Category: Focus September – 20

REDnews Post COVID Summit: Economic Forecast; Capital Markets Update; Commercial Real Estate Forecast

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Economic Forecast
Moderator: Carlton Schwab, Texas Economic Development Council. Panelists: Regina Lindsey, Economic Alliance Houston Port Region; Jess Thompson, Federal Reserve Bank of Dallas; Bethany Miller, Greater Houston Partnership; Lance Lacour, Katy Area Development Council; Tim Jeffcoat, Small Business Administration

• There is a high degree of uncertainty now in forecasting the future
• The United States GDP dropped 32 percent in last quarter, the sharpest drop in the history of the country; the next quarter should be better with a slow rebound starting
• Forecasts are for six quarters to recover to where we were before COVID
• Houston has an international economy which is tied to the whole world
• The Purchasing Managers Index, a good tool, shows that the lines have stopped declining and are starting a slow upward trend
• Restaurants, bars and hospitality have showed a sharp upward bounce with re-openings although now, at end of July, we seem to be seeing a leveling off in many CRE sectors
• We have recovered one-third of jobs which were initially lost
• In Houston, the local payroll should only be down about 4.8 percent for the year 2020 compared to 2019

Click to read more at www.rednews.com.

Houston Healthcare has Hiccups, but Outlook Remains Hale and Hearty

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It’s a familiar tale in 2020—a sector or market’s meteoric trajectory at the start of the year has been recalibrated due to the COVID-19 pandemic. For Houston’s healthcare real estate sector, however, attaining those projected heights may still be within reach. Medical office building (MOB) investment sales have dwindled since the end of the first quarter all around the country and Houston was no exception. According to Colliers International data, there were nine MOB sales during the first half of the year, with only two of those occurring in the second quarter. The sector has taken an economic hit due to, for example, unexpected costs associated with combatting COVID-19 and lost revenue from deferred elective surgeries. Even so, most investors see this as a momentary slowdown and remain bullish on healthcare real estate’s long-term prospects. “Medical office has increasingly become an attractive asset class,” said Coy Davidson, senior vice president in the Houston office of Colliers International. “These assets are considered attractive even for investors that haven’t traditionally been in the medical office space.” Among the MOB investment deals during H1 2020 were the sale of the 208,000-square-foot M.D. Anderson Cancer Center in The Woodlands. Chicago-based Harrison Street Realty Capital acquired the asset for $115 million in March from The Howard Hughes Corp. Other notable transactions include INVESCO’s acquisition of the 126,000-square-foot Physician Specialty Center at 1900 North Loop West and MB Real Estate’s purchase of the 99,768-square-foot Foundation Medical Tower in Bellaire. Additionally, Altera Development Company acquired Kimberly Lane Medical Center, a 63,848-square-foot MOB in West Houston. Though some of the more ambitious capital projects that were dreamed up prior to COVID-19 have hit the pause button as health systems address their operating margins, other projects that were in pre-construction prior to the pandemic are still moving forward. There are currently 13 MOBs under construction in the Houston metro, according to Colliers research, totaling more than 706,000 square feet. For example, Testa Rossa Properties is advancing their 10-story, 160,000-square-foot Museo Plaza Medical Office Building project in the Museum District. Designed by PJMD Architects, the $77 million project will define the first phase of a larger expansion and be anchored by The Mann Eye Institute. Nearby, Healthpeak Properties is developing a five-story, 116,500-square-foot medical office building at 7500 Fannin Street. In Nassau Bay, Houston Methodist is building a 150,000-square-foot MOB at its Clear Lake Hospital Campus. Leading into 2020, many health systems had been rapidly expanding into the suburbs as part of the larger retailization trend within healthcare real estate. With the uncertainty brought about by the pandemic, providers have opted to renew leases in current locations rather than explore new options or branch out. As the overall retail sector has been hammered by pandemic countermeasures such as stay-at-home orders, some are hoping that healthcare retailization can help cover those losses. Davidson believes that once there is stability in the markets, healthcare retailization will resume with its prior intensity. But it won’t be the savior of the retail sector. “They’re viewing healthcare as an attractive tenant, but they’re not going to fill up all the vacancy we’re going to see,” Davidson said. “In these suburban retail properties, healthcare tends to take 5,000, 10,000 maybe even 20,000 square feet. But all of these big boxes are going to remain empty. They can’t backfill all that with just healthcare.” The largest lease of H1 2020 was Harris Health System’s 305,000-square-foot transaction at 4800 Fournace Place in Bellaire. The deal allows the organization to consolidate its nonclinical administrative functions—as well as its school of diagnostic imaging and outpatient physical therapy program—from five locations to just one. Houston Methodist Hospital inked two deals, taking 7,711 square feet at 505 S. Friendswood Drive in Friendswood and an additional 6,920 square feet at 9090 Katy Freeway in West Houston. This expands their presence in the Spring Valley location to more than 26,000 square feet. Among the renewals, Houston Women Care Associates reupped its 22,984-square-foot Texas Medical Center lease and Texas Eye Institute opted to remain in its 16,001-square-foot space at 7710 Beechnut in Southwest Houston. Colliers research reports that sentiment among healthcare leasing agents indicates that leasing activity has begun to accelerate as we enter the third quarter. Despite the current uncertainty, Davidson believes that optimism is well placed. And not just for the local healthcare sector, but for the Houston metro as a whole. “The economy in Houston seems to be faring a little bit better through the pandemic than many of the other major cities around the country,” said Davidson. “Remember, people are moving here in droves. Houston’s going to be fine.”

