2016 Market Trends Report - Harris County Appraisal District

Transcription

Harris County
Appraisal District
2016
Market Trends Report
Harris County Appraisal District
2016 Market Trends Report
Residential Property ............................................................................. 1
Inventory Update
Sales Volume Update
Sales Price Update
Townhomes and Condominiums
Lease Property Update
New Construction
The Housing Market and Oil Prices 2016
2
3
4
4
5
5
5
Commercial Property ........................................................................... 7
Looking Forward
Jobs
Oil & Gas
Growth
Interest Rates
Other economic factors
Transportation
Real Estate Developments in Harris County
Projects outside of Harris County that will affect the greater Houston economy
Vacant Land
Central Business District
Uptown District / Galleria
Inner Loop
The Outer Loop
Baytown
The Grand Parkway
Highway 290 Expansion
Cypress Fairbanks ISD/Waller/Katy
Tomball ISD
LA Porte
Sales
Office
Inventory Analysis
Construction Activity and Deliveries
Net Absorption and Leasing Activity
Vacancy
Rental Rates
Sales Activity
Capitalization Rates
Summary
Apartments
Rental Rates
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Market Trends
New Construction
Summary
Retail
Net Absorption
Market Occupancy
Largest Lease Signings
Rental Rates
Inventory & Construction
Greater Houston Retail Market Areas
Sales Activity/Capitalization Rates
Detail by Property Type
Summary
Medical
The Texas Medical Center
Demographics: Driving Demand
Medical Office Buildings
Hospitals
Nursing Homes and Retirement Homes
Summary
Hotels and Motels
Texas Lodging
Houston Lodging
Developments
Summary
Warehouses
New Construction
Leasing Activity and Rents
Vacancy/Absorption
Sales and Capitalization Rates
Summary
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Industrial Property ............................................................................. 71
Refineries
Chemicals
Utilities
Electric
Natural Gas
Telecommunications
Manufacturing
Commercial Personal Property
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Residential Property
Houston’s economy and residential market have slowed from the hot markets of 2014. This is
due in no small part to the fact that for the fifth time in the last four decades the Houston
metropolitan area is facing uncertainty due to the collapse of oil prices. By some metrics the
current downturn is worse than previous downturns. The fall in the price of a barrel of WTI from
$105.79 to $28, a 74% tumble, is the largest percent decrease ever. Additionally, the reduction in
rig count to 1,187 rigs, a 61.5% decrease, is the second largest reduction ever.
By other metrics this downturn has been less severe than others. With the previous four
downturns, Houston experienced total job losses ranging from a relatively small 18,400 lost in
the early 1990s to 221,000 lost jobs in the 1980s (Figure 1). By comparison, although Houston
lost an estimated 10,200 energy-related jobs, overall Houston had a net gain of 23,200 jobs in
2015. Furthermore the Texas Workforce Commission is forecasting that Houston will add almost
22,000 jobs in 2016 (Figure 2). These statistics support the notion that although the oil industry
is still important to the overall economy of Houston, it is no longer the only game in town.
Figure 1 U.S. Energy Information Administration
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Figure 2 Texas Workforce Commission Houston Job Growth1
Inventory Update
According to the Houston Association of Realtors (HAR), the inventory of available homes
which hit historic lows at 2.5 months in December 2014 is at 3.2 months as of December 2015.
The 3.2 months is still considerably below the national average inventory which stands at 5.1
months of supply as of December 2015. Typically, 6 months of inventory is considered
equilibrium. Inventory levels below 6 months indicate a seller’s market. The number of days it
took a home to sell (a.k.a. Days on Market) increased slightly from 56 days in December 2014 to
57 days in December 2015. Until the supply of homes moves closer to equilibrium we are likely
to continue experiencing a seller’s market and the corresponding increases in sales prices.
1
http://www.houston.org/pdf/research/quickview/Economy_at_a_Glance.pdf
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2
Sales Volume Update
According to HAR, sales volume for single family residential properties in 2015 totaled 73,724
units, which is a 2.4 percent decline versus the 75,535 units sold in 2014. There were 6 months in
2015 where sales volume declined versus the same month in 2014.
Categories
Single-family home sales
Total property sales
Total dollar volume
Single-family average sales price
Single-family median sales price
Full-Year 2014
75,535
91,439
$23,553,542,859
$270,182
$199,000
Full-Year 2015
73,724
88,764
$23,559,111,514
$280,290
$212,000
Change
-2.4%
-2.9%
+1.0%
+3.7%
+6.5%
Courtesy HAR January 13, 20162
2
http://www.har.com/blog_49528_the-houston-real-estate-market-ends-2015-with-the-second-highest-salesvolume-of-all-time
February 10, 2016
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Sales Price Update
The chart below shows a five year trend line for both the average home sale price and the median
home sale price of single family homes. In a year-over-year comparison the median price for a
home in December increased to its highest level ever rising 2.9% to $216,000. In December the
average price fell 0.6% to $280,201. The median home sale price has gone from just under
$150,000 in 2010 to $216,000 during this period which represents a 44 percent increase.
Single Family Average Home Price & Single Family Median Home Price
Courtesy HAR January 13, 2016
Townhomes and Condominiums
Sales of townhouses and condominiums fell 2.9% in December versus one year earlier. A total of
536 units sold in December 2015 as compared to 552 properties in December 2014. The average
price fell 14.3% to $197,904 and the median price increased to $159,900. Inventory reached a
2.9 months supply, which is an increase from the 2.3 months supply a year earlier.
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Lease Property Update
As the supply of properties for sale continues to remain below equilibrium the demand for lease
property naturally increases. As a result, single-family home rentals climbed 2.9 percent
compared to December 2014, while year-over-year townhouse/condominium rentals decreased
3.6 percent. The average rent for a single-family home was unchanged at $1,710 and the average
rent for a townhouse/condominium fell 3.1 percent to $1,459.
New Construction
The number of new starts climbed 8.8 percent to 17,459 during 2015 from 16,050 in 2014
despite the continued collapse of the price of oil. The new construction value associated with the
new starts increased almost 26 percent from $2.99 billion in 2014 to $3.76 billion in 2015. The
increase in new starts is due to a number of factors including low interest rates, a shortage of
available inventory, population growth, and relative strength in the non-oil patch segments of
Houston’s economy.
The Housing Market and Oil Prices 2016
It is clear that the price of oil will stay depressed while the glut of oil inventory works its way out
of the global market, but it is unclear how long that will take. Although the price of oil appears to
have come off the bottom, there are still too many national and international influences that
remain unresolved:
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How much and how soon will Iranian oil hit the market?
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How long will Saudi Arabia and other OPEC countries continue to produce oil at
unrestricted levels?
Will the demand for the world’s oil-supply continue to grow?
If demand for oil continues to grow, how quickly will the excess supply be absorbed by
the global economy?
Based on the outlook for oil and Harris County’s link to the oil patch, it is difficult to say what
will happen with the housing market in 2016. It is likely that the number of sales will continue to
slide as they did in November and December of 2015 and that the inventory of homes will move
closer to equilibrium. What is harder to predict is what will happen to prices. The longer oil
remains in the $30 range, the greater the likelihood that oil-related companies fail and a domino
effect may begin: jobs losses, foreclosures, inventory spikes, and a reduction in construction of
both residential and commercial property. Conversely, the price of oil could rise to a $40-45
level in 2016 which could stem the tide of job losses, reduce the fears of recession, and allow
Harris County’s economy and housing market to continue with its stability and growth.
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Commercial Property
Looking Forward
The price of oil has fallen from its June 2014 high of over $107 per barrel (West Texas
Intermediate oil) to about $53/barrel at the start of 2015. By late August, it was $38 per barrel.
The price recovered moderately to around $48/barrel by November before ending the year at
around $37/barrel. This is causing a considerable amount of concern for the health of Houston’s
economy and the real estate market especially for those who recall the recessions of the 1980s
and 2008-2009. Although these concerns are historically well–founded, there are a number of
differences in Houston’s market today which will diminish the likelihood of a severe recession or
housing crash. The overall economy of Houston is expected to be generally stable or even see
moderate growth well into 2016, as population growth and other segments of the economy are
expected to offset the adjustments in the oil industry.
The Atlantic magazine stated “2014: The Best Year of Job Creation This Century.” In
comparison to the economic boom of that year, the economy since then may just seem like a
recession. In reality, 2015 declined in the first quarter to the “economic trough” of the second
and third quarter, and recovered moderately in the fourth quarter.
Jobs
The forecast in the fall of 2014 for job growth in Houston was expected to be between 50,000 to
60,000 for 2015. Although not meeting forecasts, the job market for Houston ended the year on a
resilient note. In 2015, the net job creation in Houston was 23,200, of which 8,500 were in
December. New jobs in healthcare, hospitality, and leisure somewhat offset the losses in
manufacturing and oil & gas extraction. Houston continues to add jobs and unemployment is
low. Job growth in Houston for 2014 was close to 4%, while in 2015 it was about 1.2%.
At the beginning of 2015, the national unemployment rate was 5.7%. The rate of unemployment
in Houston for November 2015 was 4.9%, and 4.6% for December, well below the national
average of 5.6%. Texas alone created 166,900 jobs in 2015, or 57% of all the jobs created last
year in the nation. “Nine sectors reported growth – construction, retail, administrative support,
educational services, health care; arts entertainment and recreation; accommodations and food
services, and government, collectively adding 64,000 jobs for the year.” Houston finished the
year with 3,015,800 payroll jobs. Forecasts from The Greater Houston Partnership estimate the
Houston area will create a net of 21,900 jobs in 2016.
During the Great Recession, Houston’s unemployment rate peaked at 8.8%, and during the oil
bust of the 1980s, unemployment hit 12.9%.
Oil & Gas
Texas employed 306,330 in the oil & gas industry at the start of 2015. Since then, upstream
(exploration) has laid off 60,000 in Texas, or 20% of its oil & gas workforce. Oil companies are
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adjusting to new oil prices and reorganizing their operations accordingly. Many capital
improvement projects may have been put on hold until the market and price stabilizes, after
which some of this workforce may be recalled. The energy jobs lost in Houston for 2015 totaled
10,200. The total number of non-farm jobs in the greater Houston area is almost 3 million.
According to the February 2016 Greater Houston Partnership Economy at a Glance3, the North
American rig count opened 2015 at 1,811 and ended 2015 at 698, down from the September
2014 peak of 1,931 working rigs. In Texas last year, 19,503 oil and gas wells were drilled,
10,000 fewer than in 2014, the peak for the recent boom.
When fracking began in 2010, the average well produced 20 barrels of oil per day. By 2015,
technology increased efficiency to 700 barrels per day on average. In December 2015, the U.S.
government lifted the ban on oil exporting. Texas is the 5th largest producer of crude oil in the
world, and accounts for 50% of the production in the U.S. In 2015, Texas produced 1.267 billion
barrels of oil in 2015, passing the all-time production high in 1972. In 2010, no oil was being
shipped from Corpus Christi to Houston via the Intracoastal Waterway. Today, 700,000 barrels a
day are shipped to Houston refineries.
Natural gas prices dropped from $3.00 in January 2015 to $1.77 in mid-December. By year end,
the price rebounded to $2.34 (values quoted are price per million BTUs). After Southwestern
Energy announced they were laying off 1,100 employees, Ed Hirs, energy economist at the
University of Houston, said, “There is a lack of pipeline capacity out of the [northeast U.S.]
where Southwestern has the bulk of its operations. Southwestern can drill new wells, but they
don’t have any place to sell the gas. They don’t have access to get the gas out into the Northeast,
or even down to the Gulf Coast where the country is better situated to take the gas and process
it.”4
Schlumberger, the world’s largest supplier of technology and project management to the oil and
gas industry, announced in August 2015 that they are acquiring Cameron International for $14.8
billion. Haliburton and Baker-Hughes, two of the largest oil logistics and supply companies, are
in the process of merger, but running into government approval issues.
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3
4
One casualty of the oil price decline is increased space for subletting, “which might be as
much as 8 million square feet.” in the greater Houston area. However, this is office space
that is leased, and provides income to the building owner. In a financial analysis, this
office space is leased/occupied and not technically vacant. The leasing tenants are
looking for sublease tenants, to defray the cost of holding the office space. It is estimated
another 2 million sf of sublease office space may come on the market for 2016. This will
affect office listings, vacancy rates and concessions.
BP (British Petroleum) had losses of $2.2 billion for the 4th quarter of 2015, with the total
annual 2015 loss at $5.2 billion. “The negative figure for the final months of the year
were caused mainly by writedowns on the value of its oil fields and restructuring costs
http://www.houston.org/pdf/research/quickview/Economy_at_a_Glance.pdf
http://www.houstonpublicmedia.org/articles/news/2016/01/21/134992/southwestern-energy-to-slash-1100-jobs/
February 10, 2016
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that totaled $2.6 billion. Operating profits were $2.2 billion in 2014, and $196 million in
2015, “despite record profits in its refinery and marketing businesses.” Similarly, Royal
Dutch Shell earned $19 billion in 2014, but in 2015 earnings fell to $3.84 billion. This
included “earnings adjusted for inventory changes [for] $1.8 billion.”
Shell Oil’s acquisition of the British oil and gas producer BG Group for $70 billion is
expected to close by March 2016. The acquisition by Shell will “allow it to realize $3.5
billion in savings, shed $30 billion in uncompetitive assets, and expand its operations in
the fatst-growing liquefied natural gas industry.” BG Group invested “about a third of its
overall $200 billion in invested capital, including in a process called gas-to-liquids that
converts natural gas into fuels like diesel and jet fuel. Shell announced they were going to
cut 10,000 jobs worldwide, but this was mostly due to the elimination of competing jobs
within the two companies (redundancy).
Recently, the hydrocarbon industry in America has found a way to produce ethylene from
natural gas, at almost half the cost of doing so from crude oil.
Growth
Population Estimates/Projections for Harris County, Houston MSA, & Texas
Population
Year
1992
2001
2006
2011
2014
2015
2016
2017
2020
Harris County
2,944,348
3,461,662
3,830,130
4,176,764
4,391,445
4,471,427
4,551,437
4,633,511
4,885,616
Houston MSA
3,815,914
4,828,082
5,485,718
6,057,425
6,473,316
6,622,047
6,772,852
6,928,233
7,413,214
Texas
17,655,650
21,325,018
23,507,783
25,674,681
27,161,942
27,695,284
28,240,245
28,797,290
30,541,978
Source: Texas Department of State Health Services5
5
https://www.dshs.state.tx.us/chs/popdat/
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From 2010 to 2015, on a net basis, an average of 1,500 people moved to Texas every day. While
Texas quickly recovered from the Great Recession, the rest of the country did not do so until
2014. Strong job and economic growth and affordable housing attracted residents, and continues
to do so.
Greater Houston Population Growth
Interest Rates
Inflation for 2016 was a negligible 0.1%. Three of the months in 2015 had deflation (negative
inflation), probably due to falling oil prices and associated purchase items. The Federal Reserve
tends to raise interest rates to cool off a hyperactive economy, and to fight inflation. With little or
no inflation, there is no need to raise interest rates to stabilize economic growth, and rates should
stay extremely low through 2016. Only once (2008 at 3.8%) since 1992 has inflation exceeded
3.4%.
Interest rates remain low which is good for lending-based economic activity, especially the
housing market. After an extended period of Federal lending at 0.25% interest, in December
2015 the target Fed Funds rate was increased to 0.50%. The 10 year U.S. Treasury bill is
normally considered as the “safe rate” portion of the capitalization rate for real estate
investments (i.e., in “built up” capitalization rates methods). The year 2015 started at a rate of
2.12%, and for 2016 it was 2.24%. However, by early February 2016, the 10 year T-bill rate was
1.75%. This is significantly lower than the beginning of 2011 when the rate was 3.36%, or 2000
at 6.58%. Lower interest rates increase property values, and compress capitalization/investment
rates.
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Federal Funds Rate
Other economic factors
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Lower oil and natural gas prices have translated into more disposable income for
residents of Harris County and the greater Houston area. This has fueled resurgence in
the retail, service and hospitality enterprises in the area.
The Panama Canal expansion project, doubling capacity with a wider and deeper channel
than the original canal, is slated to open in early 2016. This will significantly increase
shipping volume of the Port of Houston, as well as demand for docks and distribution
centers in Houston. In 2015, the volume of shipping from the Port of Houston increased
3.2% from the previous year.
Port of Houston Authority announced in October 2015 the completion of the deepening
and widening of Barbours Cut channel, making Barbours Cut Container Terminal the
Port Authority’s first 45-foot deep draft container facility. The project cost $68.9 million.
This will accommodate the large ships and supertankers that will travel through the soon
to be opened Panama Canal expansion.
According to an Associated General Contractors of America survey (taken in November
2015), 68% of “Texas building contractors plan to hire more workers in 2016. … Public
sector projects tied to higher education, K-12 education, and healthcare, will account for
much of the new work, both statewide and in Houston. The new projects are expected to
help offset the drop in construction tied to oil and natural gas. … [M]ost Texas
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contractors say they’re still having trouble finding and keeping skilled workers. That’s
even after a year of raising pay and increasing benefits.”
According to Comerica Bank, “Oil exploration and production accounts for about 10
percent of the state’s economy.” The bank’s chief economist, Robert Dye, said, “What
happens to the other 90 percent of the state economy? Fortunately, that’s not withering up
and blowing away. Texas does have a a diverse economy. And other parts of the energy
sector, the downstream part [is] doing very well. … Houston [is] continuing to add
infrastructure and capacity in terms of refineries, petrochemicals, and things like that. So
that’s been a nice balance to this.”6
In October 2015, “Southwest Airlines launched international air service from Hobby
Airport” to Mexico, Belize, Costa Rica, and the Caribbean. Hobby is “expected to
eventually handle a million or more international passengers each year” according to the
Greater Houston Partnership’s 2015 Houston Economic Highlights.7
BBA Aviation (parent of Signature Flight Support) of Britain is acquiring Landmark
Aviation, which Houston’s operation supplies most of the jet fuel to George Bush
International Airport, for $2.065 billion.
Houston First booked more than 700,000 hotel room nights tied to meetings and
conventions last year, a record, up 29% from the year before. This was attributed in part
to the opening of the 1,000-room Marriott Marquis and the $175 million renovation of
the George R Brown Convention Center.8
The Lyndon B. Johnson Space Center in southeast Harris County is the headquarters for
NASA. In 2011, cuts were made to the nation’s space program, resulting in the
elimination of 3,000 jobs at the Space Center from a workforce of 14,000. This greatly
affected the real estate market in the Clear Lake area of Harris County. At that time, the
Space Shuttle program was cancelled, and astronauts are now flown to the International
Space Station by the Russians for $60 million per astronaut. President Obama proposed
“an additional $18.5 billion for NASA” for the 2016 budget, with the Orion project recommissioned for deep space travel to begin in 2017. “NASA is developing the
capabilities needed to send humans to an asteroid by 2025 and Mars in the 2030s.” This
will revitalize the southeast area of Harris County. In addition, it was announced in 2015
that Ellington Field Airport near the Johnson Space Center will be upgraded to
accommodate a private “space-port.”
6
http://www.houstonpublicmedia.org/articles/news/2016/01/05/132975/comerica-bank-falling-oil-prices-heraldslower-texas-growth-in-2016/
7
https://www.houston.org/assets/pdf/economy/Economic%20Highlights_web.pdf
8
http://www.houstonfirst.com/Newsroom/News/ArtMID/1702/ArticleID/1036/2015-a-Record-Year-for-Houston-inConvention-Sales-Web-and-Tourism
February 10, 2016
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Transportation
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U.S. Highway 59 is being upgraded to become Interstate 69, and is often referred to as
the NAFTA Superhighway, as the major trucking corridor from Mexico to Montreal,
Canada. Most of Interstate 69 from the Kentucky-Tennessee border through Indianapolis
to Port Huron, Michigan (north of Detroit, Canadian border) is complete and in service.
Other segments are completed around Corpus Christi in Texas and northwest Mississippi.
In early February 2016, the Grand Parkway extension from Highway 290 to I-45 south of
The Woodlands was opened. The next segment, continuing to I-69 near Kingwood, is
schedule to open by late March 2016. This will divert traffic and trucking around the city.
METRORail continues to further expansion of their light rail public transport system in
greater Houston. The next two projects are the lines to southwest Houston (U.S.
90/Gessner) and the Green Line currently under construction east of downtown
(Navigation/Canal). For the month of December 2015 (one month only), 1.4 million
passengers used Houston’s light rail system, up 36% from December 2014.
The Federal Railroad Administration approved the rail corridor planned for a high speed
train to run from Houston to Dallas. Construction is expected to begin in 2017, with the
first 240-mile 90-minute rides planned for 2021.
Real Estate Developments in Harris County
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Peck Station, a proposed $50 million upscale retail and multi-family development in
northwest Harris County, is on hold indefinitely until the oil market stabilizes. Keith
Jennings, president of a manufacturing company in the area, said, “After you have a
boom of three to six years, sooner or later everybody starts overproducing and overdoing
everything. Then the demand starts to lessen, and you end up with too much [supply].”9
Walmart is breaking ground for a 186,000 sf store at Kuykendahl Road and Augusta
Pines, across from Timber Creek Elementary School, which is scheduled to open in late
fall 2016.
The 63-acre Grand Parkway Town Center will be located on Highway 249 between
Grand Parkway and Bourdreaux Road, with “about 600,000 square feet of retail and
restaurant space across about 15 pad sites.”10 A 136,000 sf Sam’s Club is part of this
project, and set to open by early 2017. Kroger and Chick-fil-A are negotiating to become
part of the site. Other new retail developments are proposed along the newly opened
Grand Parkway segment.
The Texas Medical Center, the largest medical center in the world, sees 4.7 million
patients annually. CHI St. Luke’s will build a new hospital by the DeBakey VA Medical
9
http://communityimpact.com/houston/tomball-magnolia/commerce/2016/01/13/tomball-magnolia-experienceeffects-of-oil-decline/
10
http://communityimpact.com/houston/development-construction/2016/02/10/grand-parkway-town-center-2/
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Center in the east Med Center area. Other construction and expansions are occurring in
the immediate area.
University of Texas is actively working to obtain 332 acres for an auxiliary campus and
“Engineering, Research and Education Institute.” Purchased already is a 100 acre parcel
“north of Willowbend Drive and west of Buffalo Speedway, south of NRG Park and the
Texas Medical Center.”11
“In April 2014, Chevron Phillips Chemical Co. broke ground on a $6 billion expansion
including an ethane cracker at its Baytown facility.” Construction is expected to be
complete in 2016.
Projects outside of Harris County that will affect the greater Houston economy
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Johnson Development Corp. “has acquired 590 acres southwest of Houston for a master
planned community with 2,500 homes.” It is located near the north side of U.S. Highway
59, just west of Sugar Land’s Sweetgrass subdivision. Development is scheduled for mid2016.
The 192 acre Texas Instruments site at West Airport Blvd. and U.S. 59 was sold. Some of
