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Transwestern: Houston’s Office Building Construction Boom Will Require a Little Digestion

Ben Stein, actor and political commentator, was the keynote speaker at Transwestern's TrendLines event in Houston Thursday night. Stein said the federal government should have bailed out Lehman Brothers in 2008. Photo by Ralph Bivins.

Ben Stein, actor and political commentator, was the keynote speaker at Transwestern’s TrendLines event in Houston Thursday night. Stein said the federal government should have bailed out Lehman Brothers in 2008 to head off a severe recession. Photo by Ralph Bivins.

HOUSTON – Houston is leading the nation in office building construction, with 17 million square feet being developed, and the market’s office vacancy rate will be rising accordingly as the space delivers in 2015, according to real estate researcher Sandy Paul of Delta Associates.

Paul told 600 in attendance at Transwestern’s TrendLines forecast event in Houston Thursday evening that Houston’s construction boom presents no significant problem for the office market.

Some 66 percent of the new office space under construction is preleased, Paul said.

Nevertheless, 17 million square feet is a sizable supply of new space.

Houston’s overall office vacancy rate, currently 9.9 percent, will rise to over 11 percent in two years, Paul said.

The keynote speaker for the TrendLines event was Ben Stein, an actor, economist, author and political commentator.

Stein touched on wide-ranging topics. Stein criticized federal officials for letting Lehman Brothers fail in 2008. That bank failure was a trigger for the Great Recession. The federal government should have orchestrated a bailout to preserve Lehman, Stein said.

Other Houston forecasts coming from Transwestern’s TrendLines:

The Industrial Market

For the period ahead, Transwestern expects continued strong performance from the Houston industrial market. The overall vacancy rate will likely edge up into the low-5 percent range over the next 12 months, as strong demand continues and more new supply is delivered. The development pipeline is expected to continue at this level given the market’s strong demand and low vacancy rate. The Houston industrial market is one of the healthiest in the U.S. and one of the best-positioned for future rent growth, given its low vacancy rate and strengthening demand drivers, particularly in the warehouse/distribution sector.

 Investment Sales

The Houston metro recorded $2.6 billion in office investment sales transactions through third quarter 2014. Although this sales volume is tracking below 2013, investor interest in Houston remains at high levels as lucrative market conditions, driven by one of the nation’s strongest local economies, continue to fuel a greater interest in Houston office assets. The Houston industrial market achieved a sales volume of $786 million through the third quarter of 2014, also behind the 2013 pace. The fundamentals of Houston’s industrial market suggest increasing sales in the period ahead as Houston is now considered a gateway city by the investor community, and many investment funds have allocated capital ready to invest.

 The Multifamily Market

Houston remains an attractive market for multifamily investment with its long-term job market success and the nation’s sixth-lowest median age of housing inventory. Houston has absorbed 14,760 units during the first three quarters of 2014, and rental rates have increased 7.1 percent during the past 12 months. With the enduring velocity of job creation, Houston will likely continue to experience success across all multifamily asset classes. Metro population growth is expected to remain steady in the years ahead, supporting strong demand for rental units and helping keep vacancy in check as new supply delivers.

The Retail Market

Houston’s retail market continues to gain momentum and further growth is anticipated in the period ahead, making investment – especially in grocery-anchored centers – very attractive. Retail and restaurant tenants are flocking to urban infill locations as metro job growth has caused a ramp up in residential construction. Mixed-use projects such as the River Oaks District development and Uptown Park redevelopment are further defining the live-work-play dynamic in the Houston market.

“TrendLines allows us to share our analysis of the driving forces behind Houston’s success to our key clients and relationships while comparing it to other top-tier markets and forecast trends that will impact the commercial real estate market in Houston,” said Kevin Roberts, Transwestern’s Southwest President.

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