Thursday, April 05, 2007

WSJ on Houston's commercial real estate boom

Just a quick pass-along tonight. The Wall Street Journal profiled Houston's commercial real estate market yesterday (seven-day open link, subscriber permalink), and I thought I'd cover key excerpts:

Soaring oil and gas prices have sparked a robust economic rebound that is lifting the fortunes of Houston's commercial real-estate market.

The region's downtown office market has seen a dramatic recovery that has prompted some developers to jump-start plans for new projects...

The gleaming glass-clad icon [former Enron building leased by Chevron] is now a symbol of the Houston real-estate market's rising tide. "It was a catalyst for change. Now we're looking at the next development cycle," says Paul Layne, executive vice president and head of the Houston regionfor New York-based Brookfield Properties Corp., ... The lease helped central business-district office vacancies drop to the 12.4% in the fourth quarter from 18.8% last year, according to Property & Portfolio Research, a Boston real-estate research firm.

At the same time, the Bayou City's Texas-size pride was dinged last month when Houston's Halliburton Co. said it would open an additional corporate headquarters in Dubai. Asked how the decision will affect the company's Houston-area employees and real-estate needs, a spokeswoman for Halliburton writes in an email that Dave Lesar, the company's chief executive, is "the only employee who will move to Dubai to lead the company's efforts in growing Halliburton's business in the Eastern Hemisphere. ... No other employees are being relocated (or offices vacated) and no jobs will be lost as a result of opening the additional headquarters in Dubai."

Halliburton, which employs more than 5,000 people in the Houston area and has more than 3,000 employees in various locations throughout the Middle East, is still in the process of determining how many people will be located in Mr. Lesar's new offices.


But the potential for a loss in energy-related status may be offset by the area's increasingly diverse economy. The energy sector as well as health-care and education and construction sectors pushed job levels up 4.2% In January from the year-earlier, well above the national rate of 1.7%, according to the Bureau of Labor Statistics. The National Aeronautics and Space Administration is also a major employer in the region. The region's economy, which suffered two straight years of job declines with the unwinding of Enron and the consolidation of other companies, has been on the upswing since 2004.

The economy has raised nearly all sectors of the commercial real estate market. Office, retail and warehouse markets all saw vacancies fall and rents rise in the fourth quarter, though rents and building values are generally still below national averages. The area's retail is also expanding, driven partly by the rising number of consumers in the region as its population rose at more than double the national rate in 2006 from the year-earlier to 5.5 million, according to Moody's

As is often the case in sprawling regions, the real-estate recovery has been somewhat uneven. Apartment vacancies have risen as some refugees from Hurricane Katrina have left the Houston area. Meanwhile, office vacancies are as high as 21% in such areas as the northwestern Houston submarket and speculative office construction in the so-called energy corridor of West Houston is expected to push vacancies up to 14.2%, PPR says.

Houston's historically volatile economy and the relatively few constraints on new building construction make some experts cautious about real estate investments there. Kenneth T. Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley, gives the short-term prospects for office and apartment investments in Houston an A and a long-term grade of B minus. "In the long run it's not as good because of its boom-bust nature," Mr. Rosen says.

At first I thought he meant the nature of the energy industry, but I think what he's really saying is that, in a relatively unregulated market like Houston, there's lots of competition in real estate, and occasional boom-bust overbuilding cycles. That makes life a little riskier for real estate developers, but great for tenants, who can count on finding plenty of affordable space - obviously a good thing for the city and maintaining a vibrant economy.


At 2:36 PM, April 06, 2007, Anonymous Anonymous said...

A boom bust cycle is not a good thing for anybody. During the building boom rates are going to go up higher than if construction had been constant until you get to the bust when all of a sudden there are to many buildings and vacancies jump and rents fall. Both sides of the boom and bust cycle show the innefficiencies that seem to be inherent in real estate. The reason for the boom is to little investment in construction just prior to the boom and the bust occurs because of the overinvestment in construction during the boom.

While I agree that the lightly regulated market that we have here in Houston is a good thing, and I believe that we could argue that our boom bust cycles are better than the persistent undersupply that might occur if we had heavier regulation. Boom-bust cycles are not really good for anybody, maybe just less bad.

At 7:08 PM, April 07, 2007, Anonymous Anonymous said...

As a new residential developer I see the good and bad to the boom. I've outlined a few points to each on this video.

Some of the NEGATIVES of increasing home density:
1) Overbuilding on land results in lack of adequate drainage to the overburdened bayou system
2) As the developers keep pace with the demand, more developers resort to quick in and out builds, where lots are completely raised and older trees are torn down resulting in less greenery
3) Increasing property values result in higher property taxes driving out older residents who can’t afford the higher tax burden
4) Loss of vintage homes that could have been renovated

Some of the POSTIVES of increasing home density:
1) Renewal of neighborhoods with contemporary architectural home designs juxtaposed amongst a broad array of older homes creates a diverse community
2) Living and working in the city results in less personal vehicle carbon emissions due to less commuting times
3) Increasing use of Metro mass transit bus and rail services
4) Increasing number of jobs in the construction and repair industry to build, maintain and service the growing number of homes.
5) Living close together with others, results in a more interaction with their neighbors and a greater understanding of the various ethnic groups in the city
6) Redevelopment and expansion of inner city parks to serve as hubs of outdoor activity
7) Not everyone wants to cut grass

At 11:27 PM, April 07, 2007, Anonymous Anonymous said...

I love how you turned that into an argument against development regulation!

But I think he was just talking about the energy industry.

At 7:16 AM, October 02, 2007, Anonymous Anonymous said...

It`s normal that some country or some kind of business have cycle. Now in USA market of property we have a crisis, 0,5 year ago was a increase.


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