BoyarMiller Real Estate eBook August 2013 State of the Industry

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BoyarMiller Real Estate eBook August 2013 State of the Industry

  1. 1. 2013 State of the Industry REAL ESTATE
  2. 2. Chairman’s Letter To Our Readers, At BoyarMiller, when we partner with clients, we work as a strategic part of their business team, and that means we have to be experienced in more than just law. We also need to understand their industry so that we are able to work collaboratively with them and add value to their business. That’s why we bring together the top insights into industry trends and best practices, and deliver it to you. Not only has this information been invaluable to us and to our clients, but we hope it will be beneficial to you as well. The information in this publication has been gathered from industry-leading clients we have partnered with and from our own energy team. If you find value in it and would like to hear more, join us for our next BoyarMiller Breakfast Forum. Sincerely, Chris Hanslik Firm Chairman 1
  3. 3. TABLE OF CONTENTS Introduction State of the Industry HOUSTON – A NATIONAL ANOMALY RESIDENTIAL MARKET RETAIL MARKET OFFICE MARKET INDUSTRIAL MARKET Relevant Topics ARTICLE FOR LANDLORDS ARTICLE FOR INVESTORS/BORROWERS Real Estate Practice Leaders 2
  4. 4. INTRODUCTION Your strategic partner should be an expert in your industry, not just law. At BoyarMiller, we’re committed to providing insightful, versatile expertise to organizations of all sizes as we guide them through complex business issues. We know that in order to understand how best to collaborate with you, we need to know your industry and your business. To this end, we gathered the best insights into industry trends and best practices from industry-leading clients we have partnered with and from our own real estate team. It’s our hope that the information we’ve accumulated through years of collaborative work in the real estate industry will be beneficial for you. Your strategic partner requires knowledge of trends, industry and law. 3
  5. 5. STATE OF THE INDUSTRY Houston – A National Anomaly JOB GROWTH 86,600 NEW JOBS As the nation’s economy continues its sluggish recovery, Houston continues to reap the benefits of being a center of industry and a gateway city for international trade. Houston added 86,600 jobs over the past year, leading the state. The city’s job growth represented 5% of the nation’s, which totaled 1.7 million new jobs nationwide. Houston’s 5.8% unemployment rate at the end of 2012 puts the city significantly ahead of the national average of 7.4%. In addition, Houston’s job growth rate rose to 4% over the year, outpacing the state and the nation. POPULATION GROWTH In the wake of the recession, population growth has coincided with job availability across the nation, and Houston has been no exception. Houston’s population has increased by roughly 125,000 per year over the last decade, and the city is expected to lead population growth for decades to come. 6.08M people in the Greater Houston area 4
  6. 6. TOP INDUSTRIES Energy – In January 2012, employment in oil and gas extraction grew at an 8.7% annual rate and peaked at 11.1% in May, but by November the rate settled in at 3.6%. While those rates remain above the 3.2 percent overall employment growth rate for the region, the slower pace suggests energy will not be as strong of an economic driver in 2013 as it was in 2012. Healthcare – Over the last five years, healthcare job growth has outpaced employment trends overall. Healthcare jobs accounted for one out of every six jobs created in 2012. Nearly 300,000 news jobs were created in the healthcare industry last year. Foreign Trade – More than $231.6 billion in foreign trade passed through the HoustonGalveston Customs District in the first 10 months of 2012, a 4.8% increase from the same period in 2011. 5 STATE OF THE INDUSTRY Houston – A National Anomaly, continued
  7. 7. WHAT SETS HOUSTON APART? Houston’s residential real estate market is uniquely flexible. Without strict zoning laws and bureaucratic control over land development, the city is allowed to grow according to human intuition, evolving naturally according to the needs of the population. Because of the flexible free market, Houston experienced neither the bubble nor the bust that the rest of the nation experienced in the mid-2000s. 2013 PREDICTIONS Will Holder, President, Trendmaker Homes • OPULATION WILL DOUBLE IN THE NEXT 25–30 YEARS P Projections by the Texas State Data Center put Houston at nearly double its current size in 2040 as a result of continued job growth and immigration. • UILDING WILL EXPAND TO MEET NEEDS B Home building is at two-thirds the level it needs to reach to meet the growing demand. With continued job and population growth and MLS listings lower than they were a decade ago, building will have to increase over the next several years. • EAL ESTATE PRICES WILL RISE R The industry was stripped of much of its production capacity during a recession that slowed building and forced the closing