the old office and lab buildings will be retrofitted. It will be developed with a 350,000 sf
Class A shopping center, Class A & B restaurants, two hotels, a pedestrian park, and a
Class A office building. Construction is expected to be complete in time for Super Bowl
51 in Houston in February 2017.
Schlumberger is moving their corporate headquarters from downtown Houston to its
Sugar Land campus. The cost of the move and capital improvements to be built in
southwest great Houston is estimated at $200 million.
Grand Central Park “is a 2,046-acre [3.2 sq.mi.] project under construction in Conroe
along Loop 336 and I-45. It will feature 500 homes, 112 acres of retail space, an urban
living center, a town center with shopping, dining and entertainment options and a
business center with office space.” Initial phases of this master-planned community are
projected to open in late 2016.
Dow Chemical started construction on a new ethylene production facility in June 2014 in
Freeport (Brazoria County, south of Houston), and it is slated for production in the first
half of 2017. Cost of the project was $4 billion. ExxonMobil started production of a
similar ethylene plant in 2014, creating 10,000 construction, 4,000 related, and 350
permanent jobs. Cost of the project was estimated at $6 billion. “It is expected to increase
regional economic activity by roughly $870 million per year and generate more than $90
million per year in additional tax revenues for local communities.”
In summary, the decline in oil prices have affected the oil & gas industry which has trickled
down to associated businesses and employment. Growth in other areas offset this factor,
especially in health, institutional, and service & hospitality segments of the market, through
11
http://www.bizjournals.com/houston/morning_call/2016/01/university-of-texas-takes-first-major-step-in.html
February 10, 2016
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Houston’s diverse economy. Retail saw growth with more disposable income for consumers due
to lower gasoline and energy costs. In general, 2015 saw an “economic trough” in the second and
third quarters of 2015, with a moderate recovery in the fourth quarter. As a result, the economy
in Houston is expected to fluctuate somewhat throughout the year, but over the course of 2016,
marginal to moderate economic growth is expected, as the oil industry and greater Houston area
adjust to more stabilized oil prices.
With the recessions in China, Europe, Russia, and Brazil and worldwide instability, foreign
markets have been looking for safe havens to store their capital. Most of these markets were
unprepared for the decrease in oil and gas prices experienced since June 2014. In uncertain
economic times, capital is attracted to quality. Since bonds have marginal yields, gold may have
topped out, and stock markets are too volatile, foreign markets have created a high demand for
investment-grade real estate. According to IRR, in 2015 in the northeast region United States real
estate market, Chinese real estate buyers invested $8 trillion, Canadian $3.2 trillion, Middle
Eastern and European $1.6 trillion each, and Japanese and Israeli buyers $0.5 trillion each. From
Canada, most of it was pension fund investment, and mostly cash, even though the Canadian
dollar dropped to about 1 per 70 cents U.S. The inflow of foreign capital into the U.S. market has
increased the demand for the U.S. dollar, making it strong in comparison to foreign currency.
Foreign buyers are in competition with American pension funds, REITs, insurance companies,
and large companies that “are so flush with cash that the market is chasing deals.”
Houston is not an exception to this phenomenon. Houston offers a more affordable option with
long term yield on than Los Angeles, New York, or Chicago. Foreign capital accounts for 15%
to 20% of the real estate investment market in the greater Houston area. Low interest rates
further compress rates due to demand for quality properties. Most investment grade properties,
like Class A & B apartment blocks and quality retail properties, were purchased from 2011 to
2014 when prices were recovering from a major recession and capitalization/investment rates
were higher, to the point where not much is for sale now. As a result, investors may be willing to
compromise and buy property at lower capitalization/investment rates in order to acquire what is
available.
Vacant Land
Central Business District
The Central Business District is seeing a drop-off in activity in some specific property types. The
office market is not showing the same demand for space as it has in the recent past. The
confidence in the market has dwindled with the downturn in the energy market. There are
currently two office buildings nearing completion. 609 Main, a 48-story Hines project, is a Class
A high-rise featuring one million-plus square feet of leasable office space and 1111 Travis, a
28-story high rise with 475,000 square feet. There are still four other office projects planned for
downtown Houston that are indefinitely on hold. The troubles and woes in the energy sector are
showing a direct impact on the construction of those planned offices. One of the projects affected
was to add an office tower to the downtown campus of oil giant, Chevron.
February 10, 2016
15
The focus downtown is now geared towards residential. Due to a downtown living initiative, a
number of abatements were offered to developers to develop apartments and condominiums.
Since the initiative began, there have been at least 18 projects proposed. Currently eight of the
projects are under construction and half of those are nearing completion. A number of those
projects are located near the Toyota Center and St Joseph’s hospital. This area has the most land
available for redevelopment. On average, investors and developers are paying $120 per square
foot for land to develop high density apartment complexes.
The other prominent property type being developed in the central business district is hotels. Four
of six proposed hotels are under construction and near completion. The hotels are conveniently
located near the convention center and the Shopping District. The hotels are being built to help
lure more conventions, major sporting events, and other events to the downtown Houston area.
Houston hosts the Offshore Technology Conference every year and will host Super Bowl LI (51)
in 2017. The Marriott Marquis, near completion, will round out the convention center properties
that overlook the Discovery Green park. Marquis will contribute 1000 hotel rooms to downtown.
Construction has started on Hotel Alessandra. The project formerly known as the Houston
Pavilions, now Greenstreet, will be home to Alessandra. Alessandra will add 225 luxury hotel
rooms to the downtown hotel inventory.
The sales activity in the CBD is less than in previous years. There were no recorded vacant land
sales in the Central Business District for 2015. The sales in the CBD are seldom disclosed.Still
striving to be a global city, the Central Business District is still an attractive location for outside
investors.
The 16.5 acre Downtown Post office site recently sold for $60 per square foot. Speculation on
what will replace the facility is a mixed-use development that leverages the Bayou, the Theatre
District, and the significant scale of the property.
February 10, 2016
16
The map below shows the activity in the central business district.
Downtown Houston Development map
Uptown District / Galleria
The Uptown District / Galleria area is the largest business district outside of the CBD. Similarly
to the CBD, there is a lack of quality land for development, much of the new development is
taking place on land that once held buildings that either have reached the end of their economic
life or are no longer the highest and best use of the property, and the area has high levels of
occupancy in most of the office space located there. Occupancy remains high even with the
addition of the Compass BBVA tower, the first office tower constructed in the Galleria area in
almost 30 years, and a Skanska-built tower, both located on Post Oak Boulevard.
Many projects are now under construction, nearing completion, or are up and running. A thirtystory tower is well into construction at Four Oaks Place, located on a site that formerly held a
health club at 1550 Post Oak. The site is now meeting its highest best use, adding class A office
space to the second most attractive business district in Harris County.
1885 St James Place is being improved with a 15-story, 165,000 square foot office tower. The
tower replaces the iconic Courtyard on Saint James, a popular venue for weddings and business
meetings.
February 10, 2016
17
The headquarters for Amegy Bank is under construction at 1717 West Loop South. The former
site of Micro Center will be home to a 350,000 square foot office tower. The construction is
expected to be completed in the fourth quarter of 2016.
The Galleria Uptown area is not exempt from the issues the Central Business District is having
with the office market. Phase two of BBVA Compass Plaza is currently on hold. Located at 2100
Post Oak, it is proposed to include a 29-story, 343,000 square foot high-end office and retail
space. The current owners of the property, Masaveu Post Oak Houston Delaware, don’t feel the
current economic climate is right for new construction.12
Unlike the office market, the other property types are thriving in the Galleria Uptown District.
The retail market is constantly growing. The Galleria’s major redevelopment of the third section
is nearing completion. A number of new high-end shops have been added at River Oaks District
located at Westcreek and Westheimer. This mixed-use project is home to retail, office, and
apartments, as well as iPic Theaters, Houston’s first luxury movie experience.
The apartment market is constantly expanding with new construction taking place along the 610
Loop and on Westcreek Lane. 2031 Westcreek is home to SkyHouse River Oaks, the second of
three SkyHouse apartments in Houston. Two high-rise condominiums are planned on either side
of SkyHouse River Oaks.
Two hotels across the street from the Galleria are also nearing completion. Both of the hotels are
Hyatt-brand hotels. The corner of Sage and W. Alabama will be home to the Hyatt Regency with
325 rooms. Directly behind this site, Hyatt Place is almost complete. Hyatt Place will be very
similar in size but will not have the same amenities and will offer less expensive rooms than the
Regency.
Developer and entrepreneur Tilman Fertitta is also capitalizing on the need for hotels in the
Galleria Uptown area. Located at the corner of San Felipe and the West Loop South,
construction has started on The Post Oak.13 The project will be a hotel, conference center, and
parking garage sitting on nine acres already home to Post Oak Motor Cars Rolls-Royce and
Bentley dealership and to Landry’s corporate headquarters.
Inner Loop
The inner loop of Houston is constantly changing with redevelopment concentrated in the
Houston Heights, the Washington Avenue area, Upper Kirby District, Montrose, Weslayan and
Rice Village.
The Houston Heights is witnessing a constant change in the housing market. New dwellings are
under construction throughout the Houston Heights and Shady Acres neighborhoods. This has
12
http://www.bizjournals.com/houston/blog/breaking-ground/2015/11/after-galleria-area-tower-sells-phase-two-onhold.html
13
http://www.houstonchronicle.com/business/real-estate/article/Fertitta-s-new-tower-to-offer-a-wealth-of-luxury6218282.php
February 10, 2016
18
been taking place for quite some time and there is no end in sight for this activity. There is still a
strong mix of commercial which supports the area very well.
The northwestern quadrant inside Loop 610 may be “the next hot spot” in the inner loop
according to Andrew Hadley with Chodrow Realty Advisors.14 Houston-based Hines is
developing 46 acres of former industrial land into Somerset Green, a European-style luxury
neighborhood built around canals and a lake. Hines paid $40 million for the land and an extra $3
million to provide access from Old Katy Road. The property is located behind Star Motors.
Many other apartment complexes are under construction in the area both inside the loop and
along North Post Oak Road.
The Washington Avenue area is still budding with restaurants and nightlife. The area
surrounding is still seeing redevelopment with townhomes and a retail mix to support the area.
The newest development for this area will be Studemont Junction, located at the site of the
former Grocers Supply facility, which will be demolished and replaced with high-end apartments
and retail. The project has already signed its first major tenant, Memorial Hermann. The hospital
will set up a convenience care center to address the need for medical in this area.
The Montrose area has seen a number of high-priced land sales over the past few years and that
is not changing. Land is selling on average for $85 per square foot. Most sales are for
redevelopment of properties with new housing or apartments. The area will also undergo a
facelift with a recently approved beautification project. The project will add signage to the major
thoroughfares as well as landscaping on medians. The bridges that stretch across highway 59 will
get new lighting. This effort is to take place prior to the Super Bowl in 2017.
The Upper Kirby/ Greenway area is seeing a great deal of change. A number of new office
buildings have been added and more may be on the way. According to the Chronicle, “Exxon is
selling its former research complex in the Greenway Plaza area, a rare 17-acre site in the urban
core. The property, which includes a 384,000 square foot office building, a 98,000 square foot
training center, 13 auxiliary buildings, and a garage, could fetch $150 million. … The site at
3120 Buffalo Speedway between Richmond and West Alabama could be redeveloped to
accommodate up to 3 million square feet of office, residential, retail or hotel space.”15
Also per the Chronicle, “Three 1970s office and retail buildings around the northwest
intersection of Kirby Drive and the Southwest Freeway are being demolished to make way for
perhaps another major redevelopment project in Upper Kirby. The demolition of the buildings -3910 Kirby, 3930 Kirby and 2600 Southwest Freeway -- is expected to be complete around April
2016 … The structure at 3910 Kirby once housed the popular Miyako Japanese restaurant and
Madras Pavilion, an Indian restaurant.”16
14
http://www.houstonchronicle.com/business/real-estate/article/Northwestern-quadrant-of-Loop-610-the-next-hot6582711.php
15
http://www.chron.com/business/real-estate/article/Exxon-Mobil-selling-urban-office-site-6788296.php
16
http://www.chron.com/business/real-estate/article/Kirby-buildings-meet-wrecking-mall-6725660.php
February 10, 2016
19
Midtown
Midtown has been a successful model of city planning. The area has a healthy mixture of
apartments and retail, with many apartments having retail on the ground floor. An apartment
complex will be built with a Whole Foods Store as the baseplate for the apartment complex. The
project is located on the 3100 block of Smith Street. This is the site of the now demolished
Social Security Administration building. The apartments will have more than 200 high-end
luxury units.
Adding to the mix in Midtown is something rare to this neighborhood. An office tower is
proposed for 3003 Louisiana Street. The plans are for a 16-story office tower. This is one of the
first office towers to be proposed for Midtown in several years.
Near Downtown
Just north of the CBD, development has started on a forty-five acre tract known as Hardy Yard.
This property was a rail yard at one time. The property’s development will start with a 350-unit
apartment complex. The complex will have 179 affordable units and 171 market-rate one and
two-bedroom apartments. The plans for the site will present “a diverse mix of Class A office
space, high-end retail, and upper scale residential developments. The addition of an open green
landscape with a pedestrian district meandering through the mixed-use development provides the
opportunity for Hardy Yard to be a unique urban destination for residents, business entities, and
visitors alike.”17
The area east of downtown (EaDo) is going to see additional redevelopment with a project
known as East Village, a 60,000 sf mixed-use project that, according to its website, “is the first
of its kind in EaDo and includes concepts from some of Houston and Dallas’ most talented and
respected operators.”18 It is “a 2-block mixed-use complex planned along St. Emanuel and
Hutchins St. between Polk and Lamar in East Downtown — a few blocks south of the Dynamo’s
BBVA Compass Stadium.”19 The property will be home to a comedy club, office space, retail
space, and a vodka distillery.
Also slated for construction in EaDo is Ivy Lofts. According to the Chronicle, “the 24-story, 500unit project will be on a 1.4-acre block on the southwest corner of Leeland and Live Oak” Also
per the Chronicle, “the units in the proposed project would run between 300 and 750-square feet
and start in the $100,000's. The first floor would be commercial retail.” The Chronicle article
also says “The smaller units are part of trend in cities like Tokyo, New York and San
Francisco.”20
17
http://s.lnimg.com/attachments/311CD638-4CE6-4251-8CB5-F7F58F37D288.pdf
http://www.ancorian.com/project/east-village/
19
http://swamplot.com/houstons-own-east-village-planned-next-to-8th-wonder-brewery-in-east-downtown/2016-0108/
20
http://www.chron.com/about/article/East-Downtown-condo-project-would-offer-6601362.php
18
February 10, 2016
20
The Outer Loop
Within the Sam Houston Tollway a lot of activity is taking place. The activity, however, is
shifting from the west to the south and to the east. The west is still viable and active in
development but business is picking up in other areas based on industries besides oil & gas
exploration.
The west side is still seeing some office buildings under construction but they are also seeing
apartments under construction as well.
CityCentre remains a focal point in the Memorial City area. The goal is to have a truly livable
area with all of the amenities possible. Trammel Crow is developing the Alexan CityCentre at
905 Town & Country Boulevard. The complex will be 340 units and is scheduled to open in
2017.
Across from this site, the office park known as Town & Country Office Park was recently
purchased with the intent to clear the site and redevelop the parcel as an expansion of
CityCentre. The expansion will include more office space with the retail mix like the other
buildings at CityCentre. The 6.39 acre tract sold for $151.89 per square foot. This is one of the
highest sales outside of the Central Business District and Galleria/Uptown Area.
Also in the area, MetroNational is building more office towers. The latest office building is
under construction on the northwest corner of Interstate 10 and Gessner Road. The 240,000
office will sit on 18 acres of land that was previously a large retail strip center.
On the south side of Houston, The University of Texas is looking to expand in a major way. The
university “is acquiring 332 acres about one mile south of Loop 610 for a [new] campus with
dozens of new buildings.”21 UT will pay $450 million over the next 30 years for the property.
“The site is bisected by Buffalo Speedway and is south of West Bellfort Avenue, within walking
distance of the Astrodome and only 3.5 miles from the Texas Medical Center.”21
21
http://realtynewsreport.com/2015/11/10/university-of-texas-just-lit-the-fuse-for-growth-explosion-one-mile-southof-loop-610-in-south-houston/
February 10, 2016
21
Rendering of potential University of Texas campus
Baytown
The east side is where business is picking up. The decline of oil & gas has created a shift toward
the petrochemical and plastics plants on the east. Chevron Phillips Chemical is currently
expanding its plant in Baytown. The larger plants will create more jobs and need for housing,
retail and other services to support the area.
An example of development is Kilgore Crossings. This is a two hundred acre master-planned
project. The project will include a multi-family complex with 240 units, and 124 acres will be
reserved for around 500 single-family homes. Commercial development will include retail,
hotels, and offices. The property will be located at State Highway 146 and Kilgore Parkway.22
22
http://www.houstonchronicle.com/business/real-estate/article/Mixed-use-development-finds-Baytown-a-market6627894.php
February 10, 2016
22
Kilgore Crossing
Photo: Hunington Properties
The Grand Parkway
From http://communityimpact.com/houston/news/2016/01/20/regional-transportation-updates-cyf-2/:
Motorists in north Houston who were expecting to use the city’s third outer loop
by early 2016 on their daily commutes will have to wait a few more months.
Contractor Zachry-Odebrecht Parkway Builders has announced segments F-1, F-2
and G of the Grand Parkway will open sometime in the first quarter of 2016. …
Originally planned for completion by the end of 2015, segments F-1 and F-2 of
the Grand Parkway will consist of tolled roadway from Hwy. 290 to I-45, while
Segment G will connect I-45 and Hwy. 59 when completed. Construction of the
$1 billion tollway has been funded and overseen by the Texas Department of
Transportation.
The Grand Parkway segments will provide additional roadway capacity to help
alleviate the increased traffic demand, said officials with Zachry-Odebrecht.
However, construction of the project has been hampered due to recent weather
conditions. …
February 10, 2016
23
Although the project has been delayed from its original expected completion date,
Zachry-Odebrecht achieved a significant milestone in December by setting all of
the beams and bridge decks for the project. A total of 121 bridge decks and 3,802
concrete beams were set for the toll road, the company said in a news release.
A project conceived more than 50 years ago, the more than 200-mile tollway will
become Houston’s third outer loop when completed. Segment E of the Grand
Parkway, from I-10 to Hwy. 290, was completed in December 2013.
Source: Grand Parkway Association/Community Impact Newspaper
Still very few recent land sales have been reported along the Grand Parkway. As stated before
the investors and developers are waiting for a fully functional Parkway before development.
Highway 290 Expansion
The U.S. 290 freeway expansion has been a thorn in the side for many people, TxDOT and
commuters alike. It is now estimated completion will be late 2017. The first company that had
the contract to build the 4 mile ‘Project H’ segment from Pinemont to Little York, Grupo
Tradeco of Mexico, walked away from the project and that portion of the expansion project is
now spearheaded by W.W. Webber LLC, from The Woodlands. Land on both sides of the
freeway is still being taken for the road expansion.
February 10, 2016
24
Cypress Fairbanks ISD/Waller/Katy
Katy is making a big splash in the news with the construction of Typhoon Texas. “This $45
million waterpark is on scheduled to open in time for Houston's blistering summer heat. Typhoon
Texas Waterpark, located at 555 Katy Fort Bend Road adjacent to the Katy Mills Mall, will
officially open May 28 through Labor Day.”23
Katy will also see some new class A apartments. Oden Hughes acquired 18.7 acres of vacant
land near the intersection of Kingsland Blvd and Katy Gap Road, near the Katy Mills Mall and
the Grand Parkway.24 The garden-style complex will have 389 units.
In Waller, Daikin Industries Ltd. will build a new $417 million campus. The Japan-based
manufacturer of heating, cooling and refrigerant products acquired Houston-based Goodman
Global Group Inc., a manufacturer of HVAC products for residential and light commercial use,
in 2012. The 3 million- to 4 million-square-foot campus will be on a 90-acre parcel near U.S.
Highway 290, three miles west of Texas State Highway 99. When completed, the 4-million plus
square foot tilt-up concrete will be the largest in the world.25
23
http://www.bizjournals.com/houston/morning_call/2016/02/massive-katy-water-park-announces-openingdate.html
24
http://www.bizjournals.com/houston/morning_call/2015/11/new-class-a-apartments-headed-to-katy.html
25
http://www.bizjournals.com/houston/news/2015/01/07/major-hvac-manufacturer-to-build-417m-houston.html
February 10, 2016
25
In Cy- Fair, FedEx Corp will open a massive new ground facility in Cypress next summer. The
800,000-square-foot project will house the Memphis-based company's largest FedEx Ground
facility in Texas and will employ 400 people, according to a statement from the company. The
Cypress campus will be located off the Grand Parkway expansion. The facility will contribute to
northwest Houston's growing industrial presence, which is not softening quite like other markets
amid the oil slump.26
Tomball ISD
In the recent past, Tomball has seen growth along State Highway 249 with projects like Vintage
Park and the Noble Energy office tower. However, plans for more development have shifted into
a holding pattern. Baker Hughes announced it was laying off about 7,000 employees globally
and because Baker Hughes is the major player in Tomball, combined with the future Halliburton
merger, the area is showing caution in future developments.
For example, developers for the Peck Station mixed-use community, planned for the intersection
of Hufsmith-Kohrville Road and FM 2920 in Tomball, may be looking to make changes to some
sections of the 34 acre tract amid concerns about the ongoing Baker Hughes/Halliburton merger.
The original plan was to turn the site into a mixed-use development consisting of a name-brand
hotel, retail and restaurants, green space and walking trails, office space, and a multi-family
complex.
26
http://www.bizjournals.com/houston/morning_call/2016/01/fedex-plans-massive-facility-in-houston.html
February 10, 2016
26
LA Porte
From the Houston Chronicle:
A proposed new Town Center in La Porte
would come with an official licensing
agreement from country music legend
Mickey Gilley to open a new Gilley'sbranded restaurant, bar, and music
venue.27
It’s not quite the expansive honky-tonk
that Gilley ran with Sherwood Cryer in
the ‘70s and ‘80s in Pasadena but it would
at least incorporate the singer-songwriter’s
name and include some of the [trappings]
that fans of the Gilley’s brand know and
love.
The site of this new venture is located off
Highway 146 (the future frontage as part of the
Grand Parkway) on a 20-acre tract just north of
Wharton Weems Boulevard. The location will provide high visibility and easy access for
enhanced traffic circulation. The proposed pedestrian friendly town center is also located
adjacent to the Bay Forest Golf Club and would be strategically convenient to downtown La
Porte, Sylvan Beach, and the Houston Yacht Club. The project is estimated to cost $55 million to
develop.28
The development includes the following concepts.









