Opportunity in Energy Corridor and Texas

HOUSTON – Ralph Bivins of Realty News Report: The latest edition of THE RALPH BIVINS PROJECT podcast features an interview with Al Hartman of the Hartman family of non-traded REITs. Hartman focuses on commercial properties in Texas.

TO LISTEN to the PODCAST CLICK HERE

RALPH BIVINS :. We’re here today to talk about investments with some people who have been working in the commercial real estate field for quite a few decades. We have Al Hartman, CEO of the Hartman Advisors, LLC, family of non-traded REITs. With him is David Wheeler, chief investment officer of the same firm.

Al, you founded this company in the early ‘80s. How did you get started?

AL HARTMAN: Well, I moved here from Indiana when I was about 29. I was buying residential properties in that state. I had been in the home improvement business and raising money and improving homes. I was selling home improvement projects. I was making money, and with the money I took in, I was buying residential properties in Indiana. When I had 25, 26 or 27 residential units all together, I improved them and sold them for a good profit.

Around that time, I was looking for greener pastures and Houston stood out above all the other cities. It seemed that Houston was the golden buckle in the Sunbelt. In the early ‘80s, it was booming. I moved to Houston in 1981, I was 29 years old, I raised money locally to buy properties. I bought and closed on my first property in 1983, one located near the medical center. I ended up buying about 100 other properties to continue to raise capital.

What was really interesting was the timing. When I bought my first residential property, the economy had peaked – it was in November 1981. Oil was at $40 a barrel, which was really high at the time. A year later, it dropped to $8 a barrel. By ’83, ’84, ’85, property values were still diminishing, right through 1990. It was 10 years of diminishing economy, worse than the Great Depression. During those 10 years, I continued to buy properties and raise money. I bought about 20 properties in a row, all foreclosures. Primarily, I was buying retail and industrial. We are still buying retail and industrial today.

But at a certain point, by the 1990s, we were morphing more toward purchasing offices, where the market was showing a little more opportunity.

Even today, you can buy industrial property at 4, 4 1/2, even a 3 ½ cap rate. Retail is selling at 6, 6 ½ or 7 cap if you’re lucky. Industrial is priced out of the market. But with office buildings, you can buy at 10, 11, 12 cap rates. We have seen them as high as 15. These are rates you see only once in a decade. We haven’t seen rates like this in 10 years. You can get a 15% yield on an all-cash deal when the property gets fully stabilized. Those are the kinds of buys we are seeing in the marketplace, especially in Houston.

RALPH BIVINS: Looks like a good time to jump on office deals if you have some spare change.

AL HARTMAN: We really like Houston, and we really like the office market right now because of the upside.

RALPH BIVINS :. I noticed recently in the Energy Corridor that several buildings are selling. One was finished seven years ago and has never had a tenant; it’s been in mothballs. They are preparing to market it again. Even though the Energy Corridor market has been soft, it may be time to take a stronger look at it.

AL HARTMAN: Yeah, absolutely, Ralph, no question about it. We bought a bunch of properties in 2019 along the energy corridor and Park 10, before the price of oil fell and before the economy really dropped because of COVID. In any event, it was a difficult time, especially 2020. We hit bottom at the end of 2020. 2021 was a nice recovery. Now, we are continuing to recover. But going back to the energy corridor and Park 10, those half-dozen buildings we bought there have done exceedingly well – they’ve done so good that it’s hard to explain. For example, one of the properties we bought was 35 percent occupied at the time, now it’s 90 percent occupied. Another was 40 percent occupied, now it’s more than 90 percent.

We bought one building in the Energy Corridor that was 40 percent occupied, but it was so distressed. The air conditioning system was sitting on a truck outside, and it was being vented into the property from the outside. The air conditioning system was shot. After we bought the building, we put in a new air conditioning system and made other improvements. The building leased overnight. This is a very good market for us.

One of the reasons we are so successful is that we prepare spaces in advance. We don’t wait for a potential tenant to come to us and ask us to design or prepare a space. We set up spaces for firms that need 2,500 SF or less – for 1,500, 2,000 or 2,500 SF. They go in and look at it and sign a lease. It’s a very effective way to lease.

We love this market because the properties lease almost automatically.

TO LISTEN to the PODCAST CLICK HERE

Al Hartman’s biography

Allen R. Hartman is CEO, chairman of the Board of Directors and president of Hartman Advisors, LLC, and property manager, HIR Management.

In 1984, he formed Hartman Management and began sponsoring private real estate investment programs. During the next 24 years, he built Hartman Management into one of the leading commercial property management firms in Texas and sponsored 20 privately offered programs and one publicly offered program that invested in commercial real estate in Houston, San Antonio and Dallas.

In 1998, he merged the Hartman real estate programs and formed Hartman Commercial Properties REIT, now known as Whitestone REIT. He served as CEO and chairman of the board until October 2006.

In April 2008, Hartman merged four of the five Hartman programs to form Hartman Income REIT and contributed the assets and ongoing business operations of Hartman Management into Hartman Income REIT Management. He has acquired more than 90 commercial real estate properties, raised more than $300 million of investor equity and acquired more than $500 million in commercial real estate assets in various private and public real estate investment programs.

Currently, he oversees a staff of about 180 full and part time employees who manage 60 commercial properties encompassing more than 8.5 million square feet. Information Links: Allen Hartman. Hartman Income REIT.