of plants nationwide. This, combined with the scarcity of high-quality lots as lot absorption continues to double lot delivery will mean higher prices in the near future. • ESIDENTIAL MARKET WILL BE STRONG R Rental costs are at a premium, demand will continue to grow and prices can only be expected to rise. All signs point toward a seller’s market and real opportunities for homebuilders in coming years. Will Holder has worked in the homebuilding and residential land development industry for more than 30 years in Houston and in several other U.S. metro markets. He joined Trendmaker homes in 1993, and has led the company to become the leader in luxury production homebuilding and MPC development. Will is the 2012 president of The Greater Houston Homebuilders Association and a guest expert on Real Estate forecasts and homebuilding trends for local and national news, radio, TV, magazines and newspapers, including Fox Business Report and USA Today. 6 STATE OF THE INDUSTRY Residential Market
  8. 8. WHAT SETS HOUSTON APART? The retail market is dependent on the job market, and Houston has a matchlessly vibrant job market. Markets with explosive population growth like Katy are seeing sales up by 20–30%. Even in longer-established areas in the east side of Houston, centers have low vacancy and stores report high sales. Houston is a stable market with stable housing and stable retail performance. 2013 PREDICTIONS Jay K. Sears, Managing Partner, NewQuest Properties • ONSUMER SPENDING WILL CONTINUE TO IMPROVE C For retail to do well, consumers have to feel confident that there is money in their pocket, and the consumer sentiment index is on an upward swing. Texas and Houston outpaced the nation in retail sales in 2012 and will continue to improve. • NTERNET SALES WILL NOT KILL BRICK-AND-MORTAR STORES I Although Internet sales continue to grow at about 15% per year, they still represent just over 5% of the overall retail sales. Good retailers see the Internet not as a growing threat, but as a chance to enhance their own online platforms and deliver a more meaningful experience to shoppers in the store and on the Web. • OUSTON WILL LEAD RENT GROWTH H In well-anchored centers, Houston leads the nation in rent growth and is projected to lead it over the next five years. Competition is high for Class A anchored space. Not a lot of new product is being built; significant numbers of big box centers will not be built any time soon. • ROCERS WILL BE INNOVATIVE G Well-established grocers like Kroger that continue to reinvent themselves are posting positive sales. In Houston, there is also a growing market for dynamic, niche grocers like Trader Joe’s and Fresh Market. Jay Sears is a 27-year veteran of the retail/commercial brokerage and development industry. As a co-founder and managing partner of NewQuest Properties, Jay focuses on new development opportunities, on the leasing activities of NewQuest’s development pipeline and on managing key client relationships with retailers and clients. Jay is a member of the International Council of Shopping Centers (ICSC), a member of the Urban Land Institute, a member of the Rice Design Alliance, and is also involved extensively with KIPP-Houston, serving on their Board of Trustees. 7 STATE OF THE INDUSTRY Retail Market
  9. 9. WHAT SETS HOUSTON APART? Obviously, Houston is a large city, with almost 200 million square feet of office space in the Greater Houston area. Growth in the office market is driven by a strong economy and job growth, two things Houston has delivered throughout the recession and as the nation recovers. Houston is perceived as a business-friendly climate, and that is a driver for the office real estate market. 2013 PREDICTIONS Robert S. Parsley, Co-Chairman/Principal, Colliers International • OWNTOWN’S ALLEN CENTER WILL BRING BIG BUSINESS D Because of relocations by current tenants, more than one million square feet of space are available in Allen Center. This is a huge opportunity for a large company or companies who want a Central Business District location in this city. • OUSTON WILL REMAIN A MAGNET FOR BUSINESS H The energy industry is a huge part of Houston’s economy and energy companies continue to be attracted to the Energy Corridor and Westchase, where they can take advantage of proximity to residential and recreational amenities in the area. Even as economic concerns continue, office leasing activity will be robust. • REATEST GROWTH WILL BE IN SUBURBAN SUBMARKETS G There will be continued growth in The Woodlands, Westchase and the Energy Corridor. The Woodlands in particular is exploding; when Colliers began a new building project in the area, it was 96% leased as they broke ground. • OMPANIES WILL LEAVE GREENSPOINT C Greenspoint saw negative absorption in 2012 and will likely see a mass exodus of companies looking to move because of concerns about security, perceptions and attracting the youngest generation of workers. Bob Parsley has been involved in and responsible for all phases of commercial real estate brokerage activity for the past 29 years. A native Houstonian, he combines real estate experience with an understanding of the legal issues involved in real estate transactions. Bob became Colliers International CoChairman in 2004. He has served as director of numerous organizations, including Strake Jesuit College Preparatory, Development Board of the University of Texas – Houston Health Science Center, Houston Area Urban League, Houston Office Leasing Brokers Association and Leadership Houston. 8 STATE OF THE INDUSTRY Office Market
