Houston Strategies

Wall Street Journal profiles Houston real estate

When I wrote about the similarity of Houston and Atlanta last month, one of the reasons was because I thought the Wall Street Journal might never get around to profiling Houston. Well, sure enough, they did. I will pass it on in its entirety here because WSJ is a subscriber-only site:

Oil Firms Restrain Office-Space Urge

Despite Houston's reputation as the swaggering energy capital of the world, soaring oil prices have yet to translate into a commercial real-estate boom for the city. The higher prices have helped boost job growth in the nation's fourth-largest city, a situation that's often a precursor to a real-estate rebound. In the 12 months ended March 30, hiring by the professional and business services sector that is fueled in part by oil -- as well as education and health-services companies in the increasingly diversified economy -- helped drive job growth up by 1.2% from the previous 12 months. Though that pace lags behind the nation, Houston is expected to see jobs increase at almost twice the national rate through 2009, according to Property & Portfolio Research Inc.

Tenants and developers appear to have learned some lessons from Houston's painful history of booms and busts. Following the oil price run-up in the early '80s, office vacancy rates peaked at 31.6% in 1987. Nowadays, energy companies are more prudent and new office construction is moderating. "We've sobered up a lot," says Will Penland, senior managing director in Houston for Los Angeles-based CB Richard Ellis. The market is only just beginning to recover from the unraveling of the Houston-based energy trader EnronCorp., which filed for bankruptcy in late 2001, and consolidation at other energy companies such as Williams Cos. and El Paso Corp. as well as some other big employers.

The office market was hit hard and rental rates are still declining. Among the high-profile casualties was Enron's former headquarters in downtown Houston. The 50-story glass tower at 1400 Smith St. was sold in 2003 to an investment group named Towanda Development 1 Ltd. The group, led by a Houston cardiologist, paid $55.5 million, or about $44 a square foot, according to Real Capital Analytics Inc.
Houston's real-estate market is just starting to shake off the collapse of Enron. Enron's old headquarters, right, and a newer building, left, have sold. The 1.3 million-square-foot-building -- minus Enron's now infamous crooked E sign that sat outside -- remains virtually vacant. Towanda is seeking tenants and considering converting some lower floors to parking, says Bill Donovan, Towanda's senior vice president.
More encouraging for Houston was the decision by Chevron Corp. to purchase a new 40-story chrome and glass tower originally intended for Enron. Chevron, based in San Ramon, Calif., bought the high rise at 1500 Louisiana St. for $129 million, or $112 a square foot, last year. The building sold for significantly more than the Enron headquarters because it is brand new and because of the improving market, says Dan Fasulo, of Real Capital.

There are signs of a recovery. Office vacancy rates edged slightly down in the first quarter compared with last year's fourth quarter, though they're still above year-ago levels. Another bright note was the decision by Citgo Petroleum Corp., owned by Venezuela's state oil company, to move its headquarters to Houston from Tulsa, Okla.

Houston also is struggling to digest a glut of new apartment and condominiums that have had trouble competing with relatively inexpensive single-family homes. While apartment vacancy rates have begun a modest decline, they are still nearly double the average in markets nationwide, according to PPR.

Though some higher-end projects are in the planning stage, there is a lull in retail-construction activity in comparison to a three-year boom that slowed after 2001. Wal-Mart Stores Inc. has built enough new stores in the metro's outlying areas to give Houston a Wal-Mart-to-population ratio that is nearly double its national average.

Some big-name buyers are returning. In all, $2.9 billion in office properties changed hands last year, up from $1.1 billion in 2003. New York-based TIAA-CREF purchased 4 Oaks Place, a four-building suburban complex, for $255 million, or $146 a square foot. "Houston's gone through a soft period but it's on the uptick," says Tom Garbutt, managing director and head of real estate for TIAA-CREF.

Other stats in an article table include apartment, retail, and office vacancy rates between 14 and 20%, average retail and office rents of $16-19/sq.ft, average apartment rents of $713, and a median home price of $134k.

Strong job growth, affordable housing and commercial space, and plenty of Wal-Marts to choose from. What more could you want in a city? ;-)

posted by Tory Gattis @ 7:27 PM