BoyarMiller Breakfast Forum: The Houston Commercial Real Estate Markets - What's Ahead for 2010
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BoyarMiller Breakfast Forum: The Houston Commercial Real Estate Markets - What's Ahead for 2010 BoyarMiller Breakfast Forum: The Houston Commercial Real Estate Markets - What's Ahead for 2010 Presentation Transcript

  • www.boyarmiller.com Houston Commercial Real Estate Market: What’s Ahead for 2010 Breakfast Forum December 4, 2009
  • www.boyarmiller.com Homebuilding & Land Development Markets Joel Marshall – Trendmaker Homes Senior Vice President
  • 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 10/29/06 12/29/06 2/28/07 4/29/07 6/29/07 8/29/07 10/29/07 12/29/07 2/29/08 4/29/08 6/29/08 8/29/08 10/29/08 12/29/08 2/28/09 4/29/09 6/29/09 8/29/09 10/29/09 Source: Freddie Mac National 30 year Mortgage rate
  • 0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000 1,800,000 2,000,000 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 National Single Family Starts – NAHB Projections Source: NAHB 2006 2007 2008 2009 2010 SF Starts 1,465,400 1,046,000 622,000 501,000 600,000 % Change -15% -29% -41% -19% 20% Peak to 'Trough' -15% -39% -64% -71% -65%
  • National MSA Rank – Percentage Change September ‘09 Rank State City Job Growth 1 LA New Orleans -0.3% 2 VA Virginia Beach -0.6% 3 TX Austin -0.7% 4 TX San Antonio -1.1% 5 D.C. Washington D.C. -1.2% 6 OH Columbus -1.8% 7 NY Rochester -2.0% 8 TX Dallas/Ft. Worth -2.2% 9 NY New York -2.5% 10 OK Oklahoma City -2.5% 11 MA Boston -2.5% 12 MD Baltimore -2.8% 13 NC Raleigh -2.9% 14 PA Pittsburgh -2.9% 15 TX Houston -3.0% 16 NY Buffalo -3.0% 17 PA Philadelphia -3.2% 18 FL Miami -3.3% 19 VA Richmond -3.3% 20 AL Birmingham -3.7% -4.2% Top 20 United States Rank State City Job Growth 20 TN Nashville -4.2% 19 CA San Francisco -4.4% 18 UT Salt Lake City -4.4% 17 FL Tampa -4.5% 16 IL Chicago -4.6% 15 CA Sacramento -4.6% 14 CO Denver -4.7% 13 FL Orlando -4.7% 12 WA Seattle -4.8% 11 CA San Jose -5.2% 10 NC Charlotte -5.5% 9 CA Riverside -5.6% 8 OH Cleveland -5.8% 7 OR Portland -5.9% 6 GA Atlanta -5.9% 5 NV Las Vegas -6.2% 4 AZ Tucson -6.3% 3 FL Ft. Meyers -7.5% 2 MI Detroit -7.8% 1 AZ Phoenix -8.0% Bottom 20
  • 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% 11.0% 3Q98 3Q99 3Q00 3Q01 3Q02 3Q03 3Q04 3Q05 3Q06 3Q07 3Q08 3Q09 US Texas Houston Source: U. S. Bureau of Labor Statistics Texas Unemployment Rates – U.S. vs. TX vs. Houston
  • -120.0 -95.0 -70.0 -45.0 -20.0 5.0 30.0 55.0 80.0 105.0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2009(P) 2010(P) Houston Trailing 12 Month Jobs – September ‘09 Source: Texas Workforce Commission; University Of Houston Regional Forecast Center 12 Mos. Ending Sept.
