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CBRE’s Mark Taylor: Houston’s Pockets of Weakness and Sectors of Strength

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Mark Taylor

HOUSTON – With an expanding supply of vacant office space, a contraction in the pool of clients needing space, an out of whack multifamily market and a cooling job market – at least compared to the previous few years — 2016 may be 12 months Houston real estate entrepreneurs would rather forget.  ‘But there’s always next year’ became the rallying cry for many. So what is expected to happen during the 365 days beginning January 1?  To find out, Realty News Report talked to one of the city’s veteran real estate executives: CBRE’s Senior Managing Director in Houston, Mark Taylor.  Mark oversees a staff of some 400 real estate professionals that provide services for owners of over 45 million square feet of office, industrial and retail space throughout the Houston/Gulf Coast region. Prior to joining CBRE, Mark was with Trammell Crow Company.

Realty News Report: As we move toward 2017, what’s the outlook for Houston’s commercial real estate and the local economy?

Mark Taylor: The good news is that Houston’s population has continued to grow, and Houston is still being viewed as a top place to live.  Our cost of living is below the national average, our per capita income is above the national average, and we have a pro-business environment. While we’ve certainly experienced job losses in the energy sector, we’ve added jobs in healthcare and other sectors resulting in Houston’s total employment levels remaining at all time highs with the unemployment rate at 5.8%. Houston’s local economy and commercial real estate business will continue to exhibit an underlying strength, but we are going to have pockets of weakness in certain areas of the market. Development has slowed significantly, and the office market may remain soft for the next two years or so. The Industrial market will continue to be sound and the retail sector will be strong for a while. There will be more vacancy in the multifamily market but Houston should be able to work through that within the next few quarters.

Realty News Report: The Houston office market has rising vacancy rates, a growing supply of sublease space and rents appear to be under pressure.  Plus, you have dozens of energy firms declaring bankruptcy and reworking their leases, relocating or shedding more space onto the sublease market. What happens next? Has the office market hit bottom yet, or are things going to get worse before they get better?

Mark Taylor: CBRE expects Houston to be approaching the bottom of the office market downturn, but there is potential for it to continue for a number of quarters. In the meantime, companies will right size the space they have, and they will use this time to make long-term plans and become more efficient. Houston has a tendency to recover quickly in ways that are often unexpected, so while some think this market will continue for years, there is a chance that the Houston office market could look vastly improved three years from now. In the meantime, there will be some pain as well as opportunities.

Realty News Report: Have investors redlined Houston? What do investors think about Houston these days?

Mark Taylor: Investors are talking to us every single day about opportunities to buy real estate in Houston.  Right now, there is a gap between the “bid and ask” prices, so not much has been trading as most owners are generally well capitalized and not desperate to sell. Investors are hoping for “Fire Sale Bargains” but very few of those exist. The current investor makeup comes predominately from private capital, but we expect to see institutional investors becoming more active in 2017 and 2018. Foreign investors are actively seeking long-term investments in Houston, and we are we are currently working with several global clients who are exploring significant acquisition opportunities in Houston.

Realty News Report: Perhaps the strongest sector is the shopping center market. Could you describe what’s going on with the retail market in Houston?

Mark Taylor: Retail is as strong as it has ever been. The overall market is basically full, and retailers who want to open new locations in Houston are having a very hard time finding space.   Overall, Houston retail continues to have strong demand, very low vacancy, and positive absorption.  In spite of these strong fundamentals, development remains conservative and restrained.  There are a few reasons for this – land prices have increased a good bit over the past two cycles and numerous potential retail sites were purchased for other uses. What evolved is a mismatch between what retail tenants could afford to pay based on expected sales within a new location compared to the higher rental rates required for new development due in part to higher land prices. As a result, demand has outpaced supply over the last three years and new supply has been very limited.  We should see this continuing for the next 2-3 years.

Realty News Report: Industrial real estate also seems to be very strong. What’s going on with industrial?

Mark Taylor: Houston’s industrial market is healthy. Population growth has driven an increasing need for warehouse and distribution space in Houston. In addition, petrochemicals and medical are stable users of industrial space. Retailers, commercial suppliers, and e-Commerce companies continue to add space for their distribution and warehouse requirements, and The Port of Houston and the Houston market’s transportation and logistics users have also increased demand for industrial distribution space as the economics of distributing goods evolve. At the same time, this demand has been partially offset by some contractions related to oil and gas manufacturing and other energy uses. Development has been at appropriate levels even though there are some submarkets in North Houston that have a diminished demand for space, and as a result, are weaker than others, while the east side and other areas are strong.

Realty News Report: Houston’s apartment market is bifurcated. The Class B & C market is very strong with occupancy around 95 percent. But the Class A market is soft with a great deal of construction underway. How long will it take the Class A market to rebalance? What happens with Class B & C?

Mark Taylor: Class A apartments inside the loop will have excess vacancy in 2016 but there will be few new deliveries after the first quarter 2017, so that vacancy will be absorbed over a few quarters as demand continues. Concessions will allow people to find short-term bargains in Class A, inside the loop product into 2017, but that will wane as occupancy increases mid-year 2017. Class B and C properties are well occupied, and there will be a continued demand for that product.

Realty News Report: Is there something that is being overlooked? A trend or development that is not being emphasized enough?

Mark Taylor: Organizations will start to be more creative in evaluating how best to utilize their real estate. Over the next three years, we will see companies take a fresh look at their business operations and culture, and they will challenge the norm to think about how they can use space to help them accomplish their business goals. We will see more creative ways for organizations to utilize office space for the purposes of retention, recruiting, culture enhancement, productivity and expense management.  The way retailers sell to their customers will continue to evolve, and this will have an ongoing impact on logistics, warehouse space, and bricks and mortar shopping experiences. I think we will continue to see the trend that started a few years ago with the convergence of diverse commercial real estate uses developed together in urban areas. Creative developments containing office, retail and multifamily and other uses developed together will create interesting experiences for everyone, and successful investments for owner-investors.

Realty News Report: Anything else you’d like to add?

Mark Taylor: This is a very interesting time to be involved in Houston real estate.

Nov. 4, 2016 Realty News Report Copyright 2016

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