2011 • Increase in number of tenants actively seeking locations. • Continued pressure on public retailers to grow externally through new store expansion. • Legacy assets begin developing junior anchor boxes and complementary inline space adjacent to existing anchored developments. • Few if any full price retail centers from ground up. • Outlet center will be announced either in the League City/Texas City submarket. • Class A, small retail space will be in tight supply and high demand. • Rental Rates gradually increasing in the second half of the year. • Continued obsolescence of older and poorly positioned retail centers - candidates for adaptive reuses. • Bid/ask gap narrows for distressed properties.
- 65. www.boyarmiller.com Office Market Brandi McDonald Transwestern Managing Director & Senior Vice President Tenant Advisory Services
- 66. Houston Office Market Report Houston Office Market is in relatively strong position The bottom of the market is behind us The next peek is outside visual range Absorption is positive for the first time in 4 quarters Outlook: Steady improvement into 2011 Texas job growth “=“commercial space demand in Houston
- 72. Source: The Texas Workforce Commission, www.texasworkforce.org National Unemployment October 2010 Houston 8.0% Texas 8.1% U.S. 9.6%
- 73. Texas Job Growth October 2009 – 2010 Total NonAg. Employment 172,800 1.7% 6,200 0.3% Profess. & Business Svcs 50,600 4.1% ‐3,600 ‐1.0% Education & Health Svcs 38,800 2.9% 8,800 2.9% Mining & Logging 30,800 15.7% 3,700 4.2% Manufacturing 26,400 3.2% 2,600 1.2% Leisure & Hospitality 23,800 2.4% 3,600 1.6% Construction 12,900 2.3% ‐4,700 ‐2.7% Other Services 5,700 1.6% 900 1.0% Financial Activities 4,500 0.7% ‐1,600 ‐1.2% Trade, Trans. & Utilities ‐3,000 ‐0.1% ‐700 ‐0.1% Government ‐4,500 ‐0.2% ‐1,200 ‐0.3% Information ‐13,200 ‐6.6% ‐1,600 ‐4.7% Source: The Texas Workforce Commission, www.texasworkforce.org # Houston Jobs # Texas Jobs
- 74. 242M SF, 12th Largest Office Market in U.S. Houston Office Market Current Conditions Vacancy 13.3%, down from 13.6% in Q2 2010 Absorption 97,000SF YTD Lease Rates Rents stabilizing with concessions driving effective rates down New Construction 2.5M SF under construction, down from 4.4M SF one year ago Job Growth Private sector employment grew by 10,800 in May and has grown by 31,000 since January Source: Delta Associates, Q3 2010
- 76. Source: Delta Associates Q3 2010 Houston Office Market Absorption 2007: 4,754,000 2008: 4,613,000 2009: (586,000) YTD: 97,000
- 77. Houston Office Market Lease Rates
- 78. Houston Office Market New Development 62.0%
- 80. Size (MSF) CBD 50.3 West Loop 35.1 Energy Corr. 29.1 Westchase 15.5 Northwest 15.3 Greenspoint 13.4 Greenway 12.1 Vacancy % CBD 11.4% West Loop 11.1% Energy Corr. 12.6% Westchase 14.1% Northwest 19.6% Greenspoint 14.2% Greenway 13.6% Vacancy (MSF) CBD 5.2 West Loop 3.6 Energy Corr. 3.4 Westchase 2.1 Northwest 3.0 Greenspoint 1.7 Greenway 1.5 Rate (Class A) CBD $36.72 West Loop $29.00 Energy Corr. $26.75 Westchase $30.00 NW Far $27.20 Greenspoint $20.40 Greenway $28.00 Source: Delta Q3 2010 Houston Office Market Submarket Comparison Rate Forecast
- 81. 2001 2004 - 2005 2009 2010 $32.00 psf $24.00 psf $38.00 psf $36.00 psf Tech Bubble Enron 9-11 Oil Hits $145/barrel Subprime Mortgage Crisis 14 bldgs with over 50K SF Contiguous AvailableSource: Costar, a select set of buildings 12/6/10 Trends/Forecast CBD Class A 29 Bldgs, 28M SF 1.8M SF UC 7% Vacancy -602K SF Absorp. YTD
- 82. Three Allen Ctr. 333 Clay Street Devon Energy 186K SF Sublease Thru 1/2020 Two Allen Ctr. 1200 Smith Street Devon Energy 281K SF Available 4/2011 Continental Ctr. I 1600 Smith Street Continental Airlines 414K SF Expires 12/2014 Chevron 250K SF Expires 3/2011 Pennzoil North 700 Milam Shell 554K SF Expires 12/2013 Trends/Forecast CBD Class A One Allen Ctr. 500 Dallas Street Hess 388K SF Available 9/2011 Two Houston Ctr. 909 Fannin Shell Trading 249K SF Available Q3 2013 BG Group Place 811 Main Street 690K SF Available 690K SF 554K SF 249K SF 388K SF 281K SF 186K SF 664K SF 3M SF = 11% Class A Market
- 83. 2000-2001 2004 - 2005 2009 2010 $22.00 psf $19.00 psf $30.00 psf $29.00 psf Tech Bubble Enron 9-11 Oil Hits $145/barrel Subprime Mortgage Crisis 5 bldgs with over 50K SF Contiguous AvailableSource: Costar, a select set of buildings 12/6/10 36 Bldgs, 14.6M SF 302K SF Proposed SKANSKA 10% Vacancy 170K SF Absorp. YTD Trends/Forecast West Loop Class A
- 84. 3009 Post Oak SKANSKA New Dev. 302K SF GB 1Q 2011 Southern Union Tower 5444 Westheimer BG/Southern Union 220K SF Expires 5/31/2012 Trends/Forecast West Loop Class A Bechtel 3000 Post Oak 439K SF Expires 6/2011 Apache 2000 Post Oak Blvd. 340K SF Expires 12/2013
- 85. 13 bldgs with over 50K SF Contiguous AvailableSource: Costar, a select set of buildings 12/4/10 2001-2002 2004 - 2005 2008 - 2009 2010 $22.00 psf $20.00 psf $28.25 psf $26.75psf Tech Bubble Enron 9-11 Oil Hits $145/barrel Subprime Mortgage Crisis 33 Bldgs, 8.1M SF 1.6M SF UC 30% Vacancy 30K SF Absorp. YTD Trends/Forecast Energy Corridor Class A
- 86. Three Eldridge Place 737 Eldridge 305K SF Trends/Forecast Energy Corridor Class A Reserve at Park Ten 15721 Park Row 136K SF Eldridge Oaks 1080 Eldridge 272K SF Avail.
- 87. 6 bldgs with over 50K SF Contiguous AvailableSource: Costar, a select set of buildings 12/4/10 1998 - 1999 2004 - 2005 2009 2010 $24.00 psf $20.00 psf $27.75 psf $30.00 psf Tech Bubble Enron 9-11 Oil Hits $145/barrel Subprime Mortgage Crisis Trends/Forecast Westchase Class A 26 Bldgs, 7.2M SF 14% Vacancy 291K SF Absorp.
- 88. Westchase Park 3700 W Sam Houston 144K SF Oak Park Center IV 6005 Rogerdale 158K SF Trends/Forecast Westchase Class A
- 89. 10 bldgs with over 50K SF Contiguous Available Source: Costar, a select set of buildings 12/4/10 2000 -2001 2002 2009 2010 $22.74 psf $21.00 psf $27.20 psf Tech Bubble Oil Hits $145/barrel Subprime Mortgage Crisis Trends/Forecast Northwest Far Class A 24 Bldgs, 4.6M SF 39% Vacancy 785K SF Absorp.
- 90. Beltway Lakes II 5875 N Sam Houston 162K SF Trends/Forecast Northwest Far Class A Westway Park II 4424 W Sam Houston 82K SF Two Westway 11025 Equity 72K SF
- 91. 1 bldg with over 50K SF Contiguous Available Source: Costar, a select set of buildings 12/4/10 Trends/Forecast Greenspoint Class A 19 Bldgs, 4.7M SF 7% Vacancy 61K SF Absorp. YTD 2001-2002 2003 - 2004 2010 $21.50 psf $18.75 psf $20.40 psf Tech Bubble Enron 9-11 2006 $18.70 psf 2008 - 2009 $20.50 psf
- 92. 5 bldgs with over 50K SF Contiguous AvailableSource: Costar, a select set of buildings 12/4/10 2000-2001 2005 2009 2010 $21.75 psf $19.50 psf $30.50 psf $28.00 psf Tech Bubble Enron 9-11 Oil Hits $145/barrel Subprime Mortgage Crisis Trends/Forecast Greenway Class A 15 Bldgs, 6.0M SF 14% Vacancy 24K SF Absorp. YTD
- 93. Capital Markets $1.2T Debt tsunami is farther offshore and weakening Distressed loan levels stabilized in Q3 New delinquencies decreasing and more banks putting assets on market* Special services are resolving troubled loans faster this year (2009 ave 21mos/2010 ave 18)** CMBS market is slowly returning Source: *Costar Advisor 10/27/10 ** Globe Street 10/27/10
- 94. Capital Markets Houston is still the ‘place to be’ (not overbuilt + job growth) Foreign investors continuing to enter market Sellers: Buyers: Tenants: Cash is King – 55-65% LTV More buildings expected to go on the market in Q1 2011 Special servicers not motivated to spend capital Know your lease
- 95. Capital Markets Notable Sales Date Building SF $/SF % Cap Buyer Jun-10 17000 Katy Fwy 174K SF $174 9.5% Black Forest Ventures Jun-10 Energy Center I 332K SF $283 7.2% Wells Real Estate Funds Jul-10 3 Sugar Creek Blvd 153K SF $186 TBD American National Insurance Sep-10 Energy Crossing I 239K SF $119 TBD Lincoln Property Company Oct-10 3900 Essex 235K SF $144 8.0% Beacon Investment Properties UC Lakes on Post Oak 440K SF $145 8.0% Five Mile Capital UC Heritage Plaza 1.1M SF $285 6.2% Brookfield Source: Real Capital Analytics; Transwestern; CoStar Comps
- 96. Corporate Space Strategies for Tenants Renewing: Downsizing: Expanding: Subleasing: Relocating: Don’t judge a building by its market The watch list is a must see Go Long Restructure Lease Go Long Go Ugly Early Set Aside 3 Days for Tours