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Houston Trends 2014 Slide Deck

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  • 1. 2014 Commercial Real Estate Market Update
  • 2. Featured Speaker If you would like a copy of tonight’s presentation, please visit www.colliers.com/Houston/TRENDS
  • 3. TRENDS 2014 K.C. Conway, MAI, CRE Chief Economist | USA Colliers International KC.Conway@Colliers.com www.colliers.com/kc.conway “Over the River and through the Woods …” What’s 2014 Outlook at Grandma’s House in Houston? Texas? U.S.? February 4, 2014
  • 4. The Entrepreneurs Vs. KRONIES Action Figures! Parts & Labor, The Bancor & “G-Force” on “K” Street http://www.youtube.com/watch?feature=player_embedded&v=ZDXuPQ9ML9E 5
  • 5. The A, B, C, D Questions KC won’t answer: “ A man has got to know his limits” - Clint Eastwood “A” – Value of Argentine Peso – or Turkish Lira at end of 2014 … but monitor currency! “C” – Why a major American city with the world’s busiest airport can’t handle 2” of snow “B” – What is real value of a Bitcoin? ($10 to $1,200 trade range in 2013) “D” – Why Houston wasn’t ranked #1 among Top Markets in 2014 Emerging Trends? 7
  • 6. The A, B, C, D Definitive KC Forecasts for 2014: “If you don’t know somethin’, what good are ya?” “A” – Port of Houston will remain most Irreplaceable - and America’s GDP port! “C” – Colliers will be an MVP relationship & advisor to you again in 2014! “B” – The BLS will incorrectly estimate job growth 12 times again in 2014! “D” – Debt Capital will never be this good. Don’t delay or “sit on the fence” in 2014! 8
  • 7. What did KC forecast for 2013? A 100% score after 80% in 2012 Jan ‘13 KC said: “Beware of Q1, but be prepared for a robust 2H2013.” Industrial: Ports will remain an imPORTant story! Port Labor Strife not done – Feb 6, 2013. Leasing activity remains robust Dearth of new constr & assets for sale. Office: ICEE office MSAs still hot. Recovery in housing will add to suburban absorption. ½ the 71.5msf of new office construction is Med Office MF: Overbuilding Risk is exaggerated Too much in just a few MSAs (DC) TX is OK: 1 unit : 9.2 jobs in 2012 Housing: The recovery is real! NAHB IMI > 200 markets. US Census Housing Occupancy (50 MSAs 90% to 96%) GDP: Pulls back to 1% or less in 1H2013, but Rebounds >2% in 2H2013 (No “Cash for Clunkers” or housing tax credit artificial stimulants). Employment: Focus on Labor Participation rate (63.6%), U-6 (14.4%), & expect another year of <200k/mo. job growth U-3 could drop below 7% just on workers losing Unempl. benefits. Interest Rates: Get ‘eer done in 2013! 2nd U.S. Debt downgrade >50% FED balance sheet @ 20% US GDP Monitor commodity prices. 9
  • 8. So let’s look at 2014 & start with GDP: GDP 2013 Trend: Q1: 1.1% / Q2: 2.5% / Q3: 4.1% / Q4 3.2% = 2.7% for 2013 GDP 2014 Forecast: Slows back <2% in 1H due to inventory build in 2H 2013 GDP EKG 1950-2013 1950 peak; 1958 low; 3.25% L-Term Trend What drove GDP in 2H2013? Build in Inventories in Q3; Consumer Spending in Q4 (Advance view) 2013 GDP: Q1: 1.1%; Q2: 2.5%; Q3: 4.1%; Q4: 3.2% (Adv Est) 10