  10. 10. WHAT SETS HOUSTON APART? Houston has been called the energy capital of the world and city of opportunity because industry is booming here. The Houston industrial real estate market totals about 834 million square feet, and there are two million square feet under construction – a supply that significantly trails demand. Houston’s industrial vacancy rate is 4.8% , in stark contrast to the nation’s average of just under 10%. 2013 PREDICTIONS Welcome W. Wilson, Jr., President CEO, GSL Welcome Group • EMAND FOR CRANE-READY BUILDINGS WILL GROW D A growing demand in the industrial market is for crane-ready buildings, and builders are already responding. Warehouse and distribution centers will need to be able to accommodate the large parts and equipment for the oil and gas industry as they restaff and restage the oil and gas activity around the world. • OUSTON WILL GROW EVERYWHERE – NOT JUST THE NORTHWEST CORNER H Job stability is giving everyone in the industrial sector the confidence for more spec products to meet the demand for warehousing. This is not restricted to the northwest and north submarkets, although those are the most active, with 603,000 square feet and 284,000 square feet of absorption in 2012, respectively. • ORT OF HOUSTON WILL SEE INCREASED ACTIVITY P The Panama Canal expansion is target to open in late 2014, which will mean a boost for the petrochemical companies located on the Gulf Coast, as the canal will be able to support bigger LNG tankers with more cargo. Houston will be making the long-term investment to deepen the Houston ship channel to handle this bigger product. • AP RATES WILL BE DRIVEN DOWN C Institutional buyers and investors are under allocated in industrial, meaning a push to get more space. There will be twice as many bidders for every Class A industrial project, and there is very little product scheduled to come on the market in 2013. As President CEO of GSL Welcome Group, Welcome oversees the development, leasing, construction and purchase of single tenant office, lab, manufacturing and industrial facilities in Texas. A real estate developer for more than 35 years, he has extensive experience in industrial development, residential subdividing, retail centers and office buildings. He also serves as principal of Kingham • Dalton • Wilson Ltd., a Design/Build affiliate of GSL Welcome and is Director of River Oaks Financial Group, Inc. 9 STATE OF THE INDUSTRY Industrial Market
  11. 11. RELEVANT TOPICS ARTICLE FOR LANDLORDS Negotiating Alignment, Not Agreement: A Guide to Effective Tenant By Bill Boyar A well-prepared negotiator can be manipulation proof, avoid the second-guessing and achieve valuable results. This article provides an approach that can better prepare you for negotiating with tenants and help produce valuable results. MOST NEGOTIATORS TRADITIONALLY FALL INTO ONE OF THREE CATEGORIES: • osition-Driven, negotiators driven by leverage and a desire to win. P • ffinity-Driven, your classic “win-win” people. A • riteria-Driven, negotiators who use objective criteria to assure fair market outcomes. C All three of these styles leave room for being manipulated and second-guessed. So, is there a different and more valuable approach? We say it’s Alignment-Driven negotiations. Alignment-driven negotiations have five cycles: Research, Align, Design, Confer and Close. RESEARCH Truly effective negotiators prepare, and this starts with extensive Research. In the context of negotiating with a tenant, you should understand everything you can about the tenant — its business, industry, financial condition, market share, growth prospects, senior management team, other offices in other locations, leasing history, etc. In addition to research about the tenant, your research should include in-depth analysis of your lease space, your building, market alternatives, competitive properties, trends, absorptions and vacancy, etc. 10
