Recap from February 12, 2016

KEYNOTE SPEAKER: MARK DOTZOUR, PhD

• Super bullish about commercial real estate (CRE)
• What inning are we in now in current expansion cycle? – 8th or 9th but still some steam left, perhaps a year or two before down-cycle begins
• Still expecting no inflation
• Falling stock market often signals anticipation of weak economy but this time it is due to other factors such as huge margin debt
• Other countries’ economies which are managed by tyrants, monarchs, and dictators are in a mess, but many Western European economies are good, and the best is the United States, which is the ‘go-to’ country for all investors
• CRE in the United States remains attractive to international investors, and Houston especially so, even though values are said to be somewhat inflated
• Economic cycles are part of capitalism and the smart investor does not over-leverage, but waits to pick up property at a discount from those who have over-leveraged
• The Fed is watching the stock market like a hawk and will be careful not to raise interest rates until it stabilizes
• We are in a ‘hard ball game’ with other countries whose economies are one-trick ponies
• dependent on selling only oil-those countries don’t make any products which are desired in world trade, so they are in big trouble if oil prices stay low
• Our marginal cost to produce oil is low and getting lower, giving us an advantage over other countries-$50 / barrel works well for us but not for many other countries
• There is lots of investment capital in the U.S. waiting to buy stressed assets in other countries at bargain basement prices
• While oil is down, home building and car sales will buoy U.S. economy

Multi-Family: Chris Curry, HFF, & Ryan Terrell, Greystar-Kim Small, Wood Residential Services, Moderator

• This year we will add 25,000-28,000 units and possibly absorb half of them, due to leasing to
• Millenials AND Baby Boomers over 65 who are downsizing
• Lenders for MF have demanded more equity from developers so there is not a lot of over-leverage out there
• Houston is projected to have a new job increases this year in spite of continued layoffs in upstream oil & gas
• Landlords are offering concessions, which are being matched by existing units in the B & C classes
• Med Center, Clear Lake, Pearland, East Side all strong occupancies and absorption
• 5-7 jobs used to be the rule of thumb to create one MF renter, but now it is 3-1, due to Baby Boomers downsizing
• Funds are coming into Houston grabbing up 15 year and older projects, renovating and adding value, and bumping rents
• There is negative press about Houston CRE in some national publications as they assume an Armageddon like we had in the ‘80s, but on the ground here there is not anything like that pain
• After units currently under construction are absorbed, there will be few coming on stream in
• 2018, and this will create an undersupply
• Construction costs have only dropped minimally since Dallas and other Sunbelt cities are ‘on fire’

Land: Tom Dosch, ARA Newmark, & Keith Edwards, Caldwell Companies-Frank Fitzgerald, NewQuest, Moderator

• Challenging to find shovel-ready land on east side of Houston, because much of it is lacking infrastructure in place
• Port is driving growth there; light rail driving some growth inside the Loop; 290 expansion will drive growth to Waller, Cypress, and other points north and northwest
• 2016 will continue to be hot, with some land near light rail going for $175 SF
• Land activity slacking a bit but still very active-buyers are looking for ‘deals’ and equity and debt for some new projects harder to get
• Hanover has filled its high-rise in BLVD Place and has bought an adjacent site for $200 SF for a second residential tower
• Residential land activity strong in Katy, Klein, and CyFair
• High equity for land buys required, in 45-50% range
• Pads for restaurants, medical, daycare, and other uses is high demand and prices are strong, in the $10-14 SF range and sometimes higher

Industrial: Trent Agnew, HFF & Justin Bennett, DCT Industrial Trust-Greg Barra, Boyd Commercial, Moderator

• All gauges green for industrial
• Port is strongest sub-market, as distributors realize they cannot serve Houston any more out of DFW and are building big distribution centers here now
• South side of channel has infrastructure and rail, and is most desirable
• Plastics and chemicals are benefiting from low oil & gas prices and huge investments are being made in those industries, and warehouse needs are following
• Highway 225 is 2nd largest petrochemical complex in the world
• Influence from Panama is still unclear and that is not what is driving East Houston industrial investment/development
• NW is the ‘darling’ submarket with SW not far behind; NW has the highest rents
• Industrial land very difficult to find now
• Lots of investment demand for Houston area industrial
• The national recovery is driving lots of warehouse demand in Houston
• 6.5 to 7.5 cap rates for quality industrial projects
• Construction costs soar, up 30% in last 2-3 years…especially concrete; all hard costs are out of whack
• Capital and equity becoming scarcer, but some developers are still going full throttle
• Houston consumers create need for warehouses to process what they consume

Retail: Micha van Marcke, Transwestern, & Eric Walker, Capital Retail-Lilly Golden, Moderator

• Grocer expansion has been strong and will be even much stronger in next two years
• Savings by consumers in gasoline are translating into more disposable income, which helps retail sales at restaurants and car dealerships
• National retail chains have to grow and they are pouring into Houston
• Multi-story retail and retail parking are here and will increase; park your car out of the rain and in the SHADE while you shop!
• 7.25 cap on quality strip center investment sales
• CMBS lending is ramping up and becoming more aggressive in seeking loans; they usually require more equity than conventional loans
• Crowd funding lending is providing as much as 7% of funds to developers but it is an area that is highly risky to investors (who do not have to be accredited) and open to fraud
• Retail rents up a lot, even as online shopping grows exponentially
• As Millenials pay off student loans their buying power increases; some of them are moving to the suburbs as they age to start families but many crave the short commutes and being near the action in the city center, even if it means living in fewer square feet
• All the layoffs are not over in the Oil Patch and those still working are running scared, which hurts retail sales

Office: Chad Beck, Cushman & Wakefield & Bob Parsley, Colliers-Sandy Benak, Granite, Moderator

• Trend is to more and more open offices, less tenant improvement (TI)
• Many companies have up to 40-50% unused space but they have not brought it to the sub-lease market yet
• There is a big impact on office leasing from low oil prices, and it is getting worse
• The CBD is not hurting because it did not overbuild like the west side did
• Many companies which were strong going into the ‘80s are not here now and many companies which are here now will not be in a few years, and mergers and acquisitions (under pressure)
• take their toll; predict 30-75 companies and 1-2 million SF will be affected by mergers in this cycle
• Many strong companies which have been through this before will survive; such companies will hold off making any decisions under duress; better times are on the horizon
• Medical office leasing remains hot, and doctors move to the suburbs where their patients are