Agile Office: What is Next for Office?

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BY MANDI WEDIN, CEO, FEROCE REAL ESTATE ADVISORS

Agile office. Is that an oxymoron? Can a structure built of steel and concrete be agile? The answer is yes, emphatically yes, when there is agility in both the physical space and economic lease terms. In both cases, agility means being flexible and responsive in order to meet dynamic needs. Agility is also required for employers and people leaders to adapt, innovate, and evolve during this time of transition. Before the global pandemic of COVID-19, the agile office was already a differentiator for office building owners to win tenants, smart business solutions for office occupiers, and a competitive advantage for talent acquisition and retention. In today’s world, the need to be agile is crucial for the near- and long-term success of office building owners and occupiers. Agile physical space: For the physical space, consider agility from the perspective of delivering space that is useful today and can be useful for another purpose with moderate adjustments and limited capital investments in the near future. Agility means delivering spaces that are multi-purpose. Design an internal office so that it can also be used for video presentation space and small team pods. Agility means using furniture solutions and interior design principles to define spaces instead of building out walls and permanent structures. Think of how a hotel lobby contains seating areas that delineate separate spaces. Envision cafe spaces that also accommodate training sessions. Click to read more at www.rednews.com.

Hard stop to full throttle: Houston’s land market generates career firsts in 2020

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Rounding the corner into 2020, things were looking good for the Houston-area land market. “Retail was strong, multifamily was acquiring sites for new development, listings were moving and buyers were very active,” said Kristen McDade, who leads Berkadia’s land services team. As soon as the pandemic took hold, though, the market came to a grinding halt. “Everyone stomped on the brakes as nobody has ever been through a pandemic in the U.S. before,” said Kirk Laguarta, broker at Land Advisors. He said that one thing did accelerate: the home-buying process. Laguarta suggested the increase was due to low interest rates and many people wanting to get out of apartments into new homes. “Bottom feeders” also emerged in the spring, looking to capitalize on what they viewed as a wounded market.
“In April, I had a group make a $25,000 offer on a site listed around $3 million,” McDade said. “When we all finished laughing, they made another similar offer on another tract. I finally told the guy, ‘Even in the worst of times, this is ridiculous.’” She said a couple of her deals dropped, but most buyers paused to evaluate whether to close deals they had under contract. McDade said the majority worked out extensions that allowed them to get a better handle on the market moving forward. Click to read more at www.rednews.com.

DFW’s Direction: Experts Share Their Insights | BBVA-USA Launches Milestone Green CRE Loan | Warehouses in Suburban Neighborhoods

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Hope for hospitality? “We’ve been devastated.”

