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ULI Houston: How Realty Will Fare in Energy Downturn

HOUSTON – Falling oil prices are squeezing the real estate markets in Houston, although some sectors are performing well in spite of the downturn, according to panelists at the Urban Land Institute luncheon Tuesday.

The roughest spot: the Houston office market, particularly the Energy Corridor, where new buildings are being completed as energy companies trim their workforces.

The brightest spot: Single-family homes.

Houston is still on track to be the leading market in the nation for single-family home starts in 2015, even though the residential market will moderate in 2016, says Mollie Carmichael, principal of John Burns Real Estate Consulting, based in Southern California.

“Houston continues to lead the country in terms of the total permits issued. Prices will continue to rise steadily,” Carmichael said. “Houston has had great success, but it’s going to come down a little bit, closer to its average.”

The Houston office market has been upended by falling oil prices and its impossible to predict what will happen next. Last summer, oil prices peaked at $107 a barrel and this week – amid an American stock market crash and an economic meltdown in China – prices dipped below $39 a barrel.

West Houston’s Energy Corridor market, where many of the world’s major energy firms have offices, has been the hardest hit, Transwestern’s Sean Suffel told the ULI audience.

In 2012, Suffel says the Energy Corridor had a mere 3 percent Class A vacancy rate and big blocks of space were scarce. Today, vacancy in the Energy Corridor there are 20 blocks of space available that are over 50,000 square feet and the vacancy rate has skyrocketed.

A number of major office projects are now under construction in the Energy Corridor, at the same time the energy industry is under duress. Energy company bankruptcies are in the offing and merger and acquisition activity will produce even more vacant space, Suffel says.

“The best opportunities are for the tenant,” Suffel says. “Concessions are getting dramatic.”

Although free rent and other concessions are readily available, Suffel pointed out today’s downturn is not going to be as severe as the 1980s, when Houston was drowning in a sea of oversupply. Then, developers added over 70 million square feet of office space to the market in just a few years and Houston’s latest cycle produced on 24 million square feet.

Other speaker comments of note at the ULI luncheon and panel discussion titled: “The Effect of the Energy Markets on Suburban Real Estate.”

Jim Jenkins, vice president of master planned communities for Toll Brothers: “I am bullish on large-scale land holdings.” Jenkins believes 2016 and 2017 will be good years, but 2018 will be outstanding.

The Inner Loop of Houston offers great opportunities for home builders, Jenkins said. In 30 days, Toll Brothers will open in Somerset Green, an upscale Inner Loop community developed by Hines on Old Katy Road.

The market for active adult projects for the 55 and up mature crowd is going to be a strong sector. For future expansion Jenkins says he is not focused on the southeast part of Houston, but he sees opportunity from Pearland and westward, clockwise around to Kingwood. The southeast is on the fringe, away from the modern center of gravity for today’s metropolitan population, he says.

Ricardo Rivas: chief investment officer Allied Orion Group, a Houston multifamily organization. “We are clearly at the top of the cycle,” Rivas says of Houston’s apartment market. Occupancy remains strong and rents have been rising. Houston’s apartment market has not had declining rental rates since 2009. The construction boom is about to dry up and very few – if any – apartment projects will be coming online in 2017. Rivas believes multifamily development opportunities will remain in Sugar Land and Pearland, independent municipalities where there are barriers to entry. Rivas is getting strong rents in Baytown on the east side near the strong petrochemical plants, which are expanding. New amenities to look for: charging stations for residents with electric cars.

By Ralph Bivins, Editor, Realty News Report


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