  • Rank MSA Growth Rate 1 Dallas-Fort Worth-Arlington, TX 146,532 2.4% 2 Houston-Sugar Land-Baytown, TX 130,185 2.3% 3 Phoenix-Mesa-Scottsdale, AZ 115,978 2.8% 4 Los Angeles-Long Beach-Santa Ana, CA 88,196 0.7% 5 New York-Northern New Jersey-Long 84,227 0.4% 6 Chicago-Naperville-Joliet, IL-IN-WI 72,771 0.8% 7 Austin-Round Rock, TX 60,012 3.8% 8 San Franciso-Oakland-Fremont, CA 58,406 1.4% 9 Washington-Arlington-Alexandria, DC- 55,835 1.1% 10 Charlotte-Gastonia-Concord, NC-SC 55,368 3.4% 11 Denver-Aurora, CO /1 53,233 2.2% 12 Riverside-San Bernadino-Ontario, CA 49,298 1.2% 13 Seattle-Tacoma-Bellevue, WA 46,588 1.4% 14 San Antonio, TX 46,524 2.3% 15 Raleigh-Cary, NC 44,804 4.3% Source: Census Bureau TOP MSA’S RANKED BY POPULATION GROWTH IN 2008 Source: Census Bureau
  • 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 3Q00 2Q01 1Q02 4Q02 3Q03 2Q04 1Q05 4Q05 3Q06 2Q07 1Q08 4Q08 3Q09 Months Houston MLS Months of Supply Source: MLS
  • 1.6% 1.1% 0.7% 0.1% 2.4% -4% -2% 0% 2% 4% 6% Houston Fort Worth Dallas San Antonio Austin Houston Home Appreciation – Texas Markets 2Q09 Data Source: FHFA
  • 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000 3Q99 3Q00 3Q01 3Q02 3Q03 3Q04 3Q05 3Q06 3Q07 3Q08 3Q09 Annual Closings Annual Starts Houston Starts and Closings Comparison 14,472 Units of Inventory Reduction since 4Q06
  • 0 200 400 600 800 1,000 1,200 1,400 1,600 <$100k $100k- $125k $125k- $150k $150k- $175k $175k- $225k $225k- $300k $300k- $500k >$500k Houston Finished New Home Inv by Price 3Q08 to 3Q09
  • 0 10,000 20,000 30,000 40,000 50,000 60,000 3Q98 3Q99 3Q00 3Q01 3Q02 3Q03 3Q04 3Q05 3Q06 3Q07 3Q08 3Q09 Annual Starts Annual Lot Delivery Houston Lot Delivery vs. Absorption
  • 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 3Q89 3Q90 3Q91 3Q92 3Q93 3Q94 3Q95 3Q96 3Q97 3Q98 3Q99 3Q00 3Q01 3Q02 3Q03 3Q04 3Q05 3Q06 3Q07 3Q08 3Q09 Quarterly Lot Delivery Houston Quarterly Lot Delivery Rate
  • 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 C S SE NE FN NW WNW WSW SW Market Area Starts&VDL 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 VDLMoS Starts VDL VDL MoS Houston Vacant Developed Lot – Market Area Comparison
  • 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 0 to 5 6 to 24 25 to 49 50 to 74 75 to 99 100+ Annual Starts Starts&VDL 0.0 50.0 100.0 150.0 200.0 250.0 300.0 350.0 400.0 VDLMoS Ann Starts VDL VDL MoS Houston VDL Supply by Annual Starts Rate Subs with 25+ Annual Starts Total: 9,367 Annual Starts Total: 12,009 VDL @ 15.4 MoS
  • 0% 5% 10% 15% 20% 25% 3Q05 3Q06 3Q07 3Q08 3Q09 MPC Share of New Home Closings Houston Master Planned Community – Market Share
  • 0.0 50.0 100.0 150.0 200.0 250.0 300.0 350.0 400.0 Atlanta Sarasota SouthFlorida RioGrandeValley Chicago Naples NorthernColorado StGeorge Reno,NV Orlando Jacksonville Albuquerque/SantaFe Minneapolis Phoenix Triad Boise Denver Tampa LasVegas Charlotte ColoradoSpgs SaltLakeCity CentCal Raleigh-Durham Tucson SanDiego Indianapolis Sacramento Dallas/FtWorth InlandEmpire Nashville NoVa-C NorthernVirginia Houston SanFrancisco Austin SanAntonio SoCalCoast MD-C Maryland National Comparison Vacant Developed Lot Supply Houston
  • Still Obstacles Remain • Low Consumer Confidence • No Sign of Job Growth • Financial Failures..Regional & Smaller Banks • Question of Fundamental Consumer Change • Commercial Real Estate Loans • Appraisals!