Brutal honesty from Craig Davis, CEO and president of VisitDallas, set the tone in a discussion about the state of the Dallas retail, restaurant and hospitality market. Joined by United Commercial Development president Robert Dorazil, Steve Williamson (Transwestern’s senior vice president in agency leasing, retail services and land services) and Jeff Binford (managing director of CBRE’s Hotels Advisory South Central Division), the group dug into the challenges facing a market dependent on people going out during a time when they’re being told by health experts to stay in to slow the spread of COVID-19. Davis said that Dallas tourism has taken a big hit, especially because so few people are flying to their destinations these days. Instead, he said Dallas has seen people driving into town and VisitDallas has repositioned its marketing to target the drive market. “We know there is a backlog and people will travel when the time comes,” said Davis. He said he expected that bump to come within the next six months, though he added that research suggests large conferences likely won’t return until there is a sweeping change, such as a COVID-19 vaccine. As a result, the hotel industry is struggling. Davis said occupancy rates plummeted from 85 percent pre-pandemic into the single digits. That led to at least 20 hotels in Dallas proper to close their doors, which echoes what other Texas communities are experiencing. “This is the worst setback by far,” said Binford. Lenders are stepping up to help hotel properties that haven’t been able to get visitors in the door, he said. Rather than foreclose, many are refinancing or modifying loans to keep the industry afloat for the time being. The reason, Binford said, was that there are few bad actors in this case. COVID-19 is exclusively to blame for the lack of income and few lenders want to be stuck with a property in the current environment. Similarly, landlords for retail centers are largely working with their tenants to help ease the burden of the pandemic’s impact. “Most of the landlords I talk to are doing what makes sense to keep everybody healthy,” said Dorazil, adding, “In my world, most of my tenants are going to make it.” To date, he said two restaurants have closed in his centers, but diversity of tenants has helped draw foot traffic when it is so sorely needed. Along with grocery anchors, he said nail salon, workout studio and fast food business are picking up. Those businesses that have failed, Williamson suggested, were likely undercapitalized or had a poor concept or poor management. “Any kind of weakness they had, this is exacerbating it,” he said. Responding to the challenges faced by tenants, Williamson says Transwestern offered them a moratorium on base rent, but asked them to continue paying triple-net charges on their space. He said that provided at least some income and a commitment from the tenants that they intended to remain open. “If you own retail centers, you’re in business with your client, whether you want to be or not, because their entire livelihood depends on people walking in and buying stuff,” Williamson said.

Industrial investments and office opportunities

As the pandemic created new challenges for the traditional retail sector, e-commerce sales boomed and generated opportunities for industrial growth. “The online world just picked up a whole generation of people who never shopped online,” said Conrad Madsen III, founder of Paladin Partners. He explained how his parents, who are part of the Boomer generation, had never purchased anything on Amazon or used an app such as UberEats before the pandemic. Madsen laughed as he shared what they told him: that it was amazing to be able to order something one day and have it delivered the next. “Right now, e-commerce is only 11 percent of the total retail sales in the United States. Only 11 percent is online today,” he said. “It’s never going to go 100 percent, but think about how far we’ve come and it’s only 11 percent.” With more consumers relying on e-commerce for their needs, online retailers are searching for distribution centers, driving the industrial sector. “I think we’re going to end up with another outstanding year,” said Art Barkley, Prologis senior vice president. He said he expects Dallas will wrap up 2020 with 20 million square feet of industrial absorption, twice what the region reported when he moved there in 2005. “It’s definitely trending in the right direction,” Barkley added. What will no doubt help with that trend is the anticipated increase in nearshoring and onshoring as a result of the U.S.’s tumultuous trade relationship with China. “We’re realizing as a nation that we can’t depend on China. Onshoring is going to happen in the United States, but Mexico is going to be the biggest beneficiary,” Madsen said, explaining that labor costs would keep most manufacturing south of the border. That has the potential to fuel the industrial sector in North Texas as manufacturers examine the best markets through which they can distribute their goods, according to Alfredo Gutierrez, founder of SparrowHawk Real Estate Strategists. “I think in ten years, people are going to be talking about Dallas rather than LA as a distribution hub,” he said. “You’re going to see cap rates like we see in California.” As industrial rates increase, office rents are going the opposite direction. “How long that lasts, we don’t have those answers,” said Susan Arledge, executive managing director of site selection for ESRP Real Estate. “With the uncertainty in the market, every client we have is asking, ‘Is my office space going to be obsolete?’” She said it’s not a question of if employees will continue to work from home as millions are doing now, but how much of the workforce will never return to the traditional office. “Right now, I have clients who want to downsize immediately because they found working from home to be productive for their employees,” said Emily Hoffman, director of Cushman & Wakefield’s tenant advisory group. “I think that it’s probably best to wait and see exactly what you want to do with that office space, whether you want to grow or shrink.” That wait-and-see approach emphasizes the importance of flexibility in lease negotiations. Companies that would typically commit to a five-or-more-year lease are hesitant to do so, leaning instead on short-term extensions. “Right now, companies don’t want to make long-term commitments based on the cost of bringing people back,” Arledge said, citing a Deloitte study that found it could cost anywhere from $12,000 to $18,000 to bring each employee back into an office. Property owners are also looking at added costs, including improvements to HVAC systems to prevent the spread of the virus. Arledge said it remains to be seen if those costs will be viewed as operating expenses that can be passed along to tenants or if they’re simply improvements that incentivize tenants to come on board. “That conversation about what the pass-through cost will be for the tenants is just beginning,” said Hoffman, who stressed that the focus now is getting tenants into office spaces rather than discussing operating expenses. Looking ahead, she anticipates renewed interest in subleases as well as satellite offices in suburban areas.