  • 9. Employment … Monitor ADP, Challenger, NFIB, ISM Vs. BLS UNEMPLOYMENT – Is it really declining? 11
  • 10. BANKS & The FED … Are we done with Bank Failures? What will be different? BANK FAILURES – Will 2014 be different than 2013? What is different in 2014? FDIC gets a premium for deposits & failures not tied to housing. 12
  • 11. BANKS & The FED … Banks back to lending? Beware the Bank Stress Tests 35% vs. 21% decline in CRE value in Yr-End 2013 CCAR/Bank Stress tests. “March Madness” ahead for banks TX Banks Comerica & BBVA appear to be slowing CRE loan growth. Watch Citi. 13
  • 12. Banks & the FED: Volatility in 2014! A new FOMC! QE taper; Currency Crises; GDP; Jobs??? Structure of the FOMC The FED meets 8 times/yr. Yellen is now FED Chair! The Federal Open Market Committee (FOMC) consists of twelve members--the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis NE Vs. MW Dallas FED being a voting member of FOMC in 2014 is a significant! 14
  • 13. INTEREST RATES Let’s hope this correlation holds up for 2013 Jan 1 1982 14.59% Jan 1 2013 3.01% Expect Volatility & a 10-Yr range of 2%-4% 15
  • 14. STATE TAX RATES NE, DC region & CA worst, but TX not among 10-Best? Why isn’t TX among 10-Best & How does FL make it among 10-Best with such high auto ad valorem, hotel occupancy, etc. taxes? Need to add SC with high point of sale on R.E. 16
  • 15. CMBS … $340 Billion to ReFi Metrics Improve as 2nd Wave comes ashore 2014-17 CMBS ReFi Wave 2.0 Bigger than Refi Wave 1.0 / Cap Rate & Interest Rate Compression? #3 Watch List Loans #1 Delinquest Loans #2 #3 Source: TREPP #1 #2 17
  • 16. Housing … Monitor ADP, Challenger, NFIB, ISM Vs. BLS & NAHB HMI (Builder Sentiment Index Housing – Best year since 2007, but can it continue? (AP) — U.S. home construction ended 2013 with the best showing since the housing bubble burst. Builders broke ground last month at a seasonally annual rate of 999,000, the fastest in five years. For the year, builders started 923,000 homes and apartments, up 18.3 percent from 2012. It was the strongest since 2007, when 1.36 million homes were started. The avg. rate on a 30-year mtg fell to 4.41% - down from a peak of 4.6% in August. Each home built creates 3 jobs for a year and generates $90,000 in tax revenue, according to data from the homebuilders association. http://www.nahb.org/reference_list.aspx?sectionID=2223 18
  • 17. Housing … Multifamily NAHB HMI (Builder Sentiment Index) Not Overbdg MF Why? >8:1 ratio 19
  • 18. Housing … Multifamily Houston can absorb the new supply! Sales are strong! 20
  • 19. Manufacturing … ISM Strong (5%); Warehouse Absorption Strong… Houston? Manufacturing / Intermodal / IANA / Warehouse Absorption ISM Vs. GDP Industrial Absorp. – Port, Air Cargo, Intermodal More granular – backlog orders, etc.) Houston has lacked new supply to rank high! RailTime: 2013 a record for Intermodal 21