  12. 12. Article for Landlords, continued Internal alignment starts with a clear understanding of your organization’s senior purpose and the outcome that you are trying to achieve. External alignment involves taking into account the tenant’s issues, purposes and concerns. Your objective is to attempt to find the critical intersection of: 1) the facts, 2) your organization’s issues, purposes and concerns, and 3) the tenant’s issues, purposes and concerns. DESIGN In the Design phase, you are encouraged to work on the actual design of the negotiation conference. Where will the meeting be held? Who will be present? Who will be doing the talking on which subjects and issues? Who will control the agenda, timing and flow? Once these questions are answered, the next step is to practice. Yes, practice. Even the most skilled negotiators practice, and so should you. CONFER The Confer cycle involves the management of the actual conference. When conferring, the most effective negotiators clarify an essential purpose and reveal intersections for actions. They have genuine appreciation for various views and factors and research where they intersect to identify new insight and opportunity. CLOSE Once the negotiations session ends and an agreement is made, the real work begins — the deployment of time, money and talent. It is up to you to make sure that the agreement is executed (put in writing) and that resources are effectively deployed. Finally, you should debrief your organization on the negotiations, including all five cycles. LEARN MORE ABOUT EFFECTIVE NEGOTIATING IN THE FULL ARTICLE.   11 RELEVANT TOPICS ALIGN
  13. 13. ARTICLE FOR INVESTORS/BORROWERS By Timothy J. Heinrich Over the past seven to eight years, many real estate investors-borrowers have been enticed by lenders and mortgage brokers to eschew the more traditional forms of real estate financings in favor of “securitized” loans. Securitized loans are commercial real estate loans that are pooled with other similar loans and sold as securities. They are sometimes referred to as “commercial mortgage-backed securities.” Lenders and mortgage brokers often promote securitized loans to real estate investors as a cheaper and safer form of financing. Of course, many real estate investors and their attorneys long ago caught on to the fact that any cost-savings associated with lower interest rates are quickly eaten up by the lenders’ fees, the mortgage brokers’ fees, the lenders’ attorneys’ fees and due-diligence expenses. Despite the additional fees and costs associated with securitized loans, many real estate investors believe these higher fees and costs are worth the price of obtaining a nonrecourse loan. However, in our practice, we are beginning to see first-hand what appears to be a disturbing trend as lenders and their attorneys try to strip away the nonrecourse security blanket and leave the borrower — and most importantly its individual principal(s) — exposed to full recourse liability for the repayment of the loan. The best way to describe how lenders and their attorneys attempt to turn nonrecourse, securitized loans into full recourse loans is classic bait-and-switch marketing. The lender or mortgage broker convinces the borrower to enter into a securitized loan with promises of low rates, long terms and no personal liability — except, of course, for the “standard carve-outs.” The loan application simply describes these standard recourse carve-outs as fraud, misapplication of funds and “other customary items. “ The principal’s “limited recourse” obligations subsequently are expanded in the loan commitment, and the phrase “other customary items” mushrooms into a laundry list of items that, if triggered, will result in personal liability for the borrower’s principal. Although most of these triggering events are limited to “bad-boy” events (fraud, misapplication of funds, failure to pay taxes, etc.), sometimes hidden in this lengthy list is an unassuming reference that the borrower will continue to maintain its status as a single-purpose entity. How does this potentially result in personal liability for the borrower’s principal? Assume that the borrower owns a 75,000-square-foot shopping center anchored by a large discount retailer occupying 50,000 square feet. Suppose this large discount retailer files for bankruptcy, rejects the lease and the borrower is unable to find a replacement tenant. The borrower, lacking the cash flow to make the payments required under the loan, offers to deliver and convey the property to the lender. The lender, instead of accepting its 12 RELEVANT TOPICS Borrowers Beware
  14. 14. Article for Investors/Borrowers, continued In short, with maintaining solvency and adequate capital as single-purpose entity requirements, lenders may attempt to use these requirements as a sword and a shield when faced with the possibility of taking back an underperforming property. Borrowers and their counsel must be steadfast in their resolve to remove such single-purpose requirements or be prepared to walk away from these “cheap and safe” loans. LEARN MORE ABOUT WHAT TO LOOK FOR IN A COMMERCIAL LEASE IN THE FULL ARTICLE. 13 RELEVANT TOPICS collateral, counters by asserting that the borrower’s principal is personally liable under the loan. The lender reasons that if the borrower cannot pay its debts as they become due, the borrower must be insolvent. If so, the borrower violated its single-purpose status and triggered the principal’s personal liability.
  15. 15. REAL ESTATE PRACTICE LEADERS Bill Boyar Shareholder, Business Group Represents the various parties involved in the acquisition, disposition, capitalization and financing of national and international businesses. Served as lead counsel for numerous complex, multi-party acquisitions and