Moving in on multifamily

Similarly, suburbs are where multifamily developers are shifting their focus as people relocate from the urban core. “I’m not sure there are going to be a lot of capital sources eager to do an urban core tower at this point,” said Greg Willett, chief economist at RealPage. “I think it will be more suburban-focused and there is going to be some sensitivity about the price point.” One reason for the exodus, he suggested, was the prevalence of roommate households in urban areas. If one roommate loses his or her job, the household disintegrates and, depending on the age of the tenants, they may return to their parents’ home. Another trend Rastegar Property Company founder and CEO Ari Rastegar has noticed is an increased interest in vintage multifamily properties, which his firm focuses on. “On these garden-style properties, you walk up the stairs [instead of taking the elevator],” he said. “It has this kind of inherent social distancing built into it that has boded well. Our tenants find a lot of safety there.” Michael Kolshak, director of investments for Cortland Partners, pointed out the emphasis on design goes beyond just the overall layout of a multifamily property. In deals where Cortland has influence, he said the company is encouraging developers to plan for more tenants working from home. “The thinking is that work-from-home is not going away,” Kolshak said. That means closet space is less of a draw compared to office space or a built-in desk. Technology access also has increased importance and not just for tenants. Property managers are shifting to virtual leasing, offering up digital tours of vacant units. “I’m pretty impressed how the entire industry adapted almost overnight,” said Kolshak. “It’s a paradigm shift for the industry that probably doesn’t go back regardless of how long this lasts.” According to Willett, occupancy took a small hit because of the pandemic and he’s watching Class C properties closely. Those tenants, he explained, are more likely to face economic challenges during a downturn. “I think people who live in bread-and-butter Class B product are pretty well positioned and I don’t think affordability will be a challenge in the Class A product,” said Willett. “It’s the new supply coming in. It’s going to be a competitive leasing environment in the A product because of the new supply.” And there is a lot of new supply. He said of the approximately 600,000 units under construction across the country, 44,000 are in Dallas alone. It’s an indicator to him and Kolshak that deals aren’t slowing down. “Deal flow is back. Folks who were on the sidelines are all pretty aggressive,” Kolshak said. “That’s what we’re seeing in real time.” “It’s as competitive as ever,” said Suzanne Jones, senior vice president of NorthMarq Capital. “It seems like every day, we’re seeing properties going under construction in Dallas. The market is still moving.” She said she’s closely monitoring the moves lawmakers are making related to evictions, hopeful some kind of assistance program is approved so the multifamily sector doesn’t take a harder hit. But ultimately, she’s staying positive. “To me, when we experience these downturns or uncertainty, that’s when there are the most opportunities,” she said. “I think it’s a safe bet to come.”

Industrial Investors Remain Bullish on DFW

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Don’t look now, but some sectors in some markets aren’t just weathering COVID-19, they’re settling in for years of growth. Consider the DFW market where, during the first half of 2020, more than 8.2 million square feet of industrial space was absorbed. This data, which was culled from recent CBRE research, held close to the year-over-year absorption of 8.7 million square feet that the area experienced in 2019. While the pandemic is causing disruptions in sectors and markets throughout the country, the DFW industrial market appears to be quite healthy. CBRE tracked 71 transactions of 100,000 square feet or larger that closed during the first two quarters. Half of these, comprising 12.6 million square feet, were new leases, with 5 million square feet of that going under contract during Q2 as the pandemic was well underway. Steve Trese, senior vice president with CBRE in Dallas, believes that supply and demand are still fairly in balance across the metro. This holds true both for industrial product in general and for large logistical warehouses. “Smaller, front-park, rear-load product is flying off the shelf in infill areas. Partly because of the lack of quality sites, developers are capitalizing on challenging small land, and getting higher rents than ever before,” Trese said. “Big box is equally successful, but is venturing out farther than our more traditionally tracked submarkets, seeking quality labor, less congested infrastructure and slightly more affordable land basis.” Click to read more at www.rednews.com.