  • 20. FTZs – Foreign Trade Zones … Next annual report to Congress due out Aug 2014! MEXICO wage rate a big story? http://enforcement.trade.gov/ftzpage/index.html 22
  • 21. Ports & Panama Canal… West coast port strike threat June 2014! www.colliers.com/us/port-2H 23
  • 22. The 7 Class 1 Railroads… Mexico wage rate & KCS a big-deal to TX & mfg. story! The 7- Class I RRs (Note CN (red) & KCS (brown) “All that happens on the ports, doesn’t stay on the ports” – Rail, Intermodal! 24
  • 23. Ports & Industrial R.E … The 2014 influences heading into 1 st Post PMX Decade. Who will be able to refuel Duel-Fuel? SE (Jax) & Gulf ports have advantage Labor Strife: Chile now (fresh fruit and copper); Westcoast June 2014 P-Canal 50% cost overrun dispute And one other … NY faces new competition from Mid-Atl & Great Lakes ports, like Cleveland 25
  • 24. Close with ONEI & AFIRE TX MSAs dominate top-5 / Houston ranked #5 at Yr-End 2013 r YE 2014 Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 52 72 Metro Overall score Austin 84.186 Dallas-Fort Worth 84.161 Provo, Utah 82.503 San Jose 80.498 Houston 79.632 Oklahoma City 76.092 Honolulu 75.224 Denver 74.359 Ogden, Utah 74.31 Minneapolis-St. Paul 73.393 Boston 70.943 Grand Rapids, Mich. 68.914 Tampa-St. Petersburg 67.106 Salt Lake City 66.933 Indianapolis 65.769 Charleston, S.C. 65.051 Nashville 64.359 San Francisco-Oakland 64.012 Orlando 63.245 Seattle 63.22 Pittsburgh 62.75 Madison, Wis. 62.452 Des Moines, Iowa 61.735 Bakersfield, Calif. 59.037 Washington 59.011 San Antonio 49.581 El Paso, Texas 41.289 5-year job gr. 11.80% 6.00% 6.70% 3.40% 9.00% 3.60% 1.00% 2.20% 3.20% 2.30% 2.90% 6.80% 2.20% 3.20% 2.60% 2.40% 8.50% 0.90% 0.80% 0.10% 3.40% 1.80% 2.20% 5.70% 1.50% 4.00% 2.30% 1-year job gr. 3.80% 3.60% 4.30% 3.30% 3.30% 2.70% 1.50% 2.70% 4.00% 2.30% 2.50% 3.70% 4.40% 3.50% 1.50% 1.30% 3.70% 1.50% 2.60% 2.90% 2.00% 1.50% 1.90% 1.50% 1.10% 0.60% 1.00% 5-year Unempl. Weekly earnings 1-year HPA / Rate earnings growth Home $ Appr 5.20% $929 14.50% 9.00% 6.00% $943 17.90% 6.80% 4.90% $803 47.00% 10.70% 6.80% $1,456 16.60% 16.90% 6.10% $973 15.80% 6.00% 4.70% $786 22.30% 2.60% 3.80% $824 14.60% 6.80% 6.50% $1,008 14.90% 10.30% 4.90% $720 13.70% 6.20% 4.70% $942 13.50% 8.10% 6.20% $1,102 13.70% 3.40% 6.40% $765 2.70% 6.20% 7.00% $789 4.60% 8.40% 4.50% $915 6.60% 9.90% 6.90% $888 16.70% 2.20% 6.90% $778 34.30% 6.10% 6.80% $793 4.60% 4.10% 6.50% $1,142 5.90% 17.10% 6.60% $805 3.80% 10.60% 6.10% $1,170 12.20% 9.90% 7.20% $851 24.30% 3.40% 4.50% $1,002 22.20% 2.60% 4.70% $926 13.30% 2.10% 10.90% $899 2.00% 15.20% 5.40% $1,177 13.10% 4.80% 6.00% $751 -8.50% 2.70% 8.70% $568 12.40% 1.60% 26
  • 25. AFIRE – Close on a hot note! What’s Hot – Assoc. of Foreign Investors in R.E. AFIRE – U.S. tops globally & Ind’l R.E. tops (first time in a decade) Port cities move up in rankings! 27
  • 26. Thank You K.C. Conway, MAI, CRE Chief Economist | USA Colliers International KC.Conway@Colliers.com www.colliers.com/us/kcconway
