By Ray Hankamer

Speaker: Bruce Rutherford, International Director JLL

TAKEAWAY: Houston office market will suffer extreme weakness in those submarkets
depending on the Energy Sector:

Click to read more…

By Ray Hankamer

RN:  John, thanks for spending time with REDNews.  Our readership is of all ages, and most are in Commercial Real Estate (CRE) in one way or another.  Will you tell us how you got started in the lending business, and what your educational background was that prepared you for it?

JF: I received a BA in economics from the University of Texas at Austin in 1970,  worked at Texas Commerce Bank for a year and then went to TCU and received an MBA. After graduating in 1972, I joined American General Investment Corp. ( now AIG) and have been in the commercial real estate finance business ever since.

RN:  Did you specialize in your career in any of the segments of CRE lending, or did you provide financing for all of them?

JF: I have financed all property types (including a turtle farm!).

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Ray talks to John Breeding with Uptown Houston District about Post Oak Blvd

REDNews (RN):  John, the Uptown Houston District is well under way constructing a new Post Oak Boulevard. Tell us about the project.

John Breeding (JRB): The Boulevard Project will build Post Oak Boulevard into an exquisitely designed grand boulevard all the while preserving existing automobile access, substantially improving transit service and creating a beautifully landscaped pedestrian environment. (For further details, see REDNews.com/uptown)

RN: I understand this project will include an exciting new regional transportation system using existing METRO Park and Ride and a new dedicated busway to provide comprehensive commuter service for the first time to employees in the Galleria-Uptown area.  Can you tell us how this will work, and just which far suburbs will have a transit option to the Galleria-Uptown area for the first time?

JRB: We have a plan. Houston has an excellent commuter bus service on its highly successful HOV / busway network. This network effectively penetrates the heart of the suburban communities in which many of Uptown’s employees live. Communities in Katy, Cypress, Mission Bend, Fort Bend County and others. (Use blue map with park & ride lots) The Boulevard Project will get these employees to and from work using Houston’s bus way system. (For further details, see REDNews.com/uptown)

RN:  So the innovative Boulevard Project will essentially be replacing what was originally intended to be the METRO light rail Uptown Line?  What about the new Bellaire transit hub, just to the south of the Uptown District?

JRB: That is correct. METRO is in the midst of planning and building light rail lines around Houston. Uptown sits in line behind other projects that will be built first. It is unknown if or when the Uptown line could be built by METRO. In an effort to provide transit options to the employees of Uptown in the near term, our Board of Directors voted to build The Boulevard Project. The Bellaire / Uptown Transit Center will be built on the south end of this project. The Boulevard Project will tap into the existing Westpark Tollway and Southwest Freeway HOV lanes, allowing employees to use the Park and Ride lots along these corridors. (Transit Corridor map)

RN:  When do you see the system beginning operation?  How will the construction process be staged to minimize disruption in the area in the meantime?

JRB: We anticipate construction to be complete in late December 2018 with an operating date in early 2019. (For further details, see REDNews.com/uptown) construction. Southbound traffic will then be redirected onto the new (Construction segments graphic)

RN: How will this system serve employees and residents just inside the Loop and a few blocks west of Post Oak Boulevard who want to use it for both regional and local connectivity?

JRB: METRO’s new reimagining program is currently looking at providing better two-way peak and midday service on some corridors to support better connectivity with the local bus network and commute options. When the Boulevard Project is completed, we will have service that works with the local bus network providing the east / west connectivity and regionally with HOV network.

RN:  John, I have heard Post Oak Boulevard called the “Park Avenue of Houston”.  There are announcements which have been made recently of several significant new high-rise residential projects, and this will bring more pedestrian traffic to the area.  Whole Foods is there anticipating this new “24-hour population”.  Do you see future development trending more heavily to residential than office?  It appears that The Boulevard Project will be busy serving not only commuters but a fast-increasing population of local residents, who should be able to move around to shop and dine without getting into an automobile.

JRB: One of the pleasant surprises of growth of our area is the residential product. I can see the time when the value of the residential market is equal to the office market. The opportunity for residents as well as workers in the area to move along Post Oak Boulevard without getting in their car will be yet another benefit of the Boulevard Project.

February 24

Speakers:

• Matthew Phillips, National Apartment Advisors;
• Ed Nwokedi, Cushman and Wakefield

Key Takeaways:

• Houston area population will continue to grow steadily, reaching 8.33 million by 2025 according to Greater Houston Partnership-we are currently 5th largest Metro area in the U.S.
• Medical, petro-chemical, hospitality & leisure, and other industries are strong, and many local submarkets have their own economic drivers
• Most of the current multi-family (M-F) projects are Class A or “luxury A+” and are between the CBD and the Post Oak Galleria area-about 50% of the new supply
• Many of them are podium mid- to high-rise and some have a retail component, all necessary due to high land costs; ability to live in them and walk to restaurants and other attractions create an exciting new life-style for Houstonians and people are ready to spend more to ‘move up’
• For those who invested in M-F in 2008-09 there have been big profits; Class C values for example have doubled in ten years
• Concessions are coming in new Class A product but they should still lease up in two years, a slower rate than expected; some developers will encounter investor and lender pressure due to slower than projected lease-up
• Lenders are a little more hesitant now for Houston projects but they have a strong long-term opinion of our market
• Lots of international investment money coming to Houston M-F and other commercial real estate, especially from China and South America
• Occupancies may drift down from 92% to mid-to high 80s but this is not too unusual after a busy development cycle
• Construction boom has not been just in Class A but in “Luxury Class A+”, something new for our market; however, these units are ‘chasing’ a shrinking demographic to some extent due to oil industry layoffs, so the absorption rate is slowing
• Post Oak/River Oaks/Midtown projects have the highest rents: $2.70 SF, with CBD demanding $2.30 SF: all record high rents
• Financing for today’s projects was based on yesterday’s projections, therefore some equity investors are getting antsy to get their capital returned
• There will be some good deals in Houston in coming months / years for buyers of M-F projects; current crunch will create buying opportunities

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