50,000 square foot entertainment complex
20,000 square foot conference, theatre, and museum
8 restaurants
50,000 square foot retail space
5,000 square foot office space
14 brownstone town homes
7 live I work spaces
114 room hotel
2 -acre park and water features
27
http://www.chron.com/neighborhood/bayarea/business/article/New-Gilley-s-dance-hall-included-in-proposed-La6668057.php
28
http://bayareaobserver.com/developer-seeks-approval-for-la-porte-town-center-entertainment-complex-p21591.htm
February 10, 2016
27
Sales
The table below shows summarized land sales data with per square foot price ranges and sales
volume per submarket and school district. This table gives a clearer picture of hot spots for
activity. The sales dates range from January 1, 2015 to December 31,2015.
Northwest
Tot. Sales in District Market Non Market Foreclosure
Aldine
Klein
Spring
Tomball
Waller
155
Total Sales
Auction $ per SF Range
5
30
16
11
6
2
117
32
14
14
3
8
1
0
0
0
0
2
0
0
0
256
65
180
9
2
51
25
20
$0.26
$0.29
$0.52
$0.92
$0.49
-
$6.50
- $13.37
- $10.19
-
$4.57
-
$2.34
Southwest
Alief
Katy
Spring Branch
32
13
2
10
3
Total Sales
50
15
5
3
21
10
0
1
0
0
0
0
34
1
0
$0.49 - $2.34
$0.47 - $23.70
$14.10 - $24.28
Northeast
Crosby
Huffman
Humble
Sheldon
14
Total Sales
13
6
0
15
3
7
7
20
9
1
0
0
0
0
0
4
1
73
24
43
1
5
7
39
$0.06
$0.00
$0.23
$0.33
-
$3.96
-
$0.00
- $12.50
-
$2.06
Southeast
Channelview
Clear Creek
Deer Park
Galena Park
Goose Creek
La Porte
Pasadena
34
3
17
6
2
14
14
21
0
0
0
0
1
0
0
0
0
0
0
3
0
2
127
44
77
1
5
22
11
4
24
25
Total Sales
4
5
5
2
6
11
11
7
$1.18
$0.82
$3.25
$1.26
$0.15
$1.14
$1.14
-
$4.87
-
$5.31
- $13.98
-
$2.56
-
$2.56
- $20.72
- $11.55
Houston
Houston
301
72
188
4
37
Total Sales
301
72
188
4
37
$0.12 - $87.15
Cy-Fair
Cy-Fair
96
30
63
1
2
Total Sales
96
30
63
1
2
February 10, 2016
$0.91 - $22.30
28
The following chart shows the sales volume per submarket for 2014 versus 2015. Based on this
chart the 2015 sales activity was not as great as 2014. This shows the market cooling down
drastically in all submarkets.
2014 Sales Volume VS 2015 Sales Volume
500
450
400
350
300
250
2014 Sales
200
2015 Sales
150
100
50
0
Northwest
Southwest
Northeast
Southeast
Houston
Cy-Fair
This chart below shows sales volume for the whole county by quarter for 2015. Like most years
the fourth quarter shows the least amount of activity. Based on this chart the activity throughout
the county seems to drop off throughout the year.
2015 Sales by Quarter
400
350
300
250
200
150
100
50
0
1st Quarter
February 10, 2016
2nd Quarter
3rd Quarter
4th Quarter
29
This chart shows the land sales per quarter for each submarket for 2015:
2015 Land Sales by Quarter and Submarket
120
100
80
1st Quarter
2nd Quarter
60
3rd Quarter
4th Quarter
40
20
0
Houston
Cy-Fair
Northwest
Southwest
Southeast
Northeast
Summary
Although the energy sector is just a spoke in the wheel of industry in Harris County, the
downturn in that sector does impact the market activity in Harris County. Harris County is
entering the second year of the worst oil downturn in decades. Local economists say the
economy is bad but not awful. The focus is less and less about oil and gas and more about
development of petrochemical and plastic products, refineries and health care. The shift can be
seen from the west side of the county to the east side of the county. The west was geared more to
the white collar side as opposed to the east being the blue collar side. The inner city and central
business district still remain as attractive locations. Although the activity has slowed in the CBD,
the surrounding areas are seeing growth. Economists predict that 2016 will likely be a harsh year
for Harris County. Most analysts don’t expect meaningful improvement until 2017.
February 10, 2016
30
Office
Until 2015, Houston remained one of the steadiest and most productive growing cities in the
country. Houston had, for several years, continued its success as the national leader in office
development; primarily due to the strong oil and gas sector. However the downturn in oil prices
over the last year have affected the capital operations of large oil & gas companies headquartered
in the greater Houston area. Some restructured their development and operations plans and/or put
capital improvement projects on hold. Houston was able to adjust to the abrupt changes in the
supply and demand for oil refining and exploration. Houston survived through this period due to
its economic diversity in sectors including distribution, technology, and healthcare. However, the
oil & gas and energy sectors remain the most significant economic drivers. Large new office
buildings were delivered in 2014, but the number of new buildings and office space started in
2015 was less than 2014. These major sectors have led to the addition of office buildings in the
Energy Corridor/West Houston/Katy Freeway areas, adding over 12.1 million square feet over
that period, making up effectively 43.9% of all new competitive office properties added to the
overall Houston market over the ten-year period ending with the 3rd quarter 2015. Additionally,
overall average asking rent for year-end 2015 was $27.24 psf which marked an approximate
increase of 2.2% from the year-end 2014. Over the last eighteen quarters, asking rents have
increased a total of 16.1%. Since the beginning of 2006, rents have increased on average 4.3%
annually.
Twenty-fifteen has been largely a year of adjustment, with a decrease in absorption and an
increase in vacancy and lease concessions. Leasing activity absorbed roughly 2,560,000 sf
during 2014. However, over the first three quarters of 2015, there was a net addition of 2.8
million square feet to the vacancy roster. New construction delivered in 2015 may have been in
competition for tenants otherwise negotiating for existing available space.
A total of 18 buildings were delivered to the market in 4th quarter 2015 totaling 3,606,137 sf,
with 8,613,186 sf still under construction. The additional square footage more than offsets the
absorption and is sending the vacancy rate up. This will be a continuing trend as vacancy and
absorption rates try to maintain a balance with supply.
Houston’s office market recorded growth in 2015 with the completion and delivery of new
construction that was started in 2014. Furthermore, Houston has consistently shown resilience to
the national recession in the past several years and has remained one of the nation’s best areas
for employment and economic growth.
Inventory Analysis
According to CoStar, the total office inventory in Houston at the end of 4th quarter 2015
consisted of 6,547 office buildings totaling 297,844,163 sf, up from 280,416,894 sf at the end of
2014. Of that space, 44.97% is Class A consisting of 449 buildings; 41.74% Class B consisting
of 2,874 buildings; and 13.29% Class C consisting of 3,587 buildings.
February 10, 2016
31
Office Inventory by Class
2015 Inventory
13.29%
44.97%
Class A
Class B
41.74%
Class C
Existing Inventory in Select Submarkets
# Bldgs
Existing Inventory
450
400
350
300
250
200
150
100
50
0
431
42
208 208
204
179
18
51
90
45 59 26
31
73
29
Downtown
Greenway Plaza
Katy Fwy
West Loop
Westchase
Class A
42
18
90
45
31
Class B
179
51
208
59
73
Class C
431
204
208
26
29
Data provided by CoStar
Construction Activity and Deliveries
Twenty-fifteen saw several newly constructed office properties, particularly Class A sector
development. Most of the office building space under construction is in downtown Houston,
Northeast Near market, Westchase, West Loop, Katy Freeway, and The Woodlands.
Per CoStar, 2015 had 85 new office buildings completed, totaling 12,218,875 sf. In comparison,
2014 saw delivery of 103 new buildings totaling 7,576,793 sf of new office space. There was
8,613,186 sf of office space under construction at the end of the 4th Quarter 2015, about half that
of the end of 2014.
A breakdown of construction for 2015 includes:


30 buildings totaling 4,365,321 sf for the 1st Quarter;
24 buildings totaling 3,212,240 sf for the 2nd Quarter;
February 10, 2016
32


13 buildings totaling 1,035,177 sf for the 3rd Quarter; and
18 buildings totaling 3,606,137 sf for the 4th Quarter.
Some notable deliveries/completions for 2015 include:


ExxonMobil Campus Phase II, a 1.5 million sf facility delivered in the 1st Quarter of
2015 and now 100% occupied
CyrusOne West Campus Expansion Phase 1, a 640,000 sf building delivered in the 1st
Quarter of 2015 and now 100% occupied
The largest projects under construction at the end of 2015 include:


FMC Technologies campus, a 1.7 million sf building 100% pre-leased
Phillips 66 Global Headquarters, a 1.1 million sf facility 100% pre-leased
REIS reported that nearly 9.0 million square feet in a combination of speculative and singletenant projects was under construction by the end of 2015.
Best and Worst Houston Market Areas Ranked by Vacancy Rate and Rental Rate
Vacancy Rate
Rank
1.
Rate Area
4.8% South Hwy 35
Quoted Rates per square foot
Rank
1.
Rate Area
$38.71 CBD
2.
6.8% Bellaire
2.
$32.59 Greenway Plaza
3.
8.3% Medical Ctr; Northeast Near
3.
$30.91 Westchase
…
… …
…
… …
22.
16.3% I-10 East
22.
$16.38 South Hwy 35
23.
17.3% West Belt
23.
$16.27 Southwest
24.
28.8% North Belt
24.
$14.57 I-10 East
Source: CoStar Year End 2015 Houston Office Market Report
Note: The data provided by vendors can vary due to differences in classifying submarkets areas and their
locations, the individual breakdowns of said market areas, and the accuracy of each vendor’s gathered
market data.
February 10, 2016
33
Construction Activity
Downtown
1,578,258 SF
18%
All Other
1,970,891 SF
23%
Katy Fwy
914,037 SF
11%
Westchase
1,545,000 SF
18%
West Loop
905,000 SF
10%
NE Near
1,700,000 SF
20%
** CoStar stated two Class A offices are under construction: 609 Main at Texas (1,057,668 sf) and Hilcorp Energy
Tower (406,600 sf) in the CBD submarket.
Notable Year-to-Date deliveries based on square footage
Submarket
Woodlands
Leasing Co.
ExxonMobil
Foundation
West Belt
CyrusOne Inc.
Katy Fwy
Katy Fwy
CBRE
CBRE
ExxonMobil
Foundation
CBRE
MetroNational
Corp.
Mac Haik
Development
PM Realty
Group
Woodlands
FM 1960
Katy Fwy
Katy Fwy
Greenway
Plaza
Sty
NRA
%
Leased
8
1,500,000
100%
1Q 2015
3
640,000
100%
1Q 2015
22
20
599,978
546,604
100%
100%
4Q 2015
2Q 2015
8
500,000
100%
2Q 2015
20
456,000
100%
2Q 2015
Air Liquide Center - South
20
452,370
59%
4Q 2015
Energy Tower IV
17
429,157
36%
1Q 2015
3737 Buffalo Speedway
Ave
19
400,000
29%
4Q 2015
Property
ExxonMobil Campus –
Phase II
CyrusOne West Campus
Expansion Phase I
Energy Center Four
Energy Center Three
ExxonMobil Campus –
Phase III
Noble Energy II
Delivery
Date
February 10, 2016
34
Notable Year-to-Date office buildings under construction based on square footage
Submarket
Northeast
Near
Westchase
Downtown
West Loop
Katy Fwy
Leasing Co.
Trammell
Crow Houston
Phillips 66
Colville Office
Properties
Transwestern
CBRE
Sty
5
NRA
1,700,000
% PreLeased
100%
2101 Citywest Blvd –
Phillips 66
609 Main at Texas
12
1,100,000
100%
2Q 2016
48
1,056,658
6%
2Q 2016
BHP Billiton Petroleum
Energy Center Five
30
18
600,000
524,328
100%
0%
4Q 2016
2Q 2016
Property
FMC Technologies Campus
Delivery
Date
1Q 2016
Net Absorption and Leasing Activity
Per CoStar, the net absorption of office properties in the overall Houston area for 2015 was
positive at 2,653,459 sf, down from 7,783,390 sf for 2014. CoStar reported that Class A saw a
positive net absorption in 2015 of 3,930,825 sf; the Class B market was (negative) -1,438,138 sf;
the Class C market was 160,762 sf.
Furthermore, the Central Business District absorption for 2015 was 28,264 sf, compared to
571,341 sf for 2014. The suburban market absorption was at 983,336 sf for 2015 down from
7,212,049 sf for 2014. Notable tenant arrivals for 2015 included:


ConocoPhillips moving into 546,604 sf at Energy Center Three
Air Liquid USA, Inc. moving into 234,510 sf at 9811 Katy Freeway
Notable tenant departures for 2015 included:




