R AY ’ S
H O U S TO N Commercial Buzz R AY H A N K A M E R Hankamer & Assoc, Broker, Houston Contributing Writer
Houston Commercial Real Estate (CRE) Outlook by David Luther, V.P. and Regional Manager Marcus & Millichap Presented at Houston CCIM monthly luncheon, 11/14/13
In General: • We are seeing far more Texas buyers (54% of total deals) in this up-cycle-in the past out of state buyers were more dominant • We are seeing generally about a 430 basis point spread on our graph comparing cap rates to 10 year treasury yields • Investors in CRE in Texas overall are bullish, as are lenders-Investors are “hungry” • Local banks prefer lending to “local” developers • REITS are disposing of non-core assets Multi-Family: • Lots of “covered land plays”, i.e. older MF units being bought for the land… especially projects with good locations but which are 25-50 years old and lower density
• Some “value-add plays”, with B units being upgraded to A, where the yield potential is greater than C to B • The deal making is spreading to smaller cities across Texas now, and to secondary and tertiary markets within the bigger cities • There are few distress sales at this stage in the cycle
Office/Industrial: • Office-industrial sector is attracting cross-over investors experienced in other sectors of CRE • Lots of new development in this sector as oil & gas support firms bulk up their operations and need more space Hotel:
Retail: • Activity spreading to secondary and tertiary markets • Retail “covered ground” activity, i.e. older less productive properties being bought for the land, to be redeveloped as retail or other asset class • High competition for single tenant deals is driving yields down and is driving some investors to other asset classes • Some “cross-over investors” none theless are coming into the retail sector
• The franchisors are aggressive in selling “flags”, sometimes cannibalizing hotels already in place in their own family of brands • Oil & gas demand has pushed hotel occupancy and rates to stratospheric levels in some very small and remote markets in South and West Texas, and new development is underway there • There has been much activity in recent years with large private equity firms buying and operating some of the largest hotel chains-some of
David Luther these chains, having been “taken private”, are now on the verge of “going public” once again Investor Concerns in All Segments: • Interest rates are poised to return to “normal” ranges, i.e. higher • Land in prime markets is less available, and when it is available, it is now very pricy • Infrastructure costs are rising • Rising property taxes are feared • Changing tenant / user demands • Rising labor and construction material costs
Clint Duncan of Transwestern made the following comments about Houston’s Multi-Family (MF) Market at the recent O’Connor & Associates luncheon: • It’s a good time to be a buyer OR a seller • Class A projects running at 90% occupancy with rising rates, in spite of new supply coming on line • 6-8% rent growth in last year, but this should “cool” with increasing Clint Duncan new supply…we have had four years of upward trending rents • Transwestern and their investors focus more on sales of B & C apartments because that’s where higher, stable yields are to be found • The CMBS market is stepping up to securitize packages of multi-family deals that fit their criteria • There are some value added plays still going on, although
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lender-held properties on the market are diminishing. One Clear Lake area deal was recently bought for $11,000 per unit and sold for $40,000 • Financing rates are rising-example was given of one project which locked rate at 4.25 at beginning of summer on a loan which would be priced today at 5.0% • Most submarkets in Greater Houston are good…exceptions are Greenspoint and Antoine-West Gulf Bank, where there is almost flat rate growth and occupancy around 80% • Lots of investment transactions of MF projects in recent years: 76 in 2009; 101 in 2010; 150 in 2011; 206 in 2012; 130 to date in 2013. [Lots of happy brokers!] • Booming office markets are mirrored by heavy MF development: Energy Corridor, Woodlands, Inner Loop “re-fill”, etc., where office and MF development is strong • Equity players in MF segment getting leery: 18,000 units under construction and 20,000 more proposed, although many of the “proposed” will never get out of the ground
• Project costs going up due to tight labor-ExxonMobil construction site near Woodlands, for example, has guard gates to keep out contractors who might poach labor • Labor costs are pushing up single family home costs as well, as sub-contractors struggle to find workers, with the competition for them coming from the oil patch • Now outside investors are coming to Houston to “get in on the action” and are paying very high prices for local MF projects • Net addition to MF supply is unclear, given huge numbers of MF units being razed in current Houston economic cycle Summary: pent-up demand and Houston’s growing economy has led to increased MF housing demand and higher than ever rental rates; after spurt of construction to meet this demand, investors are starting to pause to evaluate future supply/demand equation; Houston’s economy is slowing a bit, so caution is warranted.