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The Good, Bad and Ugly of Houston Real Estate: The Midyear Assessment by NAI Partners

HOUSTON – (By Michelle Leigh Smith) – Houston’s commercial real estate market presents some highs and some lows at midyear 2017. The retail and industrial sectors show strength while the office market has seen better days.

And the failure of West Texas Intermediate crude to rise above $60 a barrel puts a damper on hopes for another major growth spurt for the Houston economy any time soon.

The NAI Partners commercial real estate firm delivered insights on the midyear state of affairs at its press breakfast earlier this week.

Retail action has made for an interesting summer so far. “On a national scale, retail is seeing more play than office,” says Jason Gaines, Senior Vice President, Retail with NAI Partners.

“With Amazon’s acquisition of Whole Foods, with innovation in creating different opportunities for business, I see less fear of a shakeup from the naysayers about the death of brick and mortar and more strategic choices in location.”

There’s strength in fitness and restaurants. He’s been working with the GRA Restaurant Group in Stafford on optimal location definition.

“The biggest item has been the oversaturation of restaurant category businesses,” says Gaines. “We’ve seen quality real estate coming back to the market, as the sheer numbers of food options has exploded to the point where even great locations alone can’t make the ship rise. Plenty are doing fine, but certainly food has been the absorption darling since 2009, and it seems the food market is in need of self-correction.”

“I see Sears (by way of those outlet/appliance/hometown brand sears stores) having a soft goods crisis in their traditional mall stores, more than the stand alone stores,” says Gaines.

A bright spot and testimony to the fact that Americans will always love a bargain is the fact that the Sears outlets are doing well.

“Sears has more of a mall problem than a sales problem,” he says. “The new outlet at Cypresswood and I-45 in Spring is packed. People are gravitating to that value. I’m also not so sure that the Internet sales are driven by convenience as much as it is that people gravitate to value. Retailers like TJMaxx and Marshalls are still thriving. People go and sort through the racks because value is more important.

“I’m in more of the real time strip center business,” Gaines says. “We have not seen a lot of panic or concern. In Houston, Conn’s and Sears are not shutting doors.”

The strip centers are focused on retail services, medical services, food vs. traditional soft goods or consumer tangible products, so there hasn’t been nearly as much internet retail sales impact.

Dan Boyles

Houston’s office market has been affected by the oil decline more than other sectors in real estate, and will take a longer time to recover. Within that framework, Partner Dan Boyles notes the encouraging success 609 Main has had pre-leasing in light of the current market headwinds.

Managing Partner Jon Silberman, says modern tenants want an open concept, with fewer columns in the floor plates. “There is some space available in Houston Center, as well as in Pennzoil Place – those 30- to 40- year-old Class A properties. “Whoever goes in will have to spend a fair amount of capital. That architecture misses a lot of what today’s tenants want.”

“At the Houston Center complex, some of the buildings constructed in the 80s may have some difficulty competing for tenants who want more open floor plans and amenities like communal gathering areas with lots of light,” says Boyles, who manages the Office Tenant Group for NAI Partners. Other amenities that have become more sought-after by tenants include lounge areas, elevator cell boosters, tenant-only conference rooms and free Wi-Fi throughout common areas.

Jon Silberman

Both Silberman and Boyles are hopeful about what the labor market data suggests for job growth in Houston.

The recent forecast by the Energy Information Administration estimated oil (WTI) will average $51 in 2017 and $55 in 2018, while market experts say the industry needs $60 to $65 per barrel oil for sustained growth and success. According to NAI Partners’ latest quarterly report, Houston’s unemployment rate was 5.1% in May, signaling economic expansion in metro Houston for the eighth consecutive month, and the Baker Hughes U.S. Rig Count rose for the 23rd consecutive week, totaling 941 rigs.

The WTI oil price has been hovering around $46 a barrel recently.

There are deals being made in Houston’s East End, like MEI Rigging and Crating new lease of 227,000 SF of industrial warehouse space at 6501 Navigation where Clay Pritchett of NAI Partners represented the landlord, Quasar Navigation. Partner Travis Land reported NAI’s industrial leasing is very strong in northwest and the near northwest Houston inside the Beltway, with large distribution commanding build to suit deals. “The majority of players are REITs where Houston is one market of 30 or so in a global portfolio,” Land says.

There is currently 4.3 million SF under construction in the Houston industrial market, with only one-fourth of that space available for lease. Port-and-rail oriented developments in the Southeast submarket area a good indicator of Houston’s diversified economy. A testament to those developments is the recent 500,000 SF rail-served distribution facility for Vinmar International, a Houston-based petrochemical marketing and distribution company. The acquisition of 40 acres in the TGS Cedar Port Industrial Park near Baytown was prompted in part by the expanded Panama Canal. The expansion was complete in June 2016, allowing for larger ships and more cargo containers to pass through the canal, and those ships have been making their way to Houston regularly, encouraging additional industrial and distribution projects. IKEA’s 1 million SF distribution facility, developed by Clay Development, is now complete at Cedar Port.

Andrew Pappas, Senior VP of NAI Partners’ Investment Fund, says Fund 1 is almost fully deployed and Fund II will kick off later this year. Pappas has assembled a $30-40 million diversified portfolio of value-add office and industrial real estate in Houston, Austin, San Antonio and DFW and is responsible for building a platform that allows its investors to capitalize on NAI’s market knowledge in order to generate attractive, risk adjusted returns.

Pappas has been seeing some encouraging investment sales. A recent $1.2 billion deal substantiates the Bayou City’s buoyance despite stubborn oil prices. The Canada Pension Plan Investment Board is buying Houston-based Parkway, the owner of Greenway Plaza. Parkway’s portfolio includes Phoenix Tower in the Greenway Plaza submarket and CityWest Place in Westchase, in addition to Post Oak Central and San Felipe Plaza in the Galleria/West Loop area. Major tenants in Parkway’s buildings include Apache Corp., Invesco Management Group, Occidental Oil & Gas Corp., Statoil Gulf Services, and Transocean Offshore Deepwater Drilling.

July 20, 2017 Realty News Report Copyright 2017

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