ConocoPhillips moving out of 647,408 sf at ThreeWestLake Park
Noble Energy, Inc. moving out of 456,000 sf at Energy Center II
Phillips 66 moving out of 421,470 sf at Pinnacle Westchase
ExxonMobil moving out of 189,853 sf at 396 W. Greens Road
According to REIS, the 2015 year-end net absorption total was 505,300 sf, a decrease from
2014’s net absorption total of 3,481,000 sf. Total Class A inventory was 101,516,000 sf with a
net absorption of 3,983,000 sf, 13.4% vacancy rate, average asking rent of $32.88 psf, and Gross
Revenue per square foot of $28.47. Total Class B and C inventory was 74,854,000 sf with a net
negative absorption of -1,964,000 sf.
February 10, 2016
35
Notable Year-to-Date office building leases based on square footage
Submarket
Westchase
Leasing Co.
N/A
Galleria/
Uptown
Greenway
Plaza
Greenway
Plaza
CBD
Post Oak Park
Cousins Properties
Inc.
Cousins Properties
Inc.
Cousins Properties
Inc.
Cushman &
Wakefield Inc.
CBRE
Katy Fwy W
Savills Studley
Galleria/
Uptown
Midtown
Cousins Properties
Inc.
Pollan Housman
R.E. Services
Accesso Partners,
LLC
Colvill Office
Properties
N/A
Bellaire
Greenspoint/ N
Belt West
E Ft. Bend Co./
Sugar Land
Katy Fwy West
Westchase
Katy Fwy East
Mac Haik
Development
PM Realty Group
Cresa Houston
Property
Western
Geophysical
Post Oak Central
One
Four Greenway
Plaza
Twelve Greeway
Plaza
Pennzoil Place –
South Tower
2425 West Loop
South
West Memorial
Place Phase II
Post Oak Central
Three
HCC Building
Tenant
WesternGeco
Qtr
3rd
NRA
554,385
Apache Corporation
4th
355,506
Transaction, Inc.
2nd
255,413
CPL Retail Energy
LP
Bracewell & Giuliani
LLP
Stage Stores, Inc.
1st
191,893
4th
189,061
2nd
168,901
IHI E&C
2nd
158,050
Apache Corporation
4th
150,020
4th
139,424
6330 West Loop
South
Five Greesnpoint
Place
Oasis Medical
Office Building
Energy Tower IV
St. Luke’s Episcopal
Health System
Texas Children’s
Health Plan
Swift Energy
Company
North American
University
N/A
3rd
138,599
1st
113,801
3rd
111,275
4th
106,555
Westchase Park II
10100 Katy Fwy
N/A
CEMEX USA
1st
3rd
100,000
80,000
Vacancy
According to CoStar, the vacancy rate for all classes of office buildings at the end of 4th quarter
2014 was 13.6%, up from 11.3% at the end of 2014. CoStar reported vacancy rates for the end of
the year to be:



14.5% for Class A buildings
14.3% for Class B buildings
8.1% for Class C buildings (down from 9.5% for the end of 2014)
The overall ending vacancy rate for the CBD in 2015 was 13.6%, up from the end of 2014 at
8.9%. Additionally, vacant sublease space in Houston ended 2015 with 3,816,078 sf, a little more
than double that of the end of 2014. Per CoStar, Class A properties reported vacant sublease
space of 2,773,601 sf, Class B properties reported vacant sublease space of 1,024,125 sf, and
Class C properties reported vacant sublease space of 18,352 sf.
February 10, 2016
36
Per REIS, as of the 4th Quarter of 2015, in terms of vacancy Houston ranked 5th out of 9 metro
markets in the Southwest United States and 25th out of 82 metro markets nationally. Adjustments
to the recent changes in the economy should slow the aggressive construction activity
experienced over the past few years. This will inevitably cause the market’s vacancy rate to float
higher as the market tries to rally leasing and absorption activity to keep up with supply. REIS
reported that vacancy ran in the vicinity of 15.6%, up from 14.4% for 2014 and 2013. The office
vacancy rate at the end of 2015 for Southwest U.S. was 17.9% and for the nation 16.3%.
Rental Rates
CoStar reported that overall market rental rates were $28.04 psf for 4th quarter 2015, an increase
of approximately 3.0% from the prior year. The average rental rate at the end of 2015 for Class A
spaces was $34.31 psf, Class B $21.56 psf, and Class C $16.92 psf.
According to REIS, the average asking rents saw a change from $27.20 to $27.83 per square
foot, a 2.3% change from 2014. Asking rents for greater Houston in 2013 were $25.90 psf.
REIS has projected asking rents of $28.95 psf for 2016, and $30.29 psf for 2017.
Quoted Rental Rates
$45.00
$43.19
$38.71
$40.00
$30.00
$25.00
$36.04
$35.73
$32.59
$35.00
$28.09
$25.77
$23.58
$20.37
$20.00
$35.59
$30.50
$33.48
$29.93
$35.29
$30.91
$25.84
$22.95
$19.93
Class A
Class B
$19.90
$17.69
Class C
Overall Office
$15.00
$10.00
Downtown
Greenway
Plaza
Katy Fwy
West Loop
West Chase
Sales Activity
According to CoStar, the first nine months of 2015 saw 26 office sales transactions with a total
volume of $1.251 billion and an average of $237.39 psf. In 2014, there were 32 transactions
totaling $1.363 B at a $214.84 psf average. And in 2013, Houston posted 41 office sales
transactions with a total volume of $1,960 B and an average of $217.70 psf. Cap. rates on these
sales average 6.93%, compared to 7.30% for 2014.
Capitalization Rates
CoStar reported that cap rates were lower in 2015, at 6.93% on average for office buildings,
given the increase in property values, sales, and newly constructed office buildings. Per CoStar,
cap rates in 2014 averaged 7.30% and 8.29% in 2013.
February 10, 2016
37
According to REIS, the overall average cap rate for 2015 was 7.0% , up from 6.5% a year earlier.
The average capitalization rate was 9.2% for the 2nd quarter of 2015 and 4.7% for the 2nd
quarter.
Cap Rates based on Office Building Sales from October 2014 through September 2015
Bldg Size
< 50,000 sf
50K-249K sf
250K-499K sf
> 500K sf
# of Bldgs
35
30
5
2
NRA
385,297
4,223,979
1,929,421
2,114,117
$/sf
197.95
$151.27
$245.72
$312.42
Cap Rate
7.20%
8.05%
5.98%
5.60%
REIS projects that “Construction activity is expected to continue during each of the following
two years, during which a total of 9.6 million square feet is projected to be introduced to the
market. Office employment growth at the metro level over the same period is projected to
average 1.7% annually, enough to facilitate an absorption rate averaging 2.8 million square feet
per year. Because this amount does not exceed the forecasted new construction, the market
vacancy rate will rise by 140 basis points to finish 2017 at 17.0%. On an annualized basis
through 2016 and 2017, asking and effective rents are anticipated to advance by 4.5% and 4.7%,
respectively, to finish 2017 at $30.39 and $25.56 [per square foot triple net].”
Summary
Houston’s office market rent growth is projected to continue to increase. At the same time,
supply continues to grow and demand is beginning to decrease, so vacancy is expected to inch
higher. However, the Houston market has experienced a significant increase in market activity
and improving market conditions, strong trade sectors, and high population growth rate indicate
a continuing upward trend in property values.
Apartments
Houston’s demand for apartments continues to be high due to constant significant population
growth. According to the CBRE Houston Multifamly Q4 2015 Marketview, Houston
“multifamily demand ended 2015 higher than expected, with 13,013 units absorbed, the majority
being in newly built Class A product.” Net absorption is an indicator for multi-family demand. It
measures the change in occupied apartment units over a period of time. Since 2009, Houston
gained more than 390,000 jobs, more than double the number of jobs lost during the recession.
Houston’s population boom and job growth are fueling this record demand for apartments. Last
year, Houston saw the largest population increase, nationally, after nearly 150,000 new residents
flocked to the city, up from the nearly 140,000 moving to the city in 2014. In five years, over
600,000 more people moved to Houston than moved out.
The CBRE report noted “Rents expanded year-over-year another 5.0%.” Housing prices in
greater Houston are creeping higher as well as a greater demand for rental units due to new
industrial construction in the Port of Houston area in east Houston. The report continued:
February 10, 2016
38
“An imbalance of supply and demand is starting to creep into the analytics,
specifically Class A Properties. Apartments are functionally full at 95%
occupancy, although Houston’s overall occupancy isn’t quite there ending the
year at 90.6%, due to corporate units and temporary, short-term leases making the
difference.
Conversely, Class B and C properties continue to gain renters at a steady pace,
and can almost be classified as completely full at 93.6% and [that is] expected to
be seen in the year ahead as affordable housing becomes more than a topic of
conversation.”
ADS indicated that by the end of 2015, 20,187 units were under construction, and the occupancy
rate was 90.6%. In 2016, expected deliveries are expected to total 18,327 units, and for the two
year period of 2016 and 2017, 29,716 units. According to the REIS Apartment – 4th Quarter 2015
Metro: Houston report, “Because [the absorption rate] does not exceed the forecasted new
construction, the market vacancy rate will rise by 120 basis points to finish 2017 at 7.0%. On an
annualized basis through 2016 and 2017, asking and effective rents are projected to increase by
3.7% and 3.5%, respectively.”
According to the REIS report, the national vacancy rate ended the year at 4.4% (up from 4.2%
the previous year), a potentially worrisome result for the near-term future of the apartment
sector. REIS forecasts that rent growth will stabilize as well at or around 3%.
With the expansion of the METRORail from downtown to the University of Houston, new
construction for student housing is expected to continue in the university’s immediate area. With
the population growth in the area, and associated growth in senior/retiree population, an increase
in multifamily tax credit subsidized housing and assisted living apartment complexes is expected
to continue as well.
Rental Rates
Over the past twelve months, apartments in the Greater Houston Area have registered a 5.0%
increase in rental rates, this following an 8.1% increase for the year before. Total absorption for
the twelve months ending in December 2015 was 13,262 units, according to ADS. With nearrecord numbers of units to be added to the market for 2016, newer multifamily product will be
prone to offering concessions. With positive absorption and higher occupancies, Class B, C, and
D apartment communities are now offering fewer concessions. Per ADS, as of January 2016,
22% of apartment communities are now offering concessions (all classes) in comparison to 20%
in 2014. According to ADS, 22% of the multifamily properties, or roughly 1 in 5, in the Greater
Houston Area are giving concessions to rental rates. For Class A properties, 41% of the Class A
properties are offering concessions, averaging almost 1 month free rent. However, this includes
new construction that has not stabilized occupancy as of the offering, as virtually all of new
construction is Class A, except for newly constructed Class B subsidized and tax credit
apartments. Twenty percent of Class B properties are offering concessions, Class C 17%, and
Class D 12% (roughly 1 in 8). Concessions, when given, average ½ month for Class B to ⅔
month for Class D.
February 10, 2016
39
Of the 41 submarkets analyzed by ADS, 19 have had rental rate increases and 25 had decreases.
A major change in 2015 is a trend toward increasing rent growth in suburban markets and
decreasing rent growth in the urban core. Woodlake/Westheimer had the largest rental rate
increase of 10.3% in 2015, followed by Baytown at 9.2%. The Baytown submarket had the
largest rental rate change over the previous twelve months at 13.4%, followed by Alief at 9.4%.
Throughout the metro area, ADS reports that overall vacancies increased from 8.9% in January
2015 to 9.4% at the end of 2015. During that time period, rents increased from an average of
$1.054 psf per month ($12.65 psf per year) to $1.099 psf per month ($13.18 psf per year) for the
overall market. The vacancy rate at the end of 2013 was 9.5% and average rent was $0.97 psf
($11.64 psf per year).
Market Performance
Number of
Properties
536
922
797
352
2,607
Class
A
B
C
D
OVERALL
Average
Rate
(/ sf / mo)
$1.510
$1.071
$0.879
$0.711
$1.099
Occupancy
(%)
83.0%
93.6%
93.6%
89.9%
90.6%
ALL
PROPERTIES
% Effect of
Concessions on
Market Price *
-3.8%
-1.1%
-1.1%
-1.0%
-2.0%
ONLY
PROPERTIES
W/CONCESSIONS
% Effect of
Concessions on
Market Price *
-7.9%
-4.3%
-4.8%
-5.5%
-6.4%
Note: One Month Free = -8.3%
Class A properties include multifamily projects that may have been delivered within the
last 2 years, and may not have stabilized or are out of their lease-up period
* On Street Price (s): Based on only those properties with concessions
Source: ADS – January 2016
Market Trends
Transwestern reported a total of 252 sales represented 69,003 units (compared to 68,675 units in
2014, with average 7.1% cap. rate) that took place in a trailing 12 months with average cap rate,
7.0%, totaling a volume of $5,149,400; represents an average price per unit of $89.26 psf for all
classes of property.
February 10, 2016
40
Apartments Recently Opened - January 2015 through February 2016 (ADS)
AKA
Account #
Address
Units
Eco
Area
Move
In Date
Jan 15
Sorrel Grand Parkway
135-236-001-0001
1660 Katy Gap Rd
380
28
Vue Kingsland
135-504-001-0001
18021 Kingsland Blvd
423
28
Jan 15
Aura Memorial
134-425-001-0001
14900 Memorial Dr
288
6
Feb 15
1615 Sawdust Rd
341
Broadstone Sierra Pines
Feb 15
Haven at Eldridge
134-446-001-0001
13115 Whittington Dr
246
6
Sunrise By The Park
133-755-001-0001
155 Birdsall St
180
3
Feb 15
21 Eleven
134-341-002-0001
2119 Westheimer Rd
215
3
Mar 15
2626 Fountain View
099-076-000-0002
2626 Fountain View Dr
281
4
Mar 15
Vargo's on the Lake
134-459-001-0001
2411 Fondren Rd
276
5
Mar 15
Villas at Colt Run *
135-567-001-0001
7600 E Houston Rd
138
17
Mar 15
Watercolor
045-144-002-0230
1700 Rollingbrook Dr
240
16
Mar 15
Parkside Place
127-028-001-0007
6220 FM 2920
384
25
Apr 15
Susanne, The
134-535-001-0001
3833 Dunlavy St
396
3
Apr 15
Vista Grand Crossing
134-616-007-0003
302 Cobia Dr
351
28
Apr 15
18100 West Rd
330
West Lake Park
Feb 15
Apr 15
Aldeia West
134-652-001-0001
305
28
May 15
Heights At Park Row, The
134-699-001-0001
13710 Park Row
342
27
May 15
La Mariposa
135-204-001-0001
2930 Plum Creek Ln
78
12
May 15
Lafayette Plaza (Senior) *
134-955-001-0001
7230 Clarewood Dr
122
8
May 15
Newport Village
740-281-000-0410
5925 FM 2100
80
17
May 15
Parkside At Memorial
132-965-001-0002
777 South Mayde Creek Dr
379
6
May 15
Rise, The
135-666-001-0001
7315 Spring Cypress Rd
288
24
May 15
1900 Yorktown
104-073-001-0001
1900 Yorktown St
262
4
Jun 15
Alexan Heights
133-883-001-0001
655 Yale St
352
2
Jul 15
Haven at Westgreen
131-494-001-0005
510 Westgreen Dr
225
28
Jul 15
Olympia at Willowick Park
116-432-001-0003
3939 W Alabama St
189
3
Jul 15
Pines At Woodcreek
043-209-001-0002
21021 Aldine Westfield
330
21
Jul 15
Commons At Hollyhock
046-005-000-0019
5751 Greenhouse Rd
624
27
Aug 15
Holden
135-954-001-0001
525 W 24th St
282
2
Aug 15
SkyHouse River Oaks Hi-Rise
134-929-002-0005
2031 Westcreek Ln
352
3
Aug 15
611 Dairy Ashford
333
Domain West
Sep 15
Modera Energy Corridor
133-080-001-0001
14520 Briar Forest Dr
278
6
Sep 15
Slate, The
135-108-001-0001
935 N Wilcrest Dr
414
6
Sep 15
Willow Creek
041-026-001-0637
9530 FM 2920
228
25
Sep 15
91 Fifty
131-801-001-0001
9150 Highway 6 N
210
27
Oct 15
Heights at Westchase
111-378-000-0010
3505 W Sam Houston Pkwy
265
29
Oct 15
Landmark Grand Champion
047-178-000-0048
11201 Boudreaux Rd
360
25
Oct 15
Mariposa At Pecan Park (Senior)*
136-144-000-0001
3535 Canada Rd
180
14
Oct 15
17802 Mound Rd
310
North Haven
Oct 15
Viridian Desigh Center
134-068-001-0001
7100 Old Katy Rd
394
22
Oct 15
Alexan Midtown
134-760-001-0001
2310 Main St
215
1
Nov 15
Hanover Southampton
134-340-001-0001
5122 Morningside Dr
206
3
Nov 15
High Point Uptown
133-975-001-0001
807 S Post Oak Ln
277
4
Nov 15
February 10, 2016
41
AKA
Account #
Address
Units
Eco
Area
Move
In Date
James River Oaks, The
134-266-001-0001
2303 Mid Lane
344
3
Nov 15
Modera Flats
134-752-001-0001
1755 Wyndale St
265
10
Nov 15
Pearl Woodlake
135-999-001-0001
2033 S Gessner Dr
376
5
Nov 15
District 28
128-687-001-0001
2828 Old Spanish Trail
299
10
Dec 15
H6
130-314-003-0001
410 Highway 6 S
293
6
Dec 15
Hampstead
025-024-054-0001
1508 Blodgett St
36
1
Dec 15
Alta West End
129-283-002-0001
4020 Koehler St
283
2
Jan 16
Domain Memorial
134-684-001-0001
14800 Memorial Dr
313
6
Jan 16
Towers of Seabrook
135-216-000-0005
3300 Bayport Blvd
416
13
Jan 16
5755 Hermann Park
134-395-001-0001
5755 Almeda Rd
193
10
Feb 16
Crenshaw Grand
046-164-000-0020
5400 Crenshaw/Beltway 8
264
14
Feb 16
District at Memorial
134-489-001-0001
10300 Katy Frwy
326
6
Feb 16
Tate Tanglewood
134-935-001-0002
5880 Inwood Dr
431
4
Feb 16
Pearl CityCentre
TOTAL
102-571-000-0002
10402 Town & Country Way
311
16,119
6
Mar 16
* Tax Credit
New Construction
New construction activity for apartments is expected to tighten somewhat for the next two years.
Newly delivered apartment complexes (most or all as Class A) may see a decrease in demand
and will offer concessions to support rental rates. This is expected to leave some excess supply in
the market over the long term, saving Houston’s apartment market from any further meaningful
tightening. Developers are able to build all of the new projects largely because investment grade
buyers and large cash-rich institutions are looking for a safe haven for equity, while banks are
willing to give them the money for construction and interest rates for the near term should stay
low. The total number of units in the Greater Houston Area at the end of 2015 was 606,431.
Currently, 16,208 units are under construction. Last year, 13,262 units were absorbed. Since
2004, between 10,000 and 15,000 new units have been added to the market annually, with 1,000
units a month being typical for stable economic years. The economic recession year of 2008 saw
21,862 units delivered. Between 3,900 to 5,900 new units per year were delivered during the
economic recovery years of 2010 to 2012. In 2014, 17,697 units were delivered and 20,187 in
2015. That considered, it is understandable that the total number of new units expected to be
delivered are roughly 18,000 for 2016 and 12,000 for 2017.
Per ADS, 74 new complexes totaling 21,192 units were added to the Houston market during
calendar year 2015. That is up from 54 new complexes totaling 14,559 units in 2014. In addition,
there are 56 complexes, consisting of 16,208 units, under construction as of January 2016. There
were 69 complexes with 19,286 units under construction at the end of 2014. Of the new
apartment complexes recently delivered to the market, three are tax credit properties.
February 10, 2016
42
Apartments under Construction through January 2016 (ADS)
AKA
Account #
Address
Units
Eco
Area
Move
In
Date
Jun 15
3400 Montrose Hi-Rise
026-171-000-0001
3400 Montrose Blvd
325
1
1300 N Post Oak
135-130-001-0001
1300 N Post Oak Rd
247
26
Jan 16
1711 Caroline
002-083-000-0001
1711 Caroline St
220
11
Aug 16
2121 Ella
056-166-001-0001
2121 Ella Blvd
120
22
Jan 16
3800 Main II
135-094-001-0001
800 Alabama St
116
1
Nov 15
500 Crawford
134-992-001-0001
500 Crawford St
364
1
Jan 16
800 Crawford High Rise
001-098-000-0002
800 Crawford St
314
11
Jan 17
Alexan 5151
134-569-001-0001
5151 Hidalgo St
398
4
Mar 17
Alexan Ashford
040-224-000-0047
1200 N Dairy Ashford
312
6
May 16
Alexan City Centre
135-734-001-0001
Town & Country Blvd
354
6
Nov 16
Alexan Southside Place
009-026-000-0082
4139 Bellaire Blvd
269
10
Jan 18
Alexan Spring Crossing I
043-081-000-0005
21525 Spring Plaza Dr
307
24
Apr 16
Alexan Yale
021-024-000-0004
501 Yale St
380
2
Aug 16
Amber Oaks
002-102-000-0001
1811 San Jacinto
242
11
Aug 17
Ascension On the Bayou
133-903-001-0001
150 Sam Houston Pkwy
280
6
Mar 16
Avenue Grove
135-253-001-0003
3700 Wakeforest
270
3
Mar 16
Axis
134-019-001-0001
2400 W Dallas Ave
368
1
Jan 16
BBVA EaDo Station
134-698-001-0001
2417 Capital St
311
11
Dec 15
Beacon At Buffalo Pointe
135-233-001-0001
10301 Buffalo Speedway
281
10
Mar 16
Bella Terra at Katy
048-056-000-0018
Katy Landing @ Ernsters
227
28
Jan 16
Block 334
134-973-001-0001
1515 Main St
207
1
Jan 16
10
May 16
Block 384
1825 San Jacinto
242
130-066-001-0001
Frankway/Braeswood
284
Bridgeview
135-647-001-0001
4115 Louetta
324
Broadstone Energy Park
135-858-001-0001
880 Hwy 6 S
416
3515 Discovery Creek Blvd
273
Braeswood
Broadstone Harmony
Jul 17
Feb 16
6
Jun 16
Mar 16
Broadstone Skyline
135-732-001-0001
707 Saulnier St
269
1
Sep 16
Broadstone Tinsley Park
134-741-001-0002
919 Gillette/W Dallas
365
1
Dec 16
Catalyst Hi-Rise
135-563-001-0001
1423 Texas Ave
361
11
Mar 16
Carter, The
135-534-001-0001
4 Chelsea Blvd
305
1
Mar 16
City Centre At Midtown
044-267-000-0002
1920 W Alabama St
258
1
Jun 16
Crest at Fondren
135-612-001-0001
8816 Westheimer Rd
338
4
Jun 16
Dolce Living At Midtown (DLC)
134-947-002-0001
180 W Gray St
217
1
Jan 16
Domain at Northgate Crossing
135-617-001-0001
28476 Hardy Toll Rd
306
21
Feb 16
Eastfield Baybrook Site
124-058-008-0001
Gatebrook Dr/W Eldorado Blvd
347
13
Aug 16
Elan Heights
135-307-001-0001
2222 White Oak Dr
327
2
Feb 16
Elan Memorial Park l
134-687-001-0001
902 Westcott St
258
3
Mar 16
Eldorado Green (Senior) *
040-210-000-0076
240 W Eldorado Blvd
108
13
Mar 15
Eastpointe Blvd Site
115-337-001-0315
Eastpoint Blvd N of I-10
283
16
May 16
Estates at Ellington
133-511-001-0002
635 Genoa Red Bluff Rd
72
14
Everly, The
23902 Kuykendahl
332
Aug 16
Greenhouse
2040 Greenhouse Rd
400
Feb 16
February 10, 2016
43
Move
In
Date
Jan 16
Units
Eco
Area
Grey House, The
135-444-001-0001
4444 Westheimer Rd
279
3
Hanover Montrose Hi-Rise
135-485-001-0001
3400 Montrose Blvd
327
1
Jun 16
Haven At Augusta Woods Village
133-034-001-0001
Kuykendahl / Augusta Pines
246
25
Aug 16
Haven At Highland Knolls
135-064-001-0001
Highland Knolls/Westgreen
171
28
Jan 16
Haven At Lakes Of 610
115-517-000-0020
8900 Lakes At 610 Dr
276
10
Nov 16
Haven At Liberty Hills
130-959-003-0006
Hwy 90/Beltway 8
246
17
Oct 16
Haven At Main
135-702-001-0001
8700 S Main
256
10
Jan 16
Haven At Westheimer
136-155-001-0001
Rincon/Eldridge Pkwy
230
6
Sep 16
Haven on 11th
135-575-001-0001
2205 W 11th St
120
22
Jan 16
Ivy High Rise
134-969-001-0003
2307 Mid Lane
301
3
Feb 17
Jefferson Heights
127-890-001-0001
1520 N Memorial Way
198
1
Apr 16
Kirby Dr
199
AKA
Account #
Kirby Collection
Address
Oct 17
Landmark At Spring Cypress
061-076-000-0001
3223 Spring Cypress
408
24
Le Palais
133-041-001-0001
1916 W Gray St
165
1
Jan 16
Lofts at Mid Main
135-584-001-0001
3622 Main St
363
1
Feb 16
23153 Springwoods Plaza Dr
268
Market Square Tower Hi-Rise
001-035-000-0001
777 Preston St
463
11
Oct 16
Marquis At Greenway
041-017-002-0320
3131 Timmons Ln
425
3
Jul 16
McGowen Station
134-930-000-0001
2727 Travis St
315
1
Mar 17
Memorial
131-987-001-0001
2018 N Memorial Way
198
1
Sep 15
Millennium Kirby, The
134-962-001-0001
7600 Kirby Dr
378
10
Jan 16
Millennium Med Center Hi-Rise
135-881-001-0001
1911 Holcombe Blvd
375
10
Jun 16
One Hermann Place/Capella ?
134-749-001-0001
1701 Hermann Dr
224
10
Jun 16
One Market Square Hi-Rise
001-033-000-0006
900 Preston St
274
11
May 16
18515 Bridgeland Creek Pkwy
288
Mark at CityPlace
Parklane Cypress
Dec16
Jun 16
Pearl at the Mix
013-270-001-0001
2913 Louisiana St
196
1
Pearl Residences At CityCentre
102-570-000-0013
Town & Country @ Attingham
148
6
Washington/ T C Jester
322
Pearl Washington
Dec 15
Jun 16
Apr 16
Mar 16
Place Redevelopment
039-220-000-0008
1341 Castle Ct
250
1
Dec 16
Post Galleria
134-399-001-0001
3131 West Loop South
390
3
Mar 16
Preserve At Baywood II
041-003-000-0036
Genoa Red Bluff/Red Bluff
192
14
May 16
Residences at City West
115-172-000-0004
2520 Rogerdale Rd
266
29
Mar 16
Residences at Fannin Station
124-827-001-0001
9800 Fannin
301
9
Aug 16
SkyHouse Main Hi-Rise
002-068-000-0009
1625 Main St
336
11
Jan 17
Southmore Hi-Rise
033-254-001-0001
Caroline/Southmore
225
1
Dec 16
Sovereign Spring Cypress
061-077-000-0015
2539 Spring Cypress Rd
253
24
Sep 16
Streamsong
132-009-001-0001
290
28
Mar 16
Studemont
007-134-000-0011
1011 Studemont
30
3
Tanglewood, The
097-493-000-0001
Woodhollow Dr
246
4
Texaco Building Hi-Rise
001-079-000-0001
1111 Rusk St
309
11
13922 Woodson Park Dr
304
2001 S Voss Rd
150
21145 Spring Plaza Dr
340
Trails At Lake Houston
Tuscany Walk
Venue Spring Cypress
February 10, 2016
132-470-001-0001
Dec 16
Dec 15
May 16
4
Jan 16
Jul 16
44
Move
In
Date
May 16
Units
Eco
Area
Village At Palm Center
116-775-001-0002
5330 Griggs Rd
222
35
Watercrest At Katy (Senior) *
135-900-001-0001
200 Katy Ft Bend
210
28
7955 FM 2920
340
318
25
Apr 16
228
21
Mar 16
AKA
Account #
Waterford Trails
Address
Watermark At Spring Cypress
044-046-002-0182
22803 Tomball Pkwy
Willowbend
132-464-001-0002
FM 1960 Bypass Rd W
TOTAL
Apr 16
Aug 16
24,531
* Tax Credit
Summary
According to the 2015 Kinder Institute Houston Area Survey conducted by Rice University,
“more respondents in 2015 (38 percent) than at any time in the past 10 years assert that living
conditions in the Houston area have been improving.”
In Houston, apartment developers are going vertical to combat rising land prices. In 2015, four
20-plus-story high-rises were delivered and by year-end five were under construction. The
Tomball/Spring submarket in north to northwest Harris County leads all Houston submarkets
with 11 properties containing 5,847 units under construction. Completion of the ExxonMobil
Campus to the north and upcoming Grand Parkway to Kingwood are factors driving apartment
demand in the area. Other submarkets ranking behind Tomball/Spring for under construction
projects are Montrose/Museum/Midtown (south of Downtown) with 3,623 units, Katy/Cinco
Ranch (west Houston) with 2,729 units, CBD with 2,503 units. The Woodlands and Conroe
combined submarket has 3,162 units under construction.
The Downtown Living Initiative program offers $15,000 per unit in tax rebates to developers
who create homes and multi-family projects. Currently, there are four projects under construction
and eight additional projects planned for the future. Before the initiative program only 3,600
residents lived downtown; but within 5 years this number will triple. However, as of May 2015,
the program is no longer accepting new applications.
From the Chronicle, “Skilled workers are in short supply….The labor shortage has become so
severe that construction companies have recently started putting guards on job sites to keep
workers from being poached by competitors willing to pay more. The labor shortage is leading to
scheduling delays and significant cost overruns. Rising land values, combined with higher
construction and material costs, are compressing the returns investors can make on
development.”29 An apartment complex that cost $130,000 per unit a few years ago to build now
costs $190,000 per unit to build today.
29
http://www.houstonchronicle.com/business/real-estate/article/In-building-boom-construction-workers-gain-the5706440.php
February 10, 2016
45
Marcus & Millichap’s 2016 US Multifamily Investment Forecast ranks Houston 22nd out of 46
market areas for its 2016 National Multifamily Index, down from 16th last year. Houston’s
apartment market should stabilize its multifamily market with moderate growth, taking
scheduled new construction deliveries into consideration. Investors will continue to target
Houston apartments in 2016, encouraged by another year of moderate job creation but with
continued population growth. At the same time, for-sale inventory will remain limited relative to
buyer demand, maintaining a highly competitive climate and supporting elevated prices across
the Houston area. Bidding will remain particularly intense for apartment properties inside the
Loop, and for assets in the Galleria/Uptown and The Woodlands/Spring areas, where land costs
have skyrocketed over the past few years. Gulfton/Westbury and Friendswood/Pearland have the
lowest vacancy rate in metro Houston, at 3.4%, down 80 basis points from 2014. Vacancy rates
are expected to remain near their lowest levels in the last decade, providing sufficient leverage
for local apartment owners to achieve strong rent growth.
In their Millenial Index, Marcus & Millchap ranking market growth occurring in the young-adult
population (ages 20 to 34), Houston ranked 8th in the nation, just behind Dallas/Fort Worth. A lot
of young people who are predominately renters and not homeowners will continue to provide
significant demand, even as new supply grows.
A change in the balance of supply and demand attending the supply of multifamily projects
under construction will reverse the downward movement in the vacancy rate, particularly in the
Class A sector where new product is leasing up and occupancy not stabilized yet.. While some
submarkets will see greater increases in their vacancy rates than others, a condition of general
significant oversupply is not expected. Vacancy, though, could rise to about 6.5% next year,
according to Marcus & Millichap. Rent growth should remain strong. The fourth quarter
indicated that the actual rents grew over the course of the year. The rate of development
underway in north Houston and around the Port of Houston and petrochemical refineries in the
east bears watching even as the energy-driven submarkets on the west side try to retain their
development.
According to Marcus & Millichap 4th Quarter 2015 Apartment Research Market Report –
Houston Metro Area, “Despite increased buyer interest, a lack of inventory throughout the metro
hinders transaction velocity as investors hold on to assets while options for reinvestment remain
limited. As a result, buyer demand has intensified as investors scour the metro for deals. Those
in search of upside potential will find properties in need of repositioning, whether through
management improvements or additional capital to rehabilitate units, allowing owners to push
rents.” The continued demand for quality investment grade properties should support increasing
associated real estate values.
Lastly, for their Houston Metro Area 2016 Outlook, Marcus & Millichap stated, “Hiring in
Houston’s medical community and downstream oil and gas operations will support the apartment
market this year as the energy industry awaits stabilization. Overall total employment growth
will remain slow for a second consecutive year as energy firms continue to cut spending in 2016.
In west Houston, where many of these companies are located, a building boom has brought
thousands of new apartments online, and more will be added to inventory this year. Performance
in this area has begun to soften and developers are ramping up efforts to lure tenants to recently
constructed properties. Tempering in western suburbs will be short-term, however, as deliveries
February 10, 2016
46
taper amid shifting builder attitudes and several healthcare organizations boost demand as they
expand nearby. Meanwhile, demand for housing is rising in the eastern portion of the metro and
along the Gulf Coast where several petrochemical plants are underway or proposed, increasing
the need for Class B/C housing. New construction in this area has been sparse, but the opening of
portions of Grand Parkway will generate new opportunities for development.”
Retail
The sector of the Houston economy that appeared to be strongest over 2015 was retail real estate.
Job creation in this area offset any negative changes resulting from oil & gas. As oil prices
declined, the price of gasoline also fell, giving consumers more disposable income. With a lack
of listings for investment grade apartment complexes, quality retail properties provided a viable
investment alternative. By most accounts, 2015 was better than 2014, which was better than
2013.
Houston auto dealers sold 376,481 vehicles in 2015, a record year for sales, up 1.4% from 2014,
which itself was up 6% from the 2013 figure.
REIS indicated the leading areas for retail this coming year will probably be the Southwest/Fort
Bend County/Sugar Land submarket, followed by FM 1960/Far Northwest and
Westwood/Bellaire. Consistent population growth in the greater Houston area is cited as a major
factor in a positive and resurging real estate retail market. “During 2016 and 2017, developers
are projected to deliver 1.5 million square feet.”
Net Absorption
Retail net absorption was positive in Houston in 2015, absorbing 4,148,587 square feet for the
year, compared to 4,232,709 sf for 2014, bringing the total absorption for the greater Houston
area over the last two years to 8,381,296 sf.
Tenants moving into large blocks of space in 2015 include:



Wal-Mart moving into 177,514 sf at The Shoppes at Uptown Crossing
Kroger moving into 124,000 sf at Shops at Katy Reserve, and
HEB moving into 100,000 sf at 97 Oyster Creek Drive
Market Occupancy
Houston’s tetail vacancy rate went from 6.1% in the 1st Quarter 2014, to 5.6% in the 1st quarter
of 2015. Over the past four quarters, the market has seen an overall decrease in the vacancy rate.
It decreased in the 4th quarter 2015, ending at 5.2%. The amount of vacant sublease space in the
Houston market has trended up over the past four quarters. At the end of 2014 there were
291,701 sf vacant retail space. Currently, there are 285,373 sf vacant in the market. The current
vacant sublease area is still lower than any point of 2014.
February 10, 2016
47
Largest Lease Signings
The largest lease signings to take place in 2015 were: the 57,000 square foot lease signed by
Showbiz Cinemas in the Lake Houston area at 8700 N Sam Houston Parkway East; the 52,346 sf
signed lease by Ashley Furniture Home Store at Deerbrook Corner in the Kingwood area; and
the 44,871 sf lease for Brookshire Brothers at Renaissance Center in Montgomery County.
Rental Rates
According to CoStar, the “average quoted asking rental rates in the Houston Retail Market are up
over previous quarter levels, and up from their levels four quarters ago.” Quoted rents ended the
4th quarter at $15.90 psf, up from the end of 2014 at $15.17 psf. This represents a 4.81%
increase in rental from four quarters ago. The previous year, rental rates increased 3.36% from
2013 year end.
Inventory & Construction
During the 4th Quarter 2015, thirty-three (33) buildings totaling 1,186,032 square feet were
completed in the Houston Retail Market, compared to 18 buildings and 377,127 sf for the 4th
quarter of 2014. Over the past four quarters, a total of 3,748,942 square feet of retail space in 137
buildings have been built in Houston. In 2014, there were 127 buildings with 2,323,829 sf of
retail space constructed and delivered.
There were 2,943,436 square feet of retail space under construction at the end of the 4th quarter
2015. That is in comparison to the 2,355,126 sf that was under construction at the end of 2014.
Some of the notable completions in 2015 are:



Wal-Mart Supercenter located in The Shoppes at Uptown Crossing
A 177,514 sf facility that delivered in the second quarter of 2015 and is now 100%
occupied
A 125,000 sf building that was completed and delivered in the 1st quarter of 2015 and is
now fully occupied.
The Retail inventory in the Houston market area totaled 360,647,992 square feet in 23,444
buildings and 3,981 centers as of the end of the 4th quarter 2015. That is an additional 101
shopping centers from the end of 2014.
February 10, 2016
48
Greater Houston Retail Market Areas
Considering the region as eight directional sections outside the Loop, Inner Loop (IL), and CBD,
for the 10 market retail areas of greater Houston for 2015, or the end of 2015:
Best and Worst Houston Retail Areas Ranked by Vacancy Rate, Rental Rate, Construction
Rank
1.
2.
3.
…
8.
9.
10.
Vacancy Rate
Rate Area
3.6% Inner Loop
4.2% Northeast
4.7% West
… …
5.9% Southeast
6.7% East
10.7% Central Business District
Bldgs Completed/Delivered in 2015
Rank Number Area
1.
10 North
2.
6 West
3.
5 Southeast
…
… …
…
… …
T-7.
1 Inner Loop, East, Northeast
10.
0 Central Business District
Rank
1.
2.
3.
…
8.
9.
10.
Quoted Rates per square foot
Rate Area
$22.91 Inner Loop
$20.24 Central Business District
$18.59 West
… …
$14.42 Southeast
$14.05 South
$13.14 East
Buildings Under Construction
Rank Number Area
1.
15 Northwest
2.
13 Southeast
3.
10 West
…
… …
T-7.
3 Northeast, South
9.
2 East
10.
1 Inner Loop
Sales Activity/Capitalization Rates
Total Retail center sales activity in 2015 was down compared to 2014. In the first nine months of
2015, the market saw 25 transactions with a total volume of $295,917,203. The price per square
foot averaged $152.52. In the first nine months of 2014, the market posted 52 transactions with a
total volume of $442,087,083, during which the price per square foot averaged $162.43. This
figure was $108.39 psf in 2013.
Tallying retail building sales of 15,000 square feet or larger, Houston retail sales figures fell
during the 3rd quarter 2015 in terms of dollar volume compared to the 2nd quarter 2015. This
also happened for these quarters in 2014.
In the 3rd Quarter 2015, 7 retail transactions closed with a total volume of $48,025,0000. These
seven buildings totaled 456,240 square feet and the average was $105.26 per square foot. This
compares to 11 transactions totaling $113,298,109 in the 2nd quarter 2015. The total square
footage in the 2nd quarter was 737,478 sf for an average price per square foot of $153.63.
Cap rates have been marginally lower in 2015, averaging 7.70%, compared to the same period in
2014 when they averaged 7.72%. The average rate was 8.47% for 2013.
Specific information on key indicators measuring the strength of the retail market was obtained
mostly from the Costar Retail Report – 4th quarter 2015, covering the Houston Retail Market.
February 10, 2016
49
Detail by Property Type
The CoStar 4th quarter 2015 Report gives further detailed information on the five retail
subcategories:
Shopping Centers
The Shopping Center market in Houston currently consists of 3,873 projects (99 more than last
year) with 157,119,461 square feet of retail space in 6,319 buildings. At the end of 2014, there
were 152,610,978 square feet of retail space in 6,098 buildings. In this report, the Shopping
Center market is comprised of all Community Centers, Neighborhood Centers, and Strip Centers.
After absorbing 507,947 square feet and delivering 426.429 square feet in the current quarter, the
Shopping Center sector saw the vacancy rate decrease from 8.5% at the end of 2014 to 7.9% for
the end of 2015. For 2014, absorption was 102,392 sf and 32,835 sf was completed/delivered.
Over the past four quarters, the Shopping Center vacancy has decreased from 8.4% to 8.2% to
8.0% and finally to 7.9% at the end of the 4th quarter of 2015. At the end of the first quarter of
2014, the vacancy rate was 9.1%.
Rental rates ended the 4th quarter 2015 at $15.76 per square foot, up from the $15.09 psf one
year ago, an increase of 4.4%. The end of 2014 saw rental rates of $14.47 psf.
Net Absorption in the Shopping Center sector has totaled 2,041,427 sf over the past four
quarters, a 43% increase from the previous year. Almost 3.5 million square feet has been
absorbed over the last 2 years.
Power Centers
The Power Center average vacancy rate was 3.8% in the 4th quarter 2015. A year ago, in the 4th
quarter 2014, the vacancy rate was 3.5%, and 4.2% for the end of 2013. Over the past 4 quarters,
Power Centers have absorbed 7,640 sf (188,300 sf last year) and delivered 5,500 sf (16,538 sf
last year). Rental rates have decreased from $15.81 to $15.39 per square foot.
The total stock of Power Center space in Houston is currently 26,448,138 sf in 58 centers
comprised of 562 buildings.
The was 1,121,386 sf of space under construction at the end of 2015, while there was none at the
end of 2014.
General Retail Properties
The General Retail sector of the market, which includes all freestanding retail buildings except
those contained within a center, reported a vacancy rate of 2.5% at the end of 4th quarter 2015,
down from 2.6% the previous year. Almost identical from the previous year, there was a total of
3,651,405 sf vacant at that time. The General Retail sector in Houston currently has average
rental rates of $15.71 psf, up from $14.56 psf in 2014, an increase of 7.9%. There are 761,267 sf
of space under construction in this sector (a little less than half of last year’s figure), with
222,603 sf having been completed in the 4th quarter. In all, there are a total of 16,249 buildings
February 10, 2016
50
with 144,572,106 sf of general Retail space in Houston. For 2014, there were 15,031 buildings
with 137,287,455 sf.
Specialty Centers
There are currently 15 Specialty Centers in the Houston market, with approximately 2,899,417
square feet of retail space. In this report, the Specialty Center market is comprised of Outlet
Centers, Airport Retail, and Theme/Festival Centers. Specialty Centers in the Houston market
have experienced positive 25,285 sf of net absorption in 2015. The vacancy rate is currently
6.5% (down from 9.2% at the end of last year) and rental rates average $9.02 psf.
Malls
Malls have recorded a net absorption of positive 389,623 square feet in the 4th quarter 2015
(negative 24,099 sf for 4th quarter 2014). This net absorption, combined with the 537,000 sf of
new space added in the quarter (25 times that of 4Q2014), caused the vacancy rate to decrease
from 5.5% at the end of 2014 to 3.9% at the end of 2015. Rental rates went from $24.42 psf to
$20.34 psf during that time. In this report, the Mall market is comprised of 35 Lifestyle Centers,
Regional Malls, and Super Regional Malls (two more than last year).
Summary
Wulfe & Co. projects 4.53 million square feet of new retail shopping center space will be built
and opened in the greater Houston area in 2016. According to the locally based real estate firm’s
23rd Annual Retail Survey, this represents a 22% increase from the previous year of 3.7 million
square feet.
Supermarkets will dominate the retail new construction, as they did last year. Twenty-eight (28)
new stores are planned. Kroger will open nine of their 123,000 sf stores, HEB will open five of
their 100,000 sf prototype markets, Walmart will open four neighborhood supermarkets, Whole
Foods will open one, and Aldi will add nine of their smaller 18,000 sf stores.
From Wulfe:
“Dick’s Sporting Goods is entering [the Houston] market with the addition of six
new stores approximately 50-100,000 sf; Academy will add two new 63,000 sf
stores and Cabella’s will open one 72,000 sf store. In addition Costco will open a
new 150,000 sf store and Walmart will open another 180,000 sf Walmart
Superstore. Also there will be six new theaters; three new 24 Hour Fitness centers
and one LA Fitness facility. Altogether a total of 4.53 million square feet will be
built and opened, which will be the highest amount since 2008. …
With this high expansion of new retail space commitments, overall retail
occupancy in Houston will continue to strengthen and achieve an all-time high
occupancy rate in excess of 94%. Retail rental rates will also continue to increase
driven by the limited availability of shopping center space and the higher land and
development costs. With the area’s vigorous growth coupled with the expansion
needs of established and new-to-market retailers, the competition for available
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space in well located, well tenanted and highly desirable retail developments, is
aggressive, even at ever-increasing higher rates.”
Medical
The medical segment in Harris County includes hospitals, surgery centers, medical office
buildings, medical condominiums, retirement homes and nursing homes. Medical inventory is
organized in 23 economic areas throughout the county, with the highest concentration of
development being in the Texas Medical Center.
The Texas Medical Center
Located within Loop 610 southwest of the Central Business District, the Texas Medical Center
(TMC) is one of Harris County’s leading economic contributors. It ranks as the 8th-largest
downtown business district in the United States. Recognized as the largest medical complex in
the world, it has continued to grow since it was founded in 1945, with the majority of the growth
being within the previous decade. The center contains 54 member institutions, including twentyone hospitals, six nursing programs, and three public health organizations, as well as two
universities and numerous medical, dental, and pharmacy schools. TMC is the largest employer
in Houston. It directly employs 106,000 people and instructs 50,000 students. Currently, clinical
research in the TMC generates an average of 15 new startup businesses per year. An estimated
7.2 million people visit the medical center each year. TMC is home to more than 290
professional buildings on over 1,300 acres of land.
Houston Chronicle photo
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Colliers International estimates the TMC current annual economic impact to be $15 billion.
Since 2008 the TMC has spent an estimated $7.1 billion in building and infrastructure
investments. Texas Medical Center’s recent growth increased the total campus size to 45.8
million gross square feet, up from 29.6 million gross square feet, representing an increase of
almost 55% in a six-year period. There are also many new and proposed construction projects
ongoing.
Texas Children’s Hospital recently announced details for a $506 million expansion, adding six
floors and 640,000 square feet to their Pavilion for Women. The University of Texas M.D.
Anderson Cancer Center is spending $198 million on a hospital expansion and renovation project
to add 185,000 square feet. M.D. Anderson is also adding nine floors atop the Alkek Hospital at
a cost of $293 million. Baylor College of Medicine is building a $1 billion clinic and hospital in
the TMC’s mid-campus.
Houston Methodist will build a $300 million patient tower and $70 million adult outpatient
clinic. St Luke’s is demolishing its original 50-year-old hospital to erect a new $200 million
patient care center. Memorial Hermann is undergoing a $420 million expansion of all nine of its
acute care hospitals. HCA has seven construction projects underway, including a $50 million
project at the Women’s Hospital of Texas.
Another large project is The University of Texas Research Park, located just south of the TMC.
It will be a master-planned campus with laboratory and office space for both academic and
commercial biomedical and biotechnology research facilities, encouraging collaboration between
scientific and business. The M.D. Anderson portion of the Research Park is planned to provide
parcels for as many as twelve buildings containing 1.5 million square feet of lab, office and
support space. The Park is designed to be pedestrian-friendly with a multi-level underground
parking garage.
The most recent medical office to open in the TMC market area is Parc Binz, a 50,000 squarefoot five-story Class A building featuring high-end retail mix on the first floor and an ambulatory
surgical center as well as pharmacy and private medical offices. Like many of the new
construction office buildings in Harris County, Parc Binz was 50% pre-leased with asking rents
of $30 per square foot.
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Parc Binz rendering
In October, the TMC and Harris County broke ground on the construction of its new forensic
facility. The 200,000 square foot, nine-story tower is slated to be completed in early 2017 and
will be equipped with state-of-the-art technology as well as integrated clinical, laboratory,
administrative, public and teaching/training areas. The project includes a second phase four-story
building for future expansion.
Harris County Institute of Forensic Science rendering
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Demographics: Driving Demand
Despite the uncertainties as a result of the 2014 Patient Protection and Affordable Health Care
Act, the medical sector has not been deterred. The long-term effects of the act will require
additional medical spaces as the hospital systems and physicians respond to the ongoing demand
for medical care contributed by the county’s growing population, aging baby-boomers, and
newly-insured.
Medical Office Buildings
The Medical Office Building (MOB) segment continues to outperform traditional office spaces
in both stabilized occupancy and rental rates. Medical properties are considered to be safer
investment vehicles than any other property type as a direct result of long-term leases, creditworthy tenants and stable income streams. Consequently, REITs and foreign investors consider
medical properties to be prime investments for their portfolios. Medical office buildings located
on or near hospital campuses and leased by physician groups and hospital systems (often referred
to as “compounds”) are considered prime investment grade real estate.
Examples include two projects being built near the site of the future St Luke’s Katy hospital at
the intersection of Kingsland and Grand Parkway. In early 2015, Katy Medical Plaza completed
the first of three proposed medical office buildings nearby and Vista Kingsland Equities will
begin construction in July of an 8,000 sf building at a cost of $2.5 million.
However, the latest trend is positioning small clinics and medical offices in retail centers that
serve suburban neighborhoods, as the population demands the convenience of having medical
services closer to home. Some of the major players of this type in the Houston market are the
urgent care centers, emergency centers and dialysis centers. According to Colliers International,
the high-end retail in the stronger submarkets is currently more expensive to lease than Class A
office buildings. Additionally, off-campus locations are leasing up twice as fast as traditional oncampus buildings.
An example of this trend in medical office buildings is the Spring Valley Medical Plaza. which is
under construction. This is a 68,000 sf surgery center and medical office building on the Katy
Freeway in Spring Branch and was 60% pre-leased before the start of construction.
Emergency care centers are being built throughout the suburban markets in Harris County, with
the majority of new construction in Cypress. North Cypress Medical Center began construction
in Towne Lake and Houston Methodist broke ground in December 2014 on a new facility on
Highway 290 in Fairfield. Fresenius Medical Care has 35 medical clinics in the greater Houston
area with more on the way. The “medi-clinic” or emergency care clinic is an alternative to
visiting the ER of a hospital, but is separate from a hospital campus. Usually, they are open 24/7
and are typically located in active retail areas or shopping centers. Their growth in servicing the
Houston area has been exponential, especially in suburban areas with other new development.
Memorial Hermann announced plans for a Convenient Care Center in Kingwood in northeast
Harris County. The 45,000 sf medical center is expected to be completed in fall 2016.
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Memorial Hermann Convenient Care Center in Kingwood (conceptual rendering)
US 59/IH-69 southwest of the Beltway is fast becoming a branch of TMC of sorts, with a large
number of medical offices and clinics constructed within the last 10 years. This area includes
southwest Harris County, Sugar Land and its Sweetwater subdivision, and Richmond in Fort
Bend County. Texas Children’s Hospital, St. Luke’s, Oak Bend Hospital, Methodist, and two
Memorial Hermann hospitals are located along this corridor.
Another important trend is the demand for a single destination for multiple types of medical care.
Kelsey-Seybold, the Houston-based pioneer in this type of facility, built a new $10.8 million
multi-specialty care center on North Sam Houston Parkway near Summer Creek which opened in
October of 2014. Kelsey-Seybold also opened new locations in Clear Lake and The Woodlands
in 2014. The Summer Creek clinic is their 20th location in the Houston area. Kelsey-Seybold also
owns land adjacent to the future St Luke’s Katy hospital.
According to Integra Realty Resources (IRR), “The medical office building (MOB) market is
expected to be a breakout investment class in 2016. The asset class will continue to appeal to
lenders and investors because of favorable demographic trends, driving increased demand. … By
2050, as many as one in five Americans will be more than 65 years old. … The average price for
medical office assets in 2015 was $289 psf, a 21% increase from the previous year, as tracked by
RCA through 3Q 2015. … The MOB investment class is currently benefiting from high
occupancy and low Cap Rates.”
According to IRR, Vacancy rates, as high as 10.5% in 2009, are estimated to be near 9.5% in
2015. The average medical office property averages a 7.0% capitalization/investment rate, with
hospital campus MOB properties at 6.6%. IRR continues, “Newer facilities in urban primary
market locations with leases extending 10 years or longer generally trade in the low-6.0% range,
with top-tier assets contracting into the 5.0% range. [Properties] with shorter leases typically
trade in the high-7.0% to low-8.0% range.”30
30
http://www.slideshare.net/JamesGoodard/irr2016annualviewpoint
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Hospitals
Most hospitals in Harris County thrived throughout the economic downturn of 2008-2010. With
the growing population, including seniors, and the anchor of the TMC, Houston is expected to
outperform the national growth rate over the next decade.
According to the Texas Hospital Association (THA), there are 83 hospitals in Harris County. On
average in Texas, 28% of all hospitals are nonprofit, 21% are government-owned and 51% are
investor-owned. The trend over the previous 10 years, according to THA, is a reduction in the
number of government-owned hospitals and an increase in the number of investor-owned
hospitals. Currently there are a total of 53 taxable full-service, acute care, specialty use,
rehabilitation, and psychiatric care hospitals in Harris County. U.S. News & World Report’s Best
Hospitals 2015-16 list included several nationally ranked hospitals in Harris County either
overall or in various specialties, including Houston Methodist Hospital, St. Luke’s Episcopal
Hospital, University of Texas MD Anderson Cancer Center, Menninger Clinic, TIRR Memorial
Hermann, and Texas Children’s Hospital.31
As detailed previously, most of the major hospitals in the TMC have either expanded their
facilities or are planning some major expansions in the near future in response to the increasing
demand. The new construction is not only taking place in the TMC campus, but also suburban
areas such as The Woodlands, Pearland, Katy, Cypress, and Kingwood. Much of the new
suburban hospital construction is outside of Harris County.
Along with expanding their TMC footprint, also in the works for Houston Methodist is a fullservice 470,000 sf, 193-bed inpatient hospital to be built near The Woodlands in Montgomery
County. Construction is slated to begin in early 2015 with completion in 2017. The $328 million
Woodlands project will also include a 135,000 sf medical building scheduled to open in late
2015. Methodist plans to invest more than $1 billion in expanding and replacing its facilities in
the Houston area over the next three years.
31
http://health.usnews.com/best-hospitals
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Rendering of Houston Methodist’s new hospital near The Woodlands
Early in 2014, Houston Methodist purchased the CHRISTUS St John hospital in Clear Lake and
the CHRISTUS St Catherine in Katy. The Katy location is being repurposed to a long-term acute
care facility. Houston Methodist also has plans to build in the Cypress area, at the intersection of
Hwy 290 and Fairfield Creek Drive. They begin construction on the new emergency care facility
in the fall of 2014, and the upgraded facility opened in 2015. It will be modeled after several
other free-standing emergency departments the hospital system owns throughout the area.
Methodist is Houston’s third-largest hospital system with seven hospitals and 2,222 beds.
The Memorial Hermann Health System is Houston’s largest health care system with twelve
(12) area hospitals and 3,447 beds. It has several projects in the works. Beginning the summer of
2014 and scheduled for completion in 2018 is a $650 million expansion and renovation of its
TMC campus, bringing it from the current 2.5 million square feet to 3.84 million square feet. The
new 17-story tower will be dubbed Hermann Pavilion 2. This will add 160 beds, replace 71 beds,
and add 24 new operating rooms, 16 additional emergency room bays, and 750 new parking
spaces. Included in the plans are a six-story parking and infrastructure building, emergency
generator systems, and a roof-top helipad. The plan also accounts for future growth to include six
shelled floors and six shelled operating rooms with the potential of adding 264 additional beds,
and space for expansion of the kitchen service and heating and cooling systems.
Memorial Hermann is also in the process of constructing another patient tower at its Katy
campus location. It is projected to cost an estimated $70 million; adding 58 patient beds. The
expected 155,555 sf tower will increase its current emergency department and operating room
capacity by almost double. The project is currently in phase two of its master plan, which
originally began in 2007. The construction is expected to be completed by 2016.
In addition to the Harris County properties, Memorial Hermann also has projects within the
Houston metropolitan area in Brazoria and Fort Bend Counties. Memorial Hermann broke
ground in early 2015 on a 40-acre medical campus in Pearland and will open a 64-bed acute care
hospital there in December 2015 or early 2016. In addition, it is working on a $93 million
expansion of its Sugar Land hospital.
Memorial Hermann also recently announced the purchase of a 32-acre parcel of land at Hwy 290
and the Grand Parkway in Cypress, with plans to build a medical center with both inpatient and
outpatient capabilities. The $168 million project will begin in June and is expected to be
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completed by 2017. Phase 1 will include a medical office building for primary care and an
emergency care center which will go online in early 2016. Phase 2 will include completion of the
hospital, at which time the emergency care center will likely be converted to serve as an urgent
care facility, although no definitive plans have been set. The 80-bed hospital tower will have
eight operating rooms, a 16-bed intensive care unit, a neonatal intensive care unit and a cardiac
catheterization lab. The site is large enough to accommodate future expansion, including a
parking garage, additional office buildings, a helipad, and up to 275 patient beds.
Hospital Corporation of America (HCA) is in process of two expansion projects in the TMC
and recently opened Pearland’s first hospital. In the TMC, HCA is adding two additional floors
and 112,500 square feet to its Texas Orthopedic Hospital. The expansion will allow for
privatization of patient beds and creation of clinical, educational, and business office space on
the fourth and fifth floors. The second TMC project is a $26.5 million 72,000-square-foot
