With energy prices in turmoil and layoffs mounting, there is obvious concern in in the Houston real estate industry. Realty News Report talked to Woody Mann, Jr., President, Vista Equities Group about the current situation. Founded in 1985, Houston-based Vista has been involved in the acquisition and/or development of 58 commercial properties with a market value of over $500 million including LaCenterra. Located on the western edge of Houston in Katy, LaCenterra at Cinco Ranch is one Houston’s premier shopping destinations with retailers including Trader Joes, White House/Black Market, Loft, Chico’s, Talbots, and Sephora, as well as 150,000 sq. ft. of Class A office space and the Grande at LaCenterra, a 207-unit multi-family development by Martin Fein Interests.
Realty News Report: Oil prices have plummeted. Layoffs loom. How is this affecting the retail segment in the city?
Mann: I think it’s too early to tell. In a down cycle like we’re in, retail sales tend to lag other indicators, so we probably won’t see any telltale effects of layoffs for six, eight or even 10 months. A lot of layoffs didn’t occur at corporate headquarters, but in the fields of west and east Texas and in the service companies. Now we may start to see layoffs in the C suites. That means shopping habits could change. But the Houston economy is not going to see a real adverse effect unless the energy sector layoffs continue and the recovery doesn’t come soon. It will be different than the downturn in the 1980s. Then, energy was 75% of Houston’s economy. We’re still energy-dependent, but today only about 37% of our economy is energy dependent.
Realty News Report: Are national retailers still interested in the city?
Mann: I think so. Most successful new retail centers are leasing up fairly well. Right now, we’re seeing a lot of interest from the sporting goods sector. Academy is expanding, Dick’s Sporting Goods is planning a couple of stores and both Orvis and Field & Stream are showing interest in having stores in Houston. Walmart and Costco are active in the market, and there continues to be a lot of new development in the grocery sector with grocers like HEB and Kroger, as well as Trader Joe’s and Sprouts Farmers Market.
Realty News Report: Are you seeing increased or decreased investment activity in Houston? Are REITs, institutions, etc., still interested in buying Houston retail properties?
Mann: Well, we’re certainly not seeing increased activity. However, anyone who has been in Houston for some time knows the energy business is a cyclical industry, much like the real estate industry. Oil will come back. The question is how soon. There is a certain degree of angst in the investment field because of uncertainty in energy sector and the negative headlines regarding layoffs and declining oil prices. We talk a lot to mortgage bankers and brokers and, based on their comments, it appears that Houston is persona non grata in the investment field right now. Frankly, based on our history, I think it’s an over-reaction, but if you’re a money manager, or a fund manager, I think you’re going to a harder look at making an investment in Houston commercial real estate than you would have a year ago.
Realty News Report: Is it difficult to obtain financing to build new retail product in Houston? In Texas? Has the energy situation made it more difficult?
Mann: I don’t think we’ve seen any negative impact on the retail financing market to date. But the most prudent lenders are going to require a certain amount of preleasing and most prudent developers will want a certain amount of preleasing as well. Right now, I don’t think there’s a lot of money available for spec development. The most affected markets for financing are multifamily and office projects and both debt and equity has been pulled back because of the energy situation. Retail is still strong, and if you have a viable project with preleasing from good tenants, I don’t think you’ll have any problem getting acceptable financing.
Realty News Report: One of your premier projects is LaCenterra at Cinco Ranch In Katy. How’s LaCenterra doing? Any major changes? Additional tenants?
Mann: LaCenterra is doing very well. The far west Houston market is strong, the demographics are exceptional, and sales at LaCenterra are very good. We’re certainly pleased with our results and we’re looking forward to starting phase four of LaCenterra soon. When it’s completed, LaCenterra will be a 450,000 sq. ft. mixed use development that has become the premier town center for the greater Katy area, which now has a population base larger than the city of Pittsburgh.
Realty News Report: Many residents of Cinco Ranch work in the Energy Corridor. Have residential developments such as Cinco Ranch been affected by the crash in the energy sector?
Mann: Overall, Houston home sales are about as good now as they were last year. So far Houston’s housing industry seems to be holding up really well. We don’t see any negative trends yet, but if we have several more significant rounds of layoffs in the coming months, that could negatively impact the housing market. We track home sales pretty closely and all those subdivisions on the west side of town are pretty much where they were at this time last year. Cinco Ranch is pretty much built out. I believe they’ve delivered all the lots they have left to deliver, and Cross Creek Ranch, Firethorne and Cinco Ranch Northwest all seem to be doing well and meeting their 2015 sales projections.
Realty News Report: What about Austin? How does that compare with Houston’s retail scene?
Mann: Austin is a different economy. We have several investments in Austin and they all are doing well. Austin’s office market is strong and so is retail, multifamily, and industrial. Austin is a pretty strong market and seems to be counter-cyclical to Houston.
Realty News Report: Any new trends in shopping center development?
Mann: The biggest trend we’re seeing in Houston is more emphasis on mixed used development – whether its retail and office or retail and residential – as opposed to purely retail. A lot of that is economics driven. Retail development in Houston over the last few years has lagged office and multifamily development. There was so much office and multifamily activity that land prices increased to the point where retail didn’t make economic sense. A developer can go vertical on multifamily and office projects, but there is not a lot of demand for three or four story retail, so retail development got priced out of the market in terms of land costs. With mixed use, a developer can pay more for land because the density can be increased. That’s been the biggest trend in retail development here.
Realty News Report: Any other comments?
Mann: Houston is a great place to be. It’s likely we may have zero job growth in 2015, but remember Houston added approximately 350,000 new jobs over the past several years and its population increased by 600,000-700,000 people. For the first time in our history, the greater Houston area has over three million people employed and our unemployment rate is under five percent. A lot of cities that would like those numbers! The only question is, when will be the recovery? Will it be this year or 2016 or 2017? No one knows for sure, but for those of us who have been here for a while, we’ve seen the cycles and we know a recovery is a certainty. Frankly, I believe a correction is good for the soul. We’ve really had an overheated economy in Houston the last few years, and a little slowdown gives everyone a chance to pause and catch their breath. A little dose of reality is not necessarily a bad thing. The bottom line is that Houston, and the surrounding areas, will always do well. This is merely a temporary glitch.
Realty News Report is a Texas-based publication edited by award-winning journalist Ralph Bivins.