  • www.boyarmiller.com Industrial Market Welcome Wilson, Jr. – GSL Welcome, LLC President and CEO
  • 2010 Industrial Forecast2010 Industrial Forecast Welcome Wilson, Jr.Welcome Wilson, Jr.
  • Whispering words of Whispering words of ““recoveryrecovery””......
  • Houston Industrial Market Totals:Houston Industrial Market Totals: ••482 million SF482 million SF ••3.27 million SF under construction3.27 million SF under construction
  • Houston Quoted Rental RatesHouston Quoted Rental Rates
  • Average Quoted Rental Rates Average Quoted Rental Rates ‐‐ Houston vs. USHouston vs. US
  • ••Available amount of Available amount of  sublease space in the sublease space in the  Houston market is Houston market is  1,046,000, down from 1,046,000, down from  1.2 million SF during the 1.2 million SF during the  22ndnd quarterquarter ••This only represents 3% This only represents 3%  of total industrial space of total industrial space  available for leaseavailable for lease
  • Location!Location! Location!Location! Location!Location! Financing!Financing! Financing!Financing! Financing!Financing!
  • ••HCMBS issuance in 2007 was $230 billionHCMBS issuance in 2007 was $230 billion ••In 2008 it dropped to $12 billionIn 2008 it dropped to $12 billion ••In 2009 it is at zeroIn 2009 it is at zero
  • ••Evaporation of financing has caused a Evaporation of financing has caused a  decrease in transactions and valuesdecrease in transactions and values ••Values have been difficult to determine Values have been difficult to determine  due to lack of transaction volumedue to lack of transaction volume
  • Over $500 billion of conduit debt is set to Over $500 billion of conduit debt is set to  expire in 2010, that number increases expire in 2010, that number increases  each year through 2012each year through 2012
  • Houston Industrial MarketHouston Industrial Market’’s 3 Major s 3 Major  Drivers:Drivers: ••The National EconomyThe National Economy ••Trade with Foreign CountriesTrade with Foreign Countries ••The Energy SectorThe Energy Sector
  • Domestic Rig Count Domestic Rig Count ‐‐ November 25, 2009November 25, 2009
  • Worldwide Oil DemandWorldwide Oil Demand
  • The Texas population will add 13 million The Texas population will add 13 million  people by the year 2030.people by the year 2030.
  • If Texas were itIf Texas were it’’s own country...s own country...
  • If Texas were itIf Texas were it’’s own country we would be s own country we would be  1212thth in the world among countries based upon in the world among countries based upon  GDP.GDP.
  • 33rdrd Quarter 2009Quarter 2009 HoustonHouston Dallas/Ft. WorthDallas/Ft. Worth Total Industrial SF:Total Industrial SF: 482,440,258482,440,258 746,888,878746,888,878 % Vacant:% Vacant: 6.9%6.9% 12.1%12.1% Vacant SF:Vacant SF: 33,247,21433,247,214 90,140,53490,140,534 Houston:Houston: Dallas/Dallas/ Ft. Worth:Ft. Worth:
  • www.boyarmiller.com Office Market Rudy Hubbard – Transwestern Managing Director, Investment Services Group
  • BoyarMiller December 4, 2009
  • BoyarMiller December 4, 2009 What happened?  Banks and other high-powered Wall Street firms made a lot of bad loans for houses, and commercial real estate.  They also made a lot of bad loans for businesses, credit cards, and M&A.  They lost more money than their equity.  The losses are so big that the government can’t allow banks to take them all at once.
  • BoyarMiller December 4, 2009  They can’t auction the bad assets because it would reveal the true extent of the losses.  So they have “injected capital” allowing the banks to amortize their losses over years. What happened?
  • BoyarMiller December 4, 2009 0% 5% 10% 15% 20% 25% 30% 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 3Q 09 Where is the Houston office market now? Houston’s vacancy rate, at 13.2% (12.1% for direct space), is below the national average of 14% and has held up better than some of the harder-hit markets, like Phoenix, Dallas and Atlanta. Source: CoStar, Delta Associates; October 2009. Office Vacancy Rate Houston Metro Area 1983 through 3rd Quarter 2009
  • BoyarMiller December 4, 2009 Where is the Houston office market now? Average Office Rents Houston Metro Area 1982 through 3rd Quarter 2009 Source: Delta Associates’ analysis of CoStar data; October 2009.
  • BoyarMiller December 4, 2009 -4 -2 0 2 4 6 8 10 12 14 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09* NetAbsorption(MillionsofSF) -100 -50 0 50 100 150 200 250 300 350 ChangeinEmployment(000's) Source: BLS, Delta Associates; October 2009. * Absorption through 3rd quarter; 12-month job growth ending September 2009. Where is the Houston office market now? Office Absorption and Employment Houston Metro Area 1980 through 3rd Quarter 2009
  • BoyarMiller December 4, 2009 Where is the Houston office market now? Houston Job Growth Since 1980 Houston’s average job growth since 1980 has been approximately 36,000 per year.
  • BoyarMiller December 4, 2009 Where is the Houston office market now? Houston’s average net absorption since 1980 has been approximately 3.5 million square feet per year. Houston Historical Absorption Since 1980
  • BoyarMiller December 4, 2009 Where is the Houston office market now? $0 $1 $1 $2 $2 $3 2003 2004 2005 2006 2007 2008 2009* Billionsof$  Office investment sales (for which pricing information could be obtained) in metro Houston total $109 million through 3rd quarter 2009.  By comparison, sales totaled $981 million in the first nine months of 2008.  Weak market fundamentals and lack of liquidity in the credit markets have suppressed sales activity in all metro markets. Houston Investment Sales Volume 2003 – 3rd Quarter 2009
  • BoyarMiller December 4, 2009 What does this mean for Houston’s future?  $1.4 trillion in loans maturing in the next three years  This is the equivalent of . . . 140 billion $10 million deals  1 trillion seconds is over 30,000 years
  • BoyarMiller December 4, 2009 What does this mean for Houston’s future?  Prices fall as cap rates revert to 2002 levels  Occupancy falls as job layoffs continue  Rents fall as owners covet tenants  New construction continues to add new supply  Foreclosures increase as refinancing is precluded A Timeline for CRE Recovery 2009
  • BoyarMiller December 4, 2009 A Timeline for CRE Recovery 2010  Prices continue to fall as price discovery continues  Occupancy falls as firms downsize staff  Layoffs end, but downsizing continues for cost savings  Rents fall to compete for smaller tenant base  New projects started in 2007-08 are completed  No new construction projects undertaken What does this mean for Houston’s future?
  • BoyarMiller December 4, 2009 A Timeline for CRE Recovery 2011  Slow job growth begins to soak up space  No new supply delivered to the market  Rent levels stabilize at lower rates  2006 vintage loans fail to refinance  Foreclosure rates decline as credit market heals  Class A space starts to fill at expense of lesser properties What does this mean for Houston’s future?
  • BoyarMiller December 4, 2009 A Timeline for CRE Recovery 2012  More rapid job growth increases absorption rate  No new supply delivered to the market  Rents start to rise as space starts to fill  More foreclosures from properties bought 1H07  Property values start to increase, anticipating positive absorption and very limited new supply What does this mean for Houston’s future?
  • BoyarMiller December 4, 2009 A Timeline for CRE Recovery 2013  More rapid job growth soaks up more space  Occupancy rate increases significantly  No new buildings delivered to the market  Prices continue to increase due to rising fundamentals and falling cap rates What does this mean for Houston’s future?
  • BoyarMiller December 4, 2009 www.transwestern.net The performance advantage in real estate
  • www.boyarmiller.com Retail Market Lance Gilliam – Moody Rambin Interests Managing Director
  • • consumer income to fuel and generate retail sales • retail sales to pay rent • rent to fund debt service or rent to be capitalized to create value for a sale • consumers, retailers and capital markets have to have confidence in that income
  •  Fitch Ratings reported that retail sales from Black Friday weekend were, at best, marginal.  The National Retail Federation reported that more people shopped but spent less money.  “Mounting job losses, declines in wages & salaries and falling home prices prompted consumers to cut discretionary spending.“ Source: Wells Fargo Securities’ Economics Group  Reports from the recent Urban Land Institute Fall Meeting in San Francisco were that “not one expert was willing to predict what things will look like in 3 years other than they think it will be better.” And, further, that a “…recovery will be slow. Unemployment will not drop back to more normal levels until 2014.”  Robert Bach, Grubb & Ellis’ Senior Vice President & Chief Economist, included some hope in his recent Good Friday e-mail, “The recession is over, but 2010 is not going to feel like a classic recovery. There are too many headwinds, notably lagging job creation, lingering weakness in consumer spending and tight lending conditions.”
  •  Drew Kanaly with Kanaly Trust shared the following with your peers attending Boyar Miller’s breakfast last September:”Consumer spending has a long way to fall. Household balance sheet repair (more savings paying down debt) (is) likely to drive economic fundamentals over (the) next several years.”  Dr. Barton Smith included the following in the University of Houston’s Institute for Regional Forecasting Houston Economic Symposium on November 5, 2009, “The Worst is Behind Us -- The Wait Lies Ahead.” With that framing statement, he also noted and forecast: “job growth will begin in 2010 but not fast enough to keep the year’s average from falling. Nonetheless, most sectors will show year over year job growth by fall.” “consumers continue to struggle, bargain shop only” “retail sales would fall by 2.9% in 2009 and increase by a nominal 0.63% in 2010.”  From Wednesday’s Houston Chronicle, “Retailing analysts at Thomson Reuters expect stores to post a 2.3 percent sales increase for November, in contrast to a 7.8 percent decline a year ago.”
  •  “…the retail landscape will see material changes as retailers and property owners use the current environment to right size their portfolios and focus on repositioning underperforming locations. This process is healthy in the long run and will form a solid base for retail expansion as the economy rebounds … (We) work with our clients on both sides of the equation to take actions that will stabilize one another’s real estate through and beyond those challenging times.”  What that means is; whatever deal you thought you had with the tenant, you don’t or at least the tenant doesn’t think you do.  Requests for rent reduction and lease modifications are based on a company-wide initiative to “pay less.” Today, retailers are no longer focused on growth, they are focused on profit.  Good for the retailers’ stockholders. Bad for landlords.
  •  Even if the capital markets would fund it, we still shouldn’t build it. We need to take a step back.  Any new construction and tenancies would likely cannibalize existing retail and restaurant sales and, as a result, further weaken existing tenants’ ability to meet their current lease obligations.  Further, the downward pressure on rent extends beyond existing leases and is very evident in conversations about new stores --- few of which are being constructed.  The direction to most dealmakers is “pay less” Those numbers don’t work for new construction.  When that equilibrium returns, I do not know.
  •  But … retail is a competitive industry. The strong survive. The weak do not. Successful retailers and restaurateurs who are well capitalized will take advantage of their competitors’ weaknesses.  Many retailers have remarkable liquidity. Fitch Ratings noted in a special report: The Retail Register released in September 2009 that “...liquidity is strong for the dis- counters as a result of solid cash flow generation. Lower capital expenditures are expected to help generate addi- tional cash of $1 billion each for Walmart and Target.“  Limited new construction:  retailers’, especially grocers, entries into urban markets where elevated land prices have recently posed a barrier to entry.  retailers’ relocations to improve their location within a trade area or update the store to a current prototype.  smaller owner-operated retailers and restaurants and other service users.
  •  Look beyond reports of reports that reflect vacancy rates for “retail” or “shopping centers,” in general. They overstate the problem.  Vacancies in well-located, well-designed and responsibly owned and operated will be filled. Their will be pain but the pain will pass.  There are buildings that have significant vacancies that are “shopping centers” in name only. They no longer are or, in some cases, never were viable retail shopping environments. They are “something else.”  “Something elses” represent opportunity. These projects are prime candidates for “adaptive re-use.”
  • UNCERTAINTY KILLS DEALS. There is a W I D E gap between UNTIL THOSE TWO PHILOSOPHIES RECONCILE, COMPLETING DEALS WILL BE DIFFICULT. what buyers and tenants are willing to pay for properties and what sellers and landlords are willing to take for them
  • Questions & Answers