expansion of the Women’s Hospital of Texas that will add a pediatric floor and pediatric support
area in the emergency department, as well as shell space on the hospital’s fourth floor to allow
for future growth. The Pearland Medical Center, which opened in January 2015, is a $71 million
facility with 33 beds. HCA is Houston’s second largest hospital system with ten local hospitals
and 2,607 beds.
Catholic Health Initiatives (CHI) St Luke’s Health will develop a $110 million facility in the
new master-planned community of Springwoods south of The Woodlands, near the new Exxon
Mobile campus. The 23-acre development will include a 55,000 sf ambulatory center and
100,000 sf medical office building. It is expected to be completed in late 2015 or early 2016.
Long-term plans include a 300-bed hospital and 600,000 sf of medical offices at this location.
St Luke’s also purchased nearly 30 acres of land in Katy at the intersection of Kingsland and
Grand Parkway with plans for a new hospital development and said it will invest as much as $70
million more over the next five years in future development. CHI St Luke’s is the area’s fourthlargest hospital system with six hospitals and 1,331 beds.
Medistar Corporation completed construction in July 2014 of phase one of its new Bay Area
Regional Medical Center in Webster, with construction of the second phase underway. The
nearly 400,000 sf nine-story building includes 104 patient suites and 22 intensive care unit
rooms. It also has a full-service emergency room with 11 treatment rooms, five operating suites,
three cardiac suites and one flex suite. The second phase will expand the facility and is slated for
completion September 2015. When the facility is complete, it will have 275 rooms in 11 floors.
Nursing Homes and Retirement Homes
Positive trends are also apparent in the senior housing and skilled nursing markets. Many
developers are constructing senior living facilities that consolidate multiple services into single
centralized facilities. These facilities are providing more than one type of care and are becoming
more common in the industry. The senior living facilities that incorporate independent living,
assisted living, and nursing care are often referred to as “Continuing Care Retirement
Community” (CCRC). Among the highest ranked CCRC’s in Harris County, according to U.S.
News & World Report, are Emeritus at Kingwood, The Hampton at Post Oak, and University
Place Nursing Center.
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Real estate trends for the senior housing industry will focus on building flexible spaces that
allow for customization to accommodate the demands of an aging population.
The county’s steady population growth has played a contributing factor to the increase in
demand for new development. The demand for senior care is particularly strong, given the aging
population among the post-war baby boomers. More than 390,000 (9%) of the 4,471,000 Harris
County residents are persons 65-years of age and older. The percentage is expected to climb to
15.6% by 2030, still below the national average which is expected to be closer to 18%.
Brazos Towers at Bayou Manor
Brazos Towers at Bayou Manor is a $70 million project currently underway that will transform
the historic campus of Bayou Manor in Bellaire to include a new 14-story residential tower with
84 new residents and 25 assisted living residences. The new East Tower is scheduled for
completion in 2015. Included in the project is a complete renovation of the original West Tower.
Similarly, The Buckingham in the Memorial area is expanding its facilities along Buffalo
Bayou. Currently a 323-unit community that opened its door in 2005 and has been operating at
capacity since 2008, it will purchase the adjacent apartment complex to demo and construct a
$56 million expansion that will add 187 additional residences including 104 independent living
apartments, 33 assisted living suites, 18 memory care residences and 32 private skilled-nursing
rooms. It is slated to open in 2017.
Under construction in the Heights market is the four-story, 3500 unit, senior living project The
Village of the Heights opened in 2015. It is an assisted living center and will feature specialty
memory care suites.
Belmont Village Senior Living expanded from its West University location to include an
additional development in Hunters Creek in the Galleria market area. It opened in November of
2014 and features 106,000 sf on six stories. It also emphasizes memory care services and
includes upscale features such as a gym, therapy pool and bistro. The community has 149
residences, including 31 memory suites. With the goal of encouraging socialization, common
areas will make up 40% of the gross building area.
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Legacy at Falcon Point is a luxury assisted living and memory care center that opened in the
Katy market area in October of 2014. It is located in close proximity to the campus of the future
CHI St Luke’s and Methodist hospitals near the Grand Parkway.
In the Cypress market area, construction was completed in 2014 on Villages at Cypress, a 162unit affordable care independent senior living center developed by Caddis Partners. Caddis is
also developing another assisted living community in the Cypress area with an innovative “Main
Street” concept featuring such amenities as storefronts, movie theater, ice cream parlor, art
studio, auto repair garage and plant nursery. Construction began on the luxury Heartis Cypress
development in March of 2014 and it is scheduled to open in the spring of 2016. The Heartis
facility was launched after Caddis realized the strong market demand, with over 800 people
putting their names on the waiting list for the Villages at Cypress center.
Wood Glen Court Senior Living in Cypress is an “age in place” community featuring upscale
finishes and kitchenettes in the rooms which opened in late 2014. Avanti built its $15 million,
90-unit senior living project at Towne Lake in Spring, which opened in mid-2015. The Spring
market area also has a new $10.7 million facility Magnolia Heights Assisted Living that opened
in November of 2013 and, like most of the newer facilities, features special memory care suites
as well as assisted living units.
There are plans underway to convert the Old San Jacinto Hospital in Baytown to a luxury
retirement center featuring a restaurant on the top floor with skyline views and utilizing the full
campus to create green space. The developer spent over $1 million on selective demolition to
stabilize the property and is currently waiting on a zoning variance to be approved.
Summary
The future looks bright for all property types in the medical segment for 2016. The Texas
Medical Center continues to expand to meet the demands of a growing population and places a
new emphasis on promoting the creation of startup companies. Medical office buildings are
experiencing lower vacancy rates and increasing rental rates, particularly for Class B buildings.
Retail centers should benefit from the trend toward locating medical clinics and services in
suburban markets. Many of the area health care systems are building new hospital campuses in
the suburban market, most of which are located outside of Harris County. The aging population
is driving demand for senior housing with trends toward multi-service facilities, flexible spaces
and more upscale choices.
Construction costs could rise dramatically with increased demand for material and shortages of
skilled labor. The availability of financing remains healthy, particularly for senior housing and
small medical office buildings, as more private investors, pension funds, REITs, and foreign
investors enter the market. Hospitals are also benefiting from a trend toward investor-owned
facilities. As indicated previously, the greater Houston area is experiencing consistent
tremendous growth in population, yet the unemployment rate continues to fall.
Due to the projected growth in the industry driven by demographics and abundance of willing
investors driving competition and making financing readily available, capitalization rates are
expected to remain steady and values increase as supply struggles to keep up with the rising
demand.
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Hotels and Motels
Even with the downturn in oil & gas prices and activity, the Houston hotel market will remain
one of the strongest in the country into 2016. Houston is preparing to host the 2017 Super Bowl,
which is sparking an expansion of hotel stock. Additional rooms are being built to capture
convention business and new properties are rising to service the recently built ExxonMobil
campus.
Integra Realty Resources Houston in their 2016 Annual Viewpoint reports the hospitality
transaction volume for the greater Houston area was $889,658,006 for 4Q 2014 to 3Q 2015.
This was the fourth highest in the nation, behind only Orlando, Miami, and Boston. This was
over four times the amount for Las Vegas and over twice that of Denver. Houston was 9 th out of
54 metro market areas in increase in hospitality transaction volume based on year-over-year
change at 12.37%. Hotel convention bookings were up more than 30% in 2015, according to the
Greater Houston Partnership.
For the South Region of the U.S. for 2015, full-service hotel average daily rate was $147.65 per
room, occupancy rate was 72.81%, and cap rate was 8.07% (down from 8.34% the previous
year). For limited-service hotels, the hotel average daily rate was $87.18/room, occupancy
66.26%, and cap rate 8.85% (down from 9.21% for 2014), according to IRR. They also noted,
“The U.S. lodging industry is in the midst of a six-year period of continuous double-digit
bottom-line gains. Based on the revenue forecasts, unit-level net operating income will increase
14.6% in 2015, and is forecast to rise by 12.9% in 2016.” Capitalization rates are expected to
remain constant over the next 12 months. The strong U.S. dollar may limit the amount of travel
foreign tourists can afford while the downturn of oil & gas prices has increased disposable
income to the tune of roughly $4,000 per adult consumer in 2015. This has fueled an increase in
domestic tourist travel over the past year, and increased revenues for affordable and suburban
road-side hotels and motels and American tourist destinations.
Full-service class A hotels may have seen an effect from the downturn of oil as the large oil
companies are adjusting to the new economics and potentially cutting expenditures for executive
travel, meetings, and lodging.
PKF Hospitality Research in their November 2015 Edition of Hotel Horizons, forecasted that
occupancy will decrease to 66.8% for 2016, there will be little or no change to the ADR
(Average Daily Rate), and RevPAR is estimated to decline 5.3%.
A total of thirty-seven hotels will be built over the next two years, most of which will be major
brand-name hotels. A big push of boutique hotels is predicted. The Galleria, Downtown, Energy
Corridor, and The Woodlands are saturated so boutique hotels will have to fill the gap. Boutique
hotels are slower and riskier projects to build that require experienced developers but are
typically more successful in appealing to the younger generation. There appears to be strong
demand for nightly accommodations in the Texas Medical Center area.
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Texas Lodging
Revenue Growth
Texas lodging room revenues gained 2.9% in the third quarter of 2015, compared to 8.3% for 1st
Quarter 2014, 9.7% for all of 2014, and 8.7% for 2013. Total revenue for the Houston area was
570.9 million for 3Q 2014 and 569.5 million for 3Q 2015, according to Source Strategies, Inc.
For Texas, the gain “was a combination of a 5.1% decline in Oil & Gas areas (39% of Texas
rooms) with a 7.9% gain in the balance.
Room-Nights sold
Room-nights sold are the measure of real demand and the most important driver of industry
health. Third quarter room-nights sold increased by 0.8% state-wide, after a 2% gain in the first
half and 5.0% gain for 2014.
Revenue per Available Room (RevPAR)
Third quarter RevPAR was basically flat (down 0.2%), based on a 2.3% decrease in occupancy
and a price increase of 2.1% (Average Daily Rate). RevPAR indicated that although there was a
decrease due to oil & gas downtown, other sectors of the economy balanced it out.
Occupancy
Third quarter occupancy reached 65.3% in the Houston metro. 66.4%. Annual occupancy was
66.4% in 2014, 63.6% in 2013 and 62.5% in 2012. The long term Texas average is 60%.
Supply Below Demand Growth
Supply grew by 3.1% for the 2Q 2015, the highest since 2010. For all of 2014, net supply gained
2.2%. With low demand growth, RevPAR levels are expected to continue to decline moderately.
Houston Lodging
Texas room-nights sold gained 3.8% in the 3rd quarter. Average daily rate increased from
$106.92 to $108.78 for metro Houston, and RevPAR (Revenue per available room) from $73.45
to $$71.03.
Developments
Marriott Marquis - Houston First Corporation has selected RIDA Development Corporation to
build a convention hotel downtown. The 1,000-room hotel will developed on the block
immediately north of Discovery Green and will connect to the George R. Brown Convention
Center via a skywalk. The hotel broke ground in 2014, and will be open in 2016.
JW Marriott Houston Downtown - Downtown’s 102-year old Samuel F. Carter Building was
transformed into the 328-room JW Marriott Houston Downtown in summer 2014. Pearl
Hospitality developed the new $81 million, luxury hotel at the corner of Rusk and Main Street.
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Holiday Inn Downtown - A development group will turn the former Savoy Hotel that straddles
Downtown and Midtown into a Holiday Inn. The 17-story property on Main Street has been
closed since the late 1980’s.
Springhill Suites - Just a few blocks west of the George R. Brown convention center, the
historic Humble Oil Building complex at Main Street and Dallas is now a new 166-room
Springhill Suites hotel. The complex is already home to a 191-room Courtyard and 171-room
Residence Inn. The property’s owner, RLJ Lodging, spent $80 million to convert an existing 82unit apartment tower into the new hotel.
Courtyard by Marriott/Hampton Inn Suites by Hilton – Energy Corridor - Western
International constructed new Courtyard and Hampton hotels. They are side by side at BarkerCypress Road, just off I-10, each with approximately 135 rooms. It was completed in 2015.
Hampton Inn/Homewood Suites - Houston based American Liberty Hospitality is building a
pair of hotels under one roof at Crawford and Capitol streets Downtown. A 168-room Hampton
and a 132-room Homewood Suites will comprise the $50 million project. The developer is
aiming to open in summer 2016.
Hyatt Regency & Hyatt Place – Galleria - A 325-room Hyatt Regency and a 157-room Hyatt
Place are at Sage Road and West Alabama near the Galleria. The dual-concept project was
opened in 2015.
Aloft Houston – Downtown - Aloft delivered its second Houston property Downtown at Fannin
and Walker streets in 2015. The hotel with 515 rooms was a redevelopment of the historic, 10story Stowers Building, now known as the Aloft Houston by the Galleria.
Hotel ZaZa – Memorial City - Z Resorts, in partnership with MetroNational, has broken
ground on the boutique hotel’s third location (second in Houston) in the Memorial City area near
I-10 and Bunker Hill Road. Construction began in late 2015 with an opening date of summer
2017.
Hotel Alessandra - One much anticipated new hotel project will help anchor the mixed-use
GreenStreet development Downtown. Hotel Alessandra will be a tall, narrow tower at Fannin
and Polk streets with 225 rooms. Completion is slated for 3rd quarter 2016.
Hotel Alessandra (conceptual renderings)
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Unnamed Medical Center Project - TRC Capital Partners and Medistar Corp are planning a
250-room hotel in the Texas Medical Center. The 17-story hotel will be located at 6750 Main
Street. Groundbreaking is slated for some time in 2016 but no completion date is set.
Summary
Houston’s hotel market appears to be stable, due to the overall diversity of its economy. Losses
in the oil and gas industry are offset by the other sectors of the economy in Houston.
Room-nights sold and revenue should stay flat or grow marginally, but with the Super Bowl and
continued convention growth, the outlook is still relatively good.
Warehouses
According to Colliers International Q4 2015 Houston Industrial Research & Forecast Report,
“Although Houston’s industrial market showed signs of slowing due to the downturn in the local
economy caused by falling oil prices, 2015 still ended on a positive note, with year-end net
absorption totaling a positive 9.5 million square feet.”
The Houston industrial market is still experiencing moderate signs of advancement,
development, and growth during the expansion portion of this economic cycle, however its
velocity may wane due to recent pricing pressures from the oil sector.
Colliers noted last year that “Houston’s industrial investment sales market is benefiting from the
foreign capital that is pouring into the U.S.” That trend continued into 2015, as it did with multifamily and retail investment grade property sales, independent of oil prices. Houston’s industrial
sector is ranked second after only Los Angeles, per Marcus & Millichap: “Major markets
proximate to busy ports and those with links to multi-modal transportation and distribution
networks again occupy the top ranks of this year’s Index.” Positive factors in the city include an
increase in jobs, low unemployment, stable rental rates, low vacancy, low-to-no concessions,
positive net absorption, active leasing, sales velocity, and new construction.
New Construction
Houston’s industrial construction “had 8.8 million square feet of projects underway” at the end
of the 2015, and about 4 million square feet of it was speculative development. According to
Colliers, “The largest project under construction is a 4,000,000-SF build-to-suit engineering,
manufacturing and logistics campus for Daikin Industries an HVAC equipment manufacturer
consolidating its operations” at a site located northwest of Houston. Aldi grocery stores is
constructing a 650,000 sf distribution center west of Rosenberg, southwest of Houston, to be
delivered in 2016.
Some noted deliveries include: 3507 Pasadena Blvd., a 600,000 sf 100% occupied facility,
delivered in the first quarter 2015 and Beltway Crossing Northwest Building 7, a 441,000 square
foot building delivered in the second quarter 2015, which is now vacant.
Currently, much of the warehouse construction is concentrated in three areas of the county: the
Far North, the Northwest and the Southeast. These areas are perceived as being most desirable to
February 10, 2016
65
tenants and investors of build-to-suit and speculative buildings based on their proximity to major
highways, airports, and the Port of Houston.
According to CoStar, during the 4th Quarter 2015 there were 39 buildings totaling 2,149,969 sf
that were delivered in the Houston area market. This compares to the 53 buildings totaling
3,057,209 sf delivered in the 3rd quarter of 2014, 50 buildings totaling 2,109,055 sf completed in
the 2nd quarter, and 4,483,283 sf completed in the 1st quarter of 2015. New construction
deliveries in 2015 totaled 11,799,515 sf, compared to 8,951,383 sf in 2014, and 8,687,406 sf in
2013.
Developers and investors have fueled this current surge of supply and currently have 9,713,178
square feet under construction at the end of fourth quarter 2015, reports CoStar, compared to 9.1
million square feet at the end of 2014.
According to Transwestern, for end-of-year 2015, 9,792,162 sf of industrial product was under
construction, of which 47% was in the Northwest Far sector of the Houston market, and 24% in
the East-Southeast Far sector (near the Port of Houston).
More new construction can be expected with the Panama Canal expansion project currently set to
be complete by May 2016. Other driving influences include continued expansion in the chemical
industry, progression of e-commerce and manufacturing and medical center job growth. Also,
newer properties are viewed very favorably since some older industrial products involve
obsolescence, being incompatible with modern requirements of users such as greater wall
heights, larger contiguous blocks of space, more overhead doors, and floors that can support
heavier loads of equipment and goods.
February 10, 2016
66
New construction projects of note (from CoStar and Colliers):
Address
19001 Kermier
777 Highway 90A
600 Fallbrook Dr
3013 Highway 225
9431 Bay Area Blvd
14151 E Hillcroft,
Phase 1 Bldg 1
Beltway 8 & Hwy 90A,
Bldg 2
1300 Greens Parkway
9531 Bay Area Blvd
3009 Highway 225
252 Fallbrook Dr
Volta Dr & Kenswick Dr
3011 Highway 225
9631 Bay Area Blvd
Estimated
Completion
Date
Aug-16
Feb-16
May-16
Square
Feet
4,000,000
650,000
500,400
Preleased
100%
100%
0%
394,489
353,600
240,000
100%
100%
0%
Hwy 59 & 90A
217,440
0%
Jan-16 Spec WH
North Fwy/
Tomball Pkwy
E-SE Far Ind
E-SE Far Ind
North Fwy/
Tomball Pkwy
North Hardy Toll
Rd
E-SE Far Ind
E-SE Far Ind
213,218
0%
Feb-16
212,160
205,015
193,000
100%
50%
0%
168,425
0%
Jan-16 Spec Distrib
154,360
153,655
0%
0%
Jun-16
Sep-16
Sub Market
NW, Hwy 6
Sugar Land
North Fwy/
Tomball Pkwy
E-SE Far
E-SE Far Ind
SW Far
BTS = Built to suit
Ind = Industrial
Building
Description
BTS for Daikin
BTS for Aldi
Spec Distrib
Mar-16 Spec WH
Sep-16 Spec WH
Feb-16 Spec Distrib
Spec Distrib
Sep-16 Spec WH
Mar-16 Spec WH
May-16 Spec WH
Spec WH
Spec WH
WH = Warehouse
Leasing Activity and Rents
According to Colliers, industrial leasing activity increased 8.8% on a quarterly basis, but
decreased 47.0% on an annual basis, recording 4.2 million square feet, which included renewals.
Also for 4Q 2015, the city-wide average industrial rental rate increased to $7.05 psf triple net
(NNN), which reflects a four (10.2%) percent increase compared to 4Q 2014 ($6.40 NNN). The
average industrial rental rate at the end of 2013 was $6.15 psf NNN.
This figure is higher than the Cushman & Wakefield report, which reflects an increase in rental
rates of 4.7% percent from 4th quarter 2014 ($5.79 psf) to 4th quarter 2015 ($6.06 psf). The yearend 2014 asking average rental rate was 7% higher than year-end 2013. Per CoStar the average
quoted rate within the Flex sector was $10.05 psf NNN at the end of Q4 2015, while the average
quoted rate for the Q4 2014 Flex sector was $8.96 psf NNN, reflecting a 12.2% increase. The
graph below reflects a four-year trend of positive rental rates and a four-year trend of
predominantly steady vacancy rates per Transwestern.
CoStar average quoted NNN (triple net) rate per square foot at the end of 2015 by property type
are as follows: Warehouse Distribution $6.34, Bulk Logistics $4.56, Flex/Service $12.53,
Tech/R&D $13.10.
February 10, 2016
67
Industrial Lease Statistics
Notable 2015 Leases
Tenant
Exel
Michelin N.Amer. Inc.
Dunavant
McKesson Corp.
GE Oil
Jacobson Warehouse Co.
Valassis Communications, Inc.
Forward Air
FTD
Property
City Park East
8800 Citypark Loop
Bay Area Bus. Park
20710 Hempstead Rd
16240 Port NW
11503 Highway 225
801 Seaco Court
14810 North Freeway
16727 Park Row
Square Feet
905,000
663,821
565,760
357,887
261,990
210,000
135,231
109,386
65,000
Submarket
E-SE Far
NE Hwy 90
E-SE Far
NW Hwy 6
West Outer Loop
E-SE Far
E-SE Far
N Hardy Toll Rd
NW Outlier
Note:All leased in 4th quarter of 2015
Vacancy/Absorption
CoStar Q4 2015 reports indicate vacancy for Houston’s industrial market went up twenty basis
points year-over-year to 5.0% (4.8% at end of 2014). Flex projects reported to CoStar that
vacancy was 6.8% at the end of the 4th quarter 2015 versus 7.3% at the end of the 4th quarter of
2014 and 8.3% at the end of 2013. Warehouse projects vacancy rate was reported to be 4.8% at
the end of the 2015.
February 10, 2016
68
Vacancy Data
Vacancy Rates
10.00%
9.00%
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
Vacancy per Flex projects reported to Costar
1.00%
Vacancy per Colliers and CoStar
0.00%
4th
quarter
2013
1st
quarter
2014
2nd
quarter
2014
3rd
quarter
2014
4th
quarter
2014
1st
quarter
2015
2nd
quarter
2015
3rd
quarter
2015
4th
quarter
2015
The local industrial market has recently showed signs of its positive net absorption losing some
momentum. But, it is important to remember that this is within the context of the sector having
rapidly grown in recent years. CoStar stated net absorption for the overall Houston industrial
market was positive, at 847,661 sf in the 4th quarter 2015 compared with 1,691,806 sf in 3rd
quarter, 2,607,160 sf in 2nd quarter, and 4,296,464 sf in the 1st quarter of 2015. Net absorption
reported for 2015 was 9,467,091 sf, compared to 10,350,088 sf for 2014. Colliers International,
in agreement with figures from other prominent sources, reports Houston posted approximately
700,000 sf of positive net absorption in the 4th quarter, bringing the year-to-date figure to 9.5
million square feet.
Examples of major tenant move-ins (including Exel, Michelin, and Dunavant) are listed in the
chart of notable 2015 leases above.
Sales and Capitalization Rates
Currently, interest rates are still low, and there are institutional investors vying for the newer,
well-positioned, higher occupancy properties.
Per CoStar, “Total year-to-date industrial building sales activity in 2015 is down compared to the
previous year. In the first nine months of 2015, the market saw 31 industrial sales transactions
with a total volume of $288,257,250 [up from $243,799,698 the first three quarters of 2014].
The sales price per square foot has averaged $75.29 this year [from $61.63 the previous year].
Cap rates have higher in 2015, averaging 7.26%, compared to the first nine months of last year
when they average 6.83%.” In the first nine months of 2013, cap. rates averaged 7.56%.
Capitalization/investment rates will vary, depending on the type and class of product sold. Class
A properties are expected to sell with rates in the 5-6% range for 2016, while Class B product is
February 10, 2016
69
expected to trade in the 7-9% range. However, well-located Class A distribution projects are
currently trading in the low-5% range.
Summary
With some changes and adjustments in the Houston warehouse sector due to lower oil prices, it
was a moderately positive year in 2015 due to increased rental rates, lower vacancy, and a
resulting increase in sales price per square foot. The major oil players and service providers
began reducing staff and budgets, and some proposed projects were placed on hold. Now the
new employment forecast for Houston in 2016 is approximately 20,000 new jobs which equates
to a 1% increase. Houston has diversified since the recession of the 1980s, as illustrated by the
medical industry, with the Texas Medical Center now being the largest in the world. Also, it is
important to remember the $35 billion of construction in the port area, including the world’s
largest ethane export terminal, which is coming to the Houston Ship Channel. There is also the
expected completion of the Panama Canal expansion project by May 2016.
The general consensus is that growth in Houston will continue, just at a slower pace. Cushman &
Wakefield, in their US Industrial Snapshot Q4 2015, their 12-month forecast is for overall
vacancy to decrease, net absorption to stay level, and construction and rental rates to increase.
Looking forward to 2016 from an annualized basis year over year, the Houston industrial
warehouse income sector should anticipate approximately a moderate increase in value based on
preliminary figures.
February 10, 2016
70
Industrial Property
Refineries
The price of crude oil has, once again, taken a nose-dive. On the first trading day of 2015 the
price of West Texas Intermediate (WTI) was about $53 per barrel having been priced between
$80 and $100 for the previous 3 years. It now stands around $37 (NYMEX; first trading day
2016). All other benchmark crudes have experienced similar price declines. Continued strong
production from countries in the Middle East along with concern over China’s weakening
economy has the global economy awash in relatively cheap oil at the moment. The lower crude
prices served to reduce the cost of gasoline at the pump and opportunistic Americans took to the
road last summer. Some refiners scaled back outages in order to fill demand and capture a strong
margin.
Year-over-year crude runs at refineries were strong. The Texas Gulf Coast refinery average
annual capacity utilization, as defined by the Department of Energy, for 2015 (data through
October) was 91.7 percent compared to 90.6 percent for the same period in 2014. Texas Gulf
Coast refineries produced 13 percent more barrels of finished motor gasoline in 2015 as
compared to a year earlier. Distillate fuel oil production, including ULS diesel, was up more than
2 percent.
The PACE (Pace Consultants Inc.) Gulf Coast composite refining margin for 2015 is, so far,
about 10 percent higher than 2014. Through the first three quarters of 2015, Baker & O’Brien
Inc.’s PRISM cash margins for the Gulf Coast averaged $2.70 per barrel higher than the same
period of the prior year.
Gulf Coast refining margins are mixed depending on refinery configurations, the types of crudes
processed, and the degree of the distillate production compared to gasoline. However, the robust
margin environment of the summer’s driving season probably lifted everyone’s cash margin over
that of the previous year. A healthy gasoline crack appears to have buoyed revenue not offset by
falling crude prices.
In November, the Chalmette-based joint venture of ExxonMobil and Petroleos de Venezuala SA
(PDVSA) sold their Louisiana refinery to PBF Energy for $322 million. The deal included
interests in associated pipelines and marine and truck terminals. PBF, in September, also agreed
to purchase ExxonMobil’s Torrance, California refinery for more than $500 million. Due to an
explosion and fire earlier in 2015 at the site, this deal has yet to close. Also last summer, French
refiner Total SA announced that it was seeking a 50 percent partnership in its Port Arthur, Texas
refinery. No additional public statements have been released since that announcement.
The Chalmette refinery, while not a small operation, appears to have the configuration of a
gasoline producer. In general, unless it’s very efficient and has a low cost structure, its margin
potential is probably limited. The Torrance refinery sale seems a part of a major integrated oil
company’s asset divestiture plan, and because California can be a difficult market, a completed
sale will most likely end up at a below-average market multiple when compared to other
transactions, especially those with a market location advantage.
February 10, 2016
71
Chemicals
The chemicals industry is heavily dependent on auto manufacturing and home building and, as
the economy goes, so goes the chemical industry. According to Car and Driver Magazine, retail
sales for vehicles have increased by 6 percent in 2015 when compared to 2014. Housing is still
lagging nationwide, but up about 14 percent over last year with the latest figures from the census
bureau, with most of the sales being in the south and western parts of the country.
Texas has been blessed with oil and natural gas fields that have either been recently discovered
or, through newer technologies, have been newly developed. The glut of natural gas that has hit
the market recently has caused a tremendous amount of new construction to process the gas.
Around the state there have been many other projects for building facilities to use the natural gas
found in south Texas and along the East Coast. Cheap natural gas means lower raw material
costs for many chemicals and possibly greater profit margins for their products.
Oil prices began cratering in the 4th quarter of 2014 and have yet to rebound. While this has
made an impact on what is being paid at the pump, it may have a positive impact on the
chemicals market that is dependent on oil-based feedstock. The real question is whether this
drop in price for oil is just temporary or if it will hold and only time will tell. With the drop in oil
prices, there have not been any announcements for new construction as the market is still waiting
to see if this change will last. The plants that will benefit from the drop in oil are the facilities
that are flexible enough to take advantage of whichever feed is the cheapest. And while oil has
dropped significantly, natural gas is likely to continue as the preferred feed product for the near
future.
In Harris County, there have been several announcements of increased capacity or new unit
construction. LyondellBassell has increased capacity at their La Porte and Channelview
facilities. ExxonMobil and ChevronPhillips are building a new olefins plant at their facilities
near Baytown that should be operational by 2017. Last year ChevronPhillips completed a major
process unit at the Cedar Bayou site, a 1-Hexene unit. However, with the drop in oil prices, some
of these projects may slow down. After the economic crisis and oil prices soaring in 2009 we
saw refinery projects that had been planned or in construction slow down tremendously. We may
get the same result on chemicals projects as a result of these changes and we have already seen
ChevronPhillips adjust their Chapter 313 agreement with the school district to recognize current
delays.
Operation rates specifically for olefins units have been steady and hovered just above 90 percent
on average through 2015, about 5 percent higher than last year. Oil prices appear to not have any
effect on olefin unit run rates at this point, but the impact of oil is impacting the overall economy
of Texas and the US, which does impact profitability. It appears that 2015 may end up a better
production year, but with less revenue than 2014. All together this industry appears to have
peaked for the 5 to 15-year cycle we are on and values will likely decline over the next few years
especially with the impact of the massive new plants coming online in the next few years.
Chemical-related inventory volumes should be near the levels they were on January 1, 2015 and
prices are up or down depending on the chemical. Value changes for most chemical facilities
February 10, 2016
72
look to be down for commodity chemicals going into 2016, but may be down more for specialty
chemicals that depend on oil-based feedstocks.
Utilities
Electric
The electric power generation sector (power plants and cogeneration facilities) has been through
a great deal of turbulence over the past few years and it doesn’t look like it’s going to get any
better soon. Historically, the price of electricity has followed the dominant fuel used to generate
the power for peaking plants. In Texas, that fuel is primarily natural gas, although the addition
of wind projects and transmission lines from West Texas in connection with these projects is
affecting power prices. Combining this with very mild weather for the past year and it’s no
wonder why power prices have been so soft.
There are several initiatives competing to impact generation within the Electric Reliability
Council of Texas (ERCOT). The first is the Competitive Renewable Energy Zones (CREZ)
initiative adopted by the Public Utility Commission of Texas (PUCT). In April 2008, the PUCT
adopted a $5 billion scenario to add transmission infrastructure to move electricity from wind
farms in the ERCOT West zone to markets in the North, South, and Houston zones. Wind
energy has zero fuel cost and is a clean alternative to burning hydrocarbons, but many of the
wind farms in Texas began production between 2004 and 2007 and will be losing their 10-year
federal tax incentives. This will impact the electric prices as these incentives go away because
wind power with incentives is able to sell power at negative prices (loss of ~20 cents per
Megawatt) and the government makes up that difference. When the government incentives go
away, the wind power producers will have to bid in at positive costs making the average price for
electricity higher. So far we have not seen a dramatic impact in the power prices.
The next initiative is the Public Utility Commission of Texas increasing the ceiling for power
price in ERCOT. The PUCT makes the rules for the Texas power market and they have been
looking at increasing the cap for power price per megawatt during peak hours. Their concern is
that Texas is still growing in power consumption, but there is not enough new power
construction in the market to maintain a reasonable reserve. The PUCT has typically enjoyed a
12 percent reserve on the ERCOT grid, but projections show that without new construction,
Texas could fall well below 10 percent. To encourage new power plant construction the PUCT
has increased the cap from $3,000 per MW to $4,500 per MW and there are still discussions to
raise the cap further to $9,000 per MW. While this may seem significant, the industry is
doubtful that this will be enough incentive to bring in new construction. The industry likens the
cap increase to high stakes gambling, where the owner has to bet on whether there will be
enough peak days in a year to make it worth the risk. So far there has been very little proposed
new construction and only two grass roots facilities being built by the same company.
Electricity producers have been testing the waters in different areas of the state looking for
options to build new capacity only for the summer and winter months where the price gets high
enough to justify running. These units are significantly cheaper than a combined cycle natural
February 10, 2016
73
gas plant or a coal fired plant though they are not as efficient, but when you are running less than
10 percent utilization, efficiency is not a concern.
It appears to be official, older power plants will begin to be permanently shut down and
abandoned. In 2010, we saw at least 4 units in Harris County taken offline, put back online for
the summer, only to be taken offline again. Unfortunately, that appears to no longer be the case
and the old stationary boilers may be near their true end of life.
The net effects on value within Harris County reflect a reduction in values as plants depreciate.
Calpine did complete their two new units in 2014, one at their Channelview location and the
other at Deer Park and these went on the roll at their full value for 2015. The majority of the
power in Harris County is from cogeneration facilities that produce both steam for an adjacent
facility as well as power. If the power prices are affected up or down, it will impact the value of
the facility, but the steam will help offset the impact. Steam prices typically track with the price
of natural gas, and as long as natural gas is stable, the value of these facilities will not be
significantly impacted up or down.
Natural Gas
Natural Gas Distribution utility companies are always requesting that regulators allow them
higher returns (through the rates they are allowed to charge their customers) in order to pay for
the cost of expansion when needed, repair storm damage at times, and maintain reliable service
overall. However, the main goal of regulators is to make sure gas distribution companies remain
operational while keeping service costs as low as possible, in return for the monopoly power
given to these companies over designated service areas. Because both revenues and expenses
tend to be held in line with this process, the values of property owned by these natural gas
distribution businesses tend to be rather stable. Other factors that indicate continued healthy
future demand for utility services are: a) the nation’s population appears to be on a steady
upward growth course; b) limited practical alternatives exist for consumers seeking a steady
supply of natural gas; and c) natural gas supplies in this country are abundant thanks to proficient
drilling and extraction technologies. Unseasonably warm or cold weather can always cause
substantial volatility in quarterly operating results; however, companies strive to counteract this
exposure through long-term oriented temperature-adjusted rate mechanisms. For 2016, the
values of businesses in this sector are expected to reflect confidence in the continued
improvement in the nation’s economic outlook. An improving job market and housing sales also
underpin solid revenue growth and earnings potential.
Telecommunications
Most Telephone companies in addition to the traditional land lines have a thriving cell phone
business which currently is the most profitably portion of the communications sector. For the
traditional portion of Telephone Utilities, the number of phone lines in the United States
continues to decrease. Many people are dropping traditional phone lines for internet phone
services or have chosen to carry just cellular phones. In 2013 (latest available data) 42 percent of
adults in the South live in homes without a traditional wired telephone which is down 2.5 percent
from 2003. AT&T still plans to end its traditional wire service by 2020 which would require
approval by the FCC. That approval is widely expected, although the timeframe for the transition
February 10, 2016
74
remains unknown. The continued competition from customers relying solely on cell phones and
Voice over Internet Protocol (VoIP) offered by cable companies will continue to keep the values
down. AT&T has lost approximately 80 percent of its Plain Old Telephone Service (POTS) due
to the move to cell phones and VoIP. Bundling packages that include voice, internet, and
television programming over some phone systems still cost more to provide than the revenue it
generates. Traditional telephone property across the state is expected to continue declining over
the next few years.
The cable companies and telephone companies are in competition for the same market. The
ability for these industries to provide phone, television, and internet has reduced the ability for
both industries to earn a profit. Telecommunications will continue to get less expensive as
technology advances. With that said, revenues for Comcast and Time Warner have been good for
2015. If this trend continues, then the value of these companies should change little.
Wireless communications carriers’ expenditures on infrastructure will decrease as the major
cellular carriers have already deployed the next generation of wireless technology referred to as
LTE (Long Term Evolution). However, to meet increased demand for mobile data and internet
traffic, the carriers will have to add equipment to keep up with the demand which is growing
exponentially. The new equipment includes the Hetnet concept of small cells, DAS (distributed
antenna system) and WIFI equipment working in conjunction with the cellular towers to increase
capacity.
Replacement costs for voice and data equipment will continue to decrease with design and
manufacturing improvements. Overall, value in 2015 increased 7.73 percent over 2014. The
value increase represents heavy investment on part of Verizon and T-Mobile in deploying LTE
and associated equipment to meet its data demand. AT&T acquired Cricket Communications in
2014 and Sprint finish removal of its old iDen network. The older generation equipment 2G, 3G
& 4G (2nd, 3rd & 4th Generation) will experience expedited obsolescence due to the efficiencies
of the current LTE devices. Depreciation on existing plant assets will continue to outweigh new
construction and this trend should continue for the foreseeable future.
The Data Centers business has really developed in Harris County within the past few years. This
business has seen continuous growth and the trend seems to continue. There are two new data
centers that were completed in 2015 and are on line currently. Many companies are choosing to
host in data centers as compared to building their own because of the high cost of infrastructure
and equipment associated with this business.
Fiber Optic long distance transmission carriers’ will see only continued depreciation for 2016.
The increase in data demand has been a positive for the communication industry as older cable is
getting better utilized. The only trend being seen is that larger entities are purchasing smaller
companies to reduce competition. There have been new cable deployments happening in major
metro cities. Google has also become a major player. However, they are in limited cities in the
US.
Broadcast television capital expenditures should be minimal in 2016. The improvement in
technology has resulted in a decrease in equipment cost and investment. Other communication
and internet companies’ asset values will decrease due to further depreciation of their assets and
lower investment cost associated with newer technologies.
February 10, 2016
75
Manufacturing
According to the Dallas Fed, Texas factory activity increased again in December, according to
business executives responding to the Texas Manufacturing Outlook Survey, which polls
businesses on whether key indicators of activity have increased, remained the same, or decreased
from the previous month. Survey responses are used to calculate an index for each indicator.
The production index, a key measure of state manufacturing conditions, ended the year at 13.4,
after Texas factory activity increased for the third month in a row in December. This index was
at 16.4 at the end of 2014, and was at 13.4 at the close of 2015. This indicates a slower end to
the year though not as drastic as many would have you believe.
Commercial Personal Property
Dubai’s Gulf News suggests that “the wide variety of global uncertainties are forcing many
companies to think short term and hold back on investments that are needed to both build their
prosperity in the future but also break the current mood of growing pessimism.”32 According to
About News, however, “the U.S. economic outlook is healthy. The GDP growth rate will remain
within the 2-3% ideal range. Unemployment will continue at the natural rate. There isn't too
much inflation or deflation. … There's little risk of the irrational exuberance that creates
damaging booms and busts.”33
The Texas State Comptrollers’ office reports that over the past year, Texas added jobs in 9 of the
11 major industries. Pre-recession Texas employment peaked at 10,639,900 in August 2008, a
level that was surpassed in November 2011, and by November 2015 Texas added an additional
1,242,700 jobs. In calendar 2014, Texas real gross domestic product grew by 5.2 percent. Also,
the Texas region's consumer confidence index was 117.9 in January 2016, up 1.11 percent from
one year ago. However, consumer spending showed that Texas state sales tax receipts for
December 2015 were 1.03 percent lower than for December 2014.
In Houston, office leasing is down, but retail construction is up. City of Houston sales tax
collections have slipped, but vehicle sales set a new record. Airport and port traffic continues to
grow and employers continue to add enough jobs to offset job losses in energy. The Texas
Workforce Commission reports that the Houston metro area added 4,800 jobs in November,
which was the third weakest November in the past 25 years. The region typically adds 10,000 to
12,000 jobs in the month.
The Harris County commercial personal property tax base increased approximately 6.29 percent
for tax year 2015, including a 6.09 percent increase of the general personal property value base.
32
33
http://gulfnews.com/business/economy/why-economic-outlook-for-2016-is-poor-1.1658357
http://useconomy.about.com/od/criticalssues/a/US-Economic-Outlook.htm
February 10, 2016
76
It is anticipated that this sector will show a minimal change for 2016 as the Houston economy
continues its sluggish growth.
The total value of the leased asset component of commercial personal property increased 1.93
percent in tax year 2015. The value for this sector may increase slightly for 2016 as office market
vacancy rates are expected to decline over the next few years and the majority of leased assets
are generally business office machinery and equipment.
TexAuto Facts reports that Houston-area auto dealers sold 376,481 vehicles in 2015, up 0.7
percent from 2014 and a record for the industry. The average retail sales price per vehicle,
$36,112, reflects a record for the month of December. TexAuto Facts expects sales to slip only
slightly in 2016. Since the dealer inventory component is tied to prior year vehicle sales, this
indicates an increase in value for this sector in 2016. The tax base for dealer inventory in tax year
2015 increased by 13.54 percent from 2014.
The tax base for business vehicles for tax year 2015 increased by 10.68 percent from 2014. The
value for this sector, however, is expected to show less growth for 2016.
February 10, 2016
77

2016 Market Trends Report - Harris County Appraisal District

Transcription

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