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Houston Bucks Trend: RNR Special Report From the ULI Meeting in Philadelphia

(By Realty News Report) – PHILADELPHIA – Overall U.S. office vacancy rates are expected to decline to 12.6 percent this year and 12.3 percent next, according to a new three-year economic forecast from the Urban Land Institute (ULI) Center for Capital Markets and Real Estate.

Industrial/warehouse availability rates are predicted to inch up in 2017 and 2018, but remain below the long-term average, survey respondents predict, with healthy but moderating rental rate growth.

HOUSTON IS BUCKING NATIONAL TRENDS

“Houston historically always has been counter cyclical,” says Jonathan Brinsden, chief executive officer of Houston-based Midway, a privately-owned, real estate development and investment firm with some 45 million square feet of mixed-used destinations, office, industrial facilities, and master-planned residential communities planned or under construction.

Jonathan Brinsden

Jonathan Brinsden

Speaking during Urban Land’s Spring Meeting in Philadelphia last week, Brinsden noted that Space City’s economy continues to be driven by energy. “Even though our economy is well diversified today, the decline in oil prices has impacted the office market,” Brinsden continued.  “There is increased vacancy and sublease space in downtown and energy corridor – two of the markets affected most by the energy downturn.”

Prior to gyrations in the energy sector, Houston had a fairly tight office market and 5-7 years of rent escalation. “Energy prices have impacted only a section of the office market and it has largely been large diversified oil companies,” said Brinsden.  “We continue to see demand in other sectors, such as medical, law and finance.”

Midway is actively involved in a number of developments in Space City including CityCentre, a major mixed-use development near Interstate 10 and Beltway 8.

“Like everyone else, we’re keeping a close eye on the market,” said Brinsden, “but we take a long term view of our projects. We create something more compelling than commodity space. We build quality, and in the long term, quality will win out.”

HOUSTON’S INDUSTRIAL BOOM

Rusty Tamlyn

Rusty Tamlyn

Rusty Tamlyn, senior managing director at HFF in Houston and co-head of industrial group, said Houston’s industrial market is in great shape contrary to what some would think with lower oil & gas prices. “The industrial market fundamentals  in Houston are still performing at a high level,” he added. “We haven’t seen any major change in investor pricing in the industrial or retail sectors since the oil drop and there isn’t any discounting in Houston.”

Tamlyn said Houston’s industrial market is currently 95% occupied with 9 million square feet absorption in 2015 with a number of large deals in the wings.  “FedEx is constructing an 800,000 square feet plus building off the Grand Parkway and US 290, while Daikin Industries is completing its massive, 4 million square foot HVAC manufacturing facility off US 290 west of the Grand Parkway in northwest Houston.”

8 MILLION SQUARE FEET

Bowing to market realities, new industrial development is moderating, Tamlyn said, with some 8 million square feet under construction, down from 10 million square feet last year. “Investors are pleasantly surprised around the country,” Tamlyn added.  “The industrial market in Houston is more consumer driven, compared to the market in Dallas which is more distribution oriented. In Houston, when people buy a home and need furniture, carpets, appliances and all those items need to be stored in a warehouse, which drives our industrial market.”

Houston is one of the most resilient economies in country, he added.  “It’s more diversified,” Tamlyn explained. “It’s definitely not going to be a repeat of the 1980s when the city was massively overbuilt  “The Houston economy is twice the size today and we have an expanding Port of Houston and Texas Medical Center, the largest in the world with an increasing amount of applied research and life sciences.”

The latest ULI Real Estate Consensus Forecast, a semi-annual outlook, is based on a survey of 48 of the industry’s top economists and analysts representing 36 of the country’s leading real estate investment, advisory, and research firms and organizations. The survey, conducted in March, provides forecasts on broad economic indicators; real estate capital markets; property investment returns for four property types; vacancy and rental rates for five property types; and housing starts and prices.

April 26, 2016

Realty News Report is a Texas-based publication edited by Ralph Bivins.

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