  • 27. 29
  • 28. Commercial Real Estate Market Update February 4, 2014
  • 29. HOUSTON’S BRAG BOOK 2013-2014 Headlines • Houston, “The Best City In America” (BUSINESS INSIDER) • The Highest Demand for Engineering Jobs in 2013 (MONSTER.COM) • Best Cities for your Career in 2013 (PAYSCALE.COM) • Houston Makes Top Five Lists For U.S., Global Real Estate Investment (AFIRE) • Fastest Real GDP Growth Among Large MSA’S (THE BUREAU OF ECONOMIC ANALYSIS) • Top Cities for Global Trade (GLOBAL TRADE) • Largest Export Market in U.S. (U.S. DEPARTMENT OF COMMERCE, INTERNATIONAL TRADE ADMINISTRATION)
  • 30. Industry Forecast of U.S. Tight-Oil Production
  • 31. Organization for Economic Co-operation & Development OECD – 34 Developed Countries – Blue - 1.25 Billion People (18%) Non – OECD China India Africa Latin Am Russia 5.85 Billion People – 1.34 – 1.24 - 1.0 – 0.6 – 0.14
  • 32. Oil Consumption - 2010 19% U.S 48% 14% EU Other Developed 19% China, India, Undeveloped U.S China – 12 Barrels per Person per Year (300MM People) – 2 Barrels per Person (1,344MM People) If people in China use 3 Barrels per person we need to cut our consumption by 4 Barrels per person to stay even on demand. Alternative Energy and more efficient consumption required
  • 33. Projected Demand – Going UP Quadrillion Btu 600 Non OECD – 56% Increase Projected 500 400 OECD Non OECD 300 200 100 0 1990 2000 2010 2020 2030 2040
  • 34. Energy Sector Projected Employment • Competition for employees will be fierce. • Houston will be the largest beneficiary of this boom. 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 2013 2025 Source: IHS
  • 35. HOUSTON OFFICE – 179.8M SF HOUSTON OFFICE MARKET INDICATORS YE 2012 YE 2013 CITYWIDE NET ABSORPTION (SF) 4.2M 2.9M CITYWIDE AVERAGE VACANCY 14.5% 14.0% At the close of Q4, 10.7M SF of new office development was under CITYWIDE AVERAGE RENTAL RATE $24.25 $25.16 construction, more CLASS A RENTAL RATE CBD $37.02 $38.16 SUBURBAN $28.20 $30.18 CBD 9.8% 10.2% SUBURBAN 11.4% 10.8% CLASS A VACANCY than any other U.S. metro.
  • 36. HOUSTON OFFICE – 179.8M SF Houston Average Rent Houston Average Vacancy $28.00 16.0% $26.00 15.0% $24.00 14.0% $22.00 13.0% $20.00 12.0% $18.00 11.0% $16.00 10.0%
  • 37. HOUSTON OFFICE – 179.8M SF Average Price ($) Per SF Houston Average Cap Rate (Yield) United States Houston 250 200 150 100 50 0 Q4 '09 Q4 '10 Q4 '11 Q4 '12 Q4 '13 12% 11% 10% 9% 8% 7% 6% 5% 4% Q4 '09 Q4 '10 Sales by Total $ (mil) Rolling 12-mo. Total Quarterly Vol. 6,000 5,000 4,000 3,000 2,000 1,000 0 Q4 '09 Q4 '10 Q4 '11 Q4 '12 Q4 '13 United States Q4 '11 Q4 '12 Q4 '13
  • 38. HOUSTON INDUSTRIAL – 483.6M SF HOUSTON INDUSTRIAL MARKET INDICATORS YE 2012 CITYWIDE NET ABSORPTION (SF) YE 2013 5.0M 7.0M 8.0M SF of new inventory CITYWIDE AVERAGE VACANCY (%) CITYWIDE AVERAGE RENTAL RATE ($) 5.2% 5.2% $5.77 $5.90 delivered in 2013, 4.6M SF was spec NEW SUPPLY DELIVERED (SF) 4.0M 8.0M 4Q UNDER CONSTRUCTION (SF) 2.5M 4.4M construction!
  • 39. HOUSTON INDUSTRIAL – 483.6M SF Houston Average Rent Houston Average Vacancy $6.40 8.0% $6.20 7.0% $6.00 $5.80 6.0% 5.0% 4.0% $5.60 $5.40 3.0% 2.0% $5.20 1.0% $5.00 0.0%
  • 40. HOUSTON INDUSTRIAL – 483.6M SF Average Price ($) Per SF Houston Average Cap Rate (Yield) Houston United States 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% Q4 '09 $80 $70 $60 $50 $40 $30 $20 $10 $0 Q4 '09 Q4 '10 Q4 '11 Q4 '12 Q4 '13 Q4 '10 Sales by Total $ (mil) Rolling 12-mo. Total Quarterly Vol. $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 Q4 '09 Q4 '10 Q4 '11 Q4 '12 Q4 '13 United States Q4 '11 Q4 '12 Q4 '13
  • 41. HOUSTON RETAIL – 264.7M SF HOUSTON RETAIL MARKET INDICATORS YE 2012 CITYWIDE NET ABSORPTION (SF) CITYWIDE AVERAGE VACANCY (%) YE 2013 1.2M 3.0M Houston’s Strong Economy Helps Push Retail 7.3% 6.6% Vacancy Rate to CITYWIDE AVERAGE RENTAL RATE ($) Statistically Irrelevant NEW SUPPLY DELIVERED (SF) 1.1K 880K 4Q UNDER CONSTRUCTION (SF) 1.1M 947K Historic Low
  • 42. HOUSTON RETAIL – 264.7M SF
  • 43. HOUSTON RETAIL – 264.7M SF Average Price ($) Per SF Houston Average Cap Rate (Yield) United States Houston 200 150 100 50 0 Q4 '09 Q4 '10 Q4 '11 Q4 '12 Q4 '13 12% 11% 10% 9% 8% 7% 6% 5% 4% Q4 '09 Q4 '10 Q4 '11 Sales by Total $ (mil) Rolling 12-mo. Total 1,800 Quarterly Vol. 1,600 1,400 1,200 1,000 800 600 400 200 0 Q4 '09 Q4 '10 Q4 '11 Q4 '12 United States Q4 '13 Q4 '12 Q4 '13
  • 44. HOUSTON MULTI-FAMILY – 574.5K Units HOUSTON MULTI-FAMILY MARKET INDICATORS YE 2012 UNITS ABSORBED 14,664 YE 2013 16,516 The average monthly rent amount increased 6.0% in CITYWIDE AVERAGE VACANCY (%) 10.6% 9.5% 2013 and is expected to CITYWIDE AVERAGE RENTAL RATE ($) $806 $857 UNITS DELIVERED 6,818 14,455 4Q UNDER CONSTRUCTION 2,831 20,479 increase 6.0% in 2014.
  • 45. HOUSTON MULTI-FAMILY - 574.5K Units
  • 46. HOUSTON MULTI-FAMILY – 574.5K Units Average Price ($) Per Unit Houston 120,000 Average Cap Rate (Yield) United States 12% 11% 10% 9% 8% 7% 6% 5% 4% Q4 '09 100,000 80,000 60,000 40,000 20,000 0 Q4 '09 Q4 '10 Q4 '11 Q4 '12 Q4 '13 Houston Q4 '10 Sales by Total $ (mil) Rolling 12-mo. Total Quarterly Vol. 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Q4 '09 Q4 '10 Q4 '11 Q4 '12 Q4 '13 United States Q4 '11 Q4 '12 Q4 '13
  • 47. HOUSTON HOTEL – 75.8K Units HOUSTON HOTEL MARKET INDICATORS YE 2012 YE 2013 TOTAL UNITS 74,630 75,837 CITYWIDE AVERAGE VACANCY (%) 34.6% 30.2% CITYWIDE AVERAGE DAILY RATE ($) $94 $101 UNITS DELIVERED 427 553
  • 48. HOUSTON HOTEL – 75.8K Units
  • 49. HOUSTON HOTEL – 75.8K Units Average Price ($) Per Unit Houston $250,000 Average Cap Rate (Yield) United States $200,000 $150,000 $100,000 $50,000 $0 Q4 '10 Q4 '10 Q4 '11 Q4 '12 Q4 '13 12% 11% 10% 9% 8% 7% 6% 5% 4% Q4 '09 Houston Q4 '10 United States Q4 '11 Sales by Total $ (mil) Rolling 12-mo. Total Quarterly Vol. 1,000 900 800 700 600 500 400 300 200 100 0 Q4 '10 Q4 '10 Q4 '11 Q4 '12 Q4 '13 Q4 '12 Q4 '13
  • 50. 2014 CONSTRUCTION COMMENTS • Consultants continue to aggressively pursue hiring with firms reporting “best year ever”, again. • General Contractors are hustling to keep up with demand. Finding experienced personnel has magnified. • We are still seeing the subcontractor community struggling to keep up with bidding and construction workload. • Construction costs have shown moderate increases, in spite of notices of material volatility. • Manufacturers are still not keeping significant inventory on hand. Material lead times continue to drive schedules.
  • 51. Thank You Hope you have a great 2014