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Is it Time to Buy Houston on the Dip? The Q&A with Andrew Segal, chairman of Boxer Property

Andrew Segal

Andrew Segal

Buy low and sell high is the mantra of many a real estate entrepreneur and no more than with Andrew Segal, chairman and CEO of Houston-based Boxer Property. Founded in 1992, privately owned Boxer has purchased more than 18 million square feet of real estate around the nation, realized over 100% return on properties sold and closed more than 100 deals over the past 24 years. A value investor who has turned office leasing on its ear in numerous cities, Boxer usually buys Class B buildings — so named because of their advanced age and lack of modern amenities such as parking — and rents them inexpensively to large and small tenants. Realty News Report talked to Andrew about the current situation and whether it presents opportunities to him and other firms.

Realty News Report: What’s the market like in Houston today?

Segal: Definitely we’re in somewhat of a holding pattern. The lifeblood of the real estate market – money – has been cut off while everyone waits to see what the impact of the plunge in energy prices will be. We’re hearing from banks that make loans in Houston they can’t get participation in them. When banks are calling borrowers and asking them if they know anyone who wants to share in a loan, it seems pretty bad.

Realty News Report: So money is not available for development projects?

Segal: Houston has been put on the sidelines in the commercial banking world. Lenders want to see how the situation shakes out. The market doesn’t feel it right away. There’s typically a 12-24 month delay because of the length of leases. Real estate is a different industry. Maybe if you owned a clothing store, you would know right away people are changing their buying habits because your sales would be off, but commercial real estate is different. There is a time delay.

Realty News Report: So how will we know if the real estate sector is having problems?

Segal: The first sign of trouble is a bump up in sublease space. We are definitely seeing that now. So far, it hasn’t been a big problem in the commercial real estate market, but we’re six months away from seeing the direct affect — especially on some of buildings that were started when oil was at $100 a barrel and are now getting completed. They may be in for a tough ride.

Realty News Report: Houston is more diversified than in the 1980s and 2007. Will that help?

Segal: Take a look at Dallas, which is doing really well. It would be hard to say what industry drives the city. It’s not only oil or banking or transportation. It’s really nothing, but yet everything. Dallas has a fully diversified economy.

Houston was like that 10 years ago and the economy kept expanding. But oil grew so much faster that it resulted in an overweight situation in Houston’s diversified economic portfolio of enterprises. I think we will need to adjust our percentages of diversification. We will continue to have growth in all the other sectors – technology, medical, banking – except oil.

Realty News Report: So is this a buying opportunity for firms like Boxer or opportunity funds from other areas?

Segal: It could be. Remember, it takes a long time for the situation to shake out. Commercial leases tend to be long and a building first has to go back to the lender, which then could sell it for a lesser amount. It takes a while. We’re not seeing buildings trickling back to lenders yet, but that could happen in the next six months.

Realty News Report: Any bright spots?

Segal: Yes, for firms in other industries. The labor pool here is now bigger and that’s benefitting                                                                                        other businesses. There is less competition from the energy industry. One of our new tenants is a reverse mortgage company that is new to Houston. They are hiring hundreds and hundreds of people because there is not competition from energy companies for people.

Realty News Report: Could the 1980s oil crisis in Houston – buildings selling for pennies on the dollar — repeat itself?

Segal: We’re going to see a bunch of office building completions in the Energy Corridor and new office towers downtown ready for occupancy that may have no opportunity for tenants. You could eventually see office buildings in the Energy Corridor sell like Enron’s headquarters did, which cost $250-300 a square foot to build but sold for around $100 a square foot. I wouldn’t be surprised to see that happen, but it won’t for another six or 12 months, IF it does.

Boxer Properties owns this a building on the South Loop in Houston.

Boxer Property owns this a building on the South Loop in Houston.

Realty News Report: Boxer’s business plan is to buy Class B buildings, renovate them, and offer more flexible leases, bigand small, to tenants. Has that worked?

Segal: Definitely. One example: We bought  the 723 Main building downtown – the Houston Bar building – for about $3.70 a square foot 20 years ago. Now it has increased in value 20-30 times. It’s a 100-year-old building that has retained its value.

Realty News Report: You introduced the Workstyle Executive Suites concept in early 2013, remodeling two office buildings in Houston and Clear Lake. What’s been the response?

Segal: It’s been overwhelming. Tenants quickly signed up for the space. To date, Boxer Workstyle has completed 430,000 square feet of executive office suites. Open design and flexible space is key. The reason is that there’s been a shift to collaborate spaces. Nowadays, people want to interact with others. Working at home, they                                                    become lonely. They go to Starbucks and pay 10 times more for a 25-cent cup of coffee. But what they are dong is paying $2.50 to be near someone else for a while. As office landlords, we need to think about creating opportunities for interaction with our tenants. Traditionally we didn’t think of that.

Realty News Report: What do you see for 2016?

Segal: I think we will see increased inflation. I dusted off a copy of Milton Friedman’s 1980s book, “Free to Choose.” He wrote a chapter about inflation that according to him was linked to the money supply. He won a Nobel Prize in economics for that theory. Nowadays, no one is really looking at the money supply. The U S. government is printing too much money. If diamond merchant DeBeers issued diamonds as fast as the U.S. issues dollars, no one would accept a diamond as an engagement ring!

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

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