Positive Business Climate and Consumer Confidence Drive Growth in Houston Real Estate Markets
December 3, 2012
By Becky Myers | December 3, 2012
HOUSTON – Dec. 11, 2012 – With a robust economy and one of the nation’s top job markets, Houston is the place to be, according to a panel of local real estate leaders. Speaking at a recent real estate forum, sponsored by BoyarMiller, a Houston business and litigation law firm, the panelists said Houston’s residential, office, retail and industrial real estate markets will continue to see increased absorption, rental rate growth and lower vacancy rates.
Held at The Houstonian Hotel, BoyarMiller’s program featured Will Holder, president of Trendmaker Homes; Welcome W. Wilson, Jr., president and CEO of GSL Welcome Group; Jay K. Sears, Managing Partner at NewQuest Properties; and Robert S. Parsley, SIOR, co-chairman and principal with Colliers International.
Houston’s housing market is unique compared to the rest of the nation, Holder said. Residential real estate develops organically, and no zoning restrictions allow building where people want to live. This creates flexibility with changing market conditions. Houston escaped the housing crash and is enjoying stable home prices despite a decrease in new starts from 50,000 in 2006 to 20,000 in 2012.
Houston’s population is expected to double in the next 25 years, which will be a boon to the residential housing market, Holder said. With nearly 100,000 jobs created in Houston in 2012, and fewer new and existing homes available and decreasing lot inventory, there is and will continue to be a shortage of product, creating a seller’s market. Jobs will dictate the location of new development. Rental rates are rising in the local apartment market, a trend that will continue into 2013, Holder said. Many consumers have lost confidence in the real estate market but renters eventually will seek homeownership if rental rates continue to rise.
Houston’s retail sector is outpacing the nation, in part because of the current rate of job growth, Sears said. “Jobs are key to the retail market and there is no market that is as vibrant as Houston,” he said. The optimistic outlook is enhanced by a growing consumer sentiment index, reflected by strong retail spending during the Thanksgiving holiday, Sears said. Six million more consumers visited stores and websites on Thanksgiving Day and three million more on Black Friday, compared to 2011. Total spending increased nearly 13 percent to an estimated $59.1 billion, according to the National Retail Federation. While online sales continue to grow and have tripled since 2003, they only account for 5.2 percent of all retail sales and are not affecting brick and mortar retailers, Sears said. Rather, “good retailers build their online platforms in order to deliver a better experience in the store and enhance their offering,” he added. Mobile traffic to retail sites also is growing, from 14.3 percent to 24 percent, and the mobile sales share increased by 6.2 percent from 2011, Sears said. This trend will continue as more mobile subscribers own smartphones. In July 2012, 55.5 percent of mobile phone owners had smartphones, compared to 41 percent a year earlier.
Another factor in the retail landscape is the State of Texas agreement with Amazon that will require the online retailer to begin paying sales tax in 2013, a move that will even out the playing field in the retail market, Sears said. National retail sales are 15 percent above 2008 levels and are on an upward trend, Sears said. While sales grew by eight percent in the City of Houston, some suburban areas are outpacing the nation, he said. Sales have increased by as much as 30 percent in Katy, Pasadena and Pearland. Sears also noted that school enrollment is another factor driving residential and retail development, and Katy, Spring and Alvin are leading the school districts with enrollment increases between 10 percent and 12 percent.
Not only are existing retailers increasing their presence in Houston, new retailers including Trader’s Joe, Aldi, Sprouts and Buy Buy Baby are entering the Houston market as well, Sears said. “We are leading the nation in rent growth and are projected to lead for the next five years,” Sears said. “The construction absorption is very healthy and Class A space is very limited.” Due to historically low cap rates, institutional investors are selling their suburban portfolio and investing in core and super-core retail centers and a lot of activity is driven by very cheap debt, Sears said. “When the economy is unstable, people put their money in hard assets and retail has a certain appeal.” “They know it, they shop it and they feel comfortable,” he added. “Houston is one of the top five core markets in the country from the institutional basket stand point. The negative is that we do not have a lot of turnover in core assets, with a high concentration of core assets in a few holders, but overall we have a very stable market.”
Parsley said Houston is enjoying robust leasing activity and an increased demand for office space. “Many companies see Houston as very business friendly and are considering relocating here,” he said. Currently there are 10.8 million square feet of Class A office space available in the Houston area, renting for an average of $30 per square foot, with nearly three million of positive net absorption year-to-date and an 11.6 percent vacancy rate. Another four million square feet are currently under construction and an additional 8.6 million square feet are proposed.
Parsley noted that, with the exception of the Greenspoint submarket, absorption rates across Houston submarkets have been positive. The biggest challenge for the coming year is the absorption of Allen Center in the Central Business District. With several large corporations moving out within a short period of time, more than one million square feet will become available, potentially raising the Class A vacancy rate to 15 percent, he added. “Some might see it as a concern, but to me this is an opportunity to attract large companies who seek a central business district location.”
The Energy Corridor and Westchase are among the most active office submarkets, driven by activity in the energy industry, Parsley said. Both have single digit vacancy rates, lower than the Galleria or the Central Business District, as they take advantage of their proximity to residential and recreational areas in the city. Parsley added that “as Houston expands the trend for the growth in the north and west will continue. In north Houston, The Woodlands and Montgomery County evolved into one of the most dynamic, attractive markets for business, with several oil and gas companies located there.”
Parsley believes Houston’s economy is a magnet for business. He expects the office leasing activity to be robust in 2013, with further increases in rental rates, positive absorption and lower vacancy levels.
“Many companies put decisions on hold until the presidential elections, and the industrial real estate market is now seeing increased activity,” Wilson said. The current inventory totals 843 million square feet, with nearly two million square feet under construction. Industrial market vacancies are down slightly from last year and at 5.3 percent are in much better shape compared to a national average of just under 10 percent. Industrial sales transactions in 2012 increased, with 22 transactions, up from 20 in 2011 totaling $315 million. “Houston has always been a good market, but now all big institutions and players in the world now consider us to be a strong gateway city, mainly due to the Port of Houston,” Wilson said.
The expansion of the Panama Canal, expected to be completed by 2015, will open new opportunities for industrial real estate Wilson said. “The trade from China will come to the Port of Houston as soon as the canal is ready,” Wilson predicted. “Moreover, the LNG tankers will be able to go back to the Far East and will be a big boost for the petrochemical industry.”
Eagle Ford shale also is boosting Houston’s industrial real estate market, especially for companies supporting the oil and gas industry. Many leases have been signed for a short three-year term and will be up for renewal in 2013, creating a lot of activity in the market.
The panelists shared a positive outlook and anticipated even more opportunities for the commercial real estate markets in 2013. “Houston became a job creating machine, which is fueling our home economy,” Wilson concluded. “It’s a very good time to be in Houston.”
Media contact: Becky Myers
Magnolia Sky Communications