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Houston Wounded by Oil Bust, But It’s Not Fatal: Q & A Part 2 with John Fenoglio

John Fenoglio

John Fenoglio

John T. Fenoglio has witnessed many peaks and valleys in the Texas real estate business, including the Great Recession and the catastrophic crash of the mid 1980s, when foreclosures, bankruptcies and S&L failures devastated the Texas economy.

Along with Hal Holliday, Fenoglio founded Holliday Fenoglio in 1982. With Fenoglio at the helm as CEO, HFF went on to become the largest commercial mortgage banking firm in the United States. Realty News Report talked to Fenoglio – now Executive Vice President at CBRE’s Debt & Structured Finance Group – about the 1980s crash for perspective as the Houston economy deals with oil under $50 a barrel.

Part Two: Q & A with John Fenoglio:

Realty News Report: How would you compare this energy downturn to the one in the 1980s? More severe? Less?

Fenoglio: The 1980s was a far more severe downturn. You not only had the collapse of energy prices and the dismantling of the upstream business, but financial institutions were over-leverage and we saw a huge capital withdrawal as banks and S&Ls went broke. In the 80s, not only were there problems in the energy industry, but we had a banking crisis, a liquidly crisis, severe job loss and all of this came on heels of an irrational expansion of commercial space, which doubled from 1979 to 1984. It was a huge tidal wave of problems crashing on beach. Added to this was the government took a severe position and created the RTC to take back assets, crashing property values. Today, fracking has been curtailed 50% and we are going through job losses. The real estate and financial markets are in better shape and the deals are structured with more equity. What happened in the ‘80s is totally differently than what we are seeing now.

Realty News Report: Union Investment of Germany paid over $400M for the 1000 Main building earlier this year. Do you see other foreign investors paying attention to Houston today because they see Houston as a ‘bargain?’

Fenoglio: Foreign investment has always been strong. Oversees capital views us as a viable long term investment. These transactions are not low, per square foot purchases but full priced acquisitions for the best assets. Last summer, Broadstone Post Oak, an upscale apartment community developed Alliance Residential Co., was sold to Strategic Capital, the U.S.-based investment arm of China State Construction Engineering Corp. Strategic Capital paid a record price because they looking for good, core acquisitions.  Many pension funds and equity funds want to do the same.

Realty News Report: What about pricing? With the current woes in the energy industry, are the prices of CRE in Houston holding up?

Fenoglio: Fortunately, we have not seen prices decline. We’ve had a few properties go to market and not receive the prices the sellers wanted, so they came off the market. Prices are holding steady because many of properties are joint ventures with large institutional sources of capital. They have staying power and are not going to fire sale prices. Unlike the 1980s, owners have holding power and are not dumping properties. Transaction volume has slowed because people are taking a cautious approach, but when a good property comes on the market, we’re seeing spirited competition.

Realty News Report: This recent crash in oil prices certainly took away from some of Houston’s luster in the capital markets. Will the city carry this black eye forever?

Fenoglio: I don’t think so. It’s been said that the 1980s in Houston was to CRE what the Titanic was to the steamship industry. Houston had a black eye after the ‘80s and it took 20 years for some investors to come back to the market. Houston is not rolling up carpet and shutting the store. Houston has a more diversified economic base, with the world’s largest medical center, for example. Our energy industry is not disappearing, it is just cutting back. The world will still be relying on fossil fuels for the rest of my lifetime.

Houston is having a slowdown in its economy and not a crash. We are going into a slower period with a balanced supply and demand that portends well for the future. Houston has always attracted capital. We’re going to have to see how it plays out. I’d say in 2017 and 2018, we could be looking extremely good with most of inventory leased and the construction pipeline shut down. Most of forecasts I’m seeing are saying there will be a recovery in energy prices in the next 12-18 months — not $100 barrel oil but maybe $60 barrel activity — that will mean some renewed demand for office space.

Realty News Report: What’s your prediction for the commercial market in 2016.  Better? Worse?

Fenoglio: I’m not an economist, but my gut feeling says we’ll have a slow year in 2016. Employment will be flat. We may still have some job losses but it won’t be a return to the 1980s. Commercial and residential real estate will continue to do well. We have a city that is growing rapidly as far as population goes. Once energy prices bottom out, investors will take another look at Houston.

Realty News Report: Any other comments?

Fenoglio: I’ve been pleasantly surprised with the resiliency of city and the discipline at work here. The 1980s were the go-go, boom years, often likened to the Wild West. This time, Houston saw a run up in fracking that has now declined but it hasn’t wrecked the Houston economy. We don’t have a tidal wave of supply that is going to disrupt commercial real estate markets. There’s continued strength in the residential market and I think that is one of the best economic indicators. I’m optimistic.

Oct. 29, 2015

Realty News Report is a Texas-based publication edited by veteran real estate journalist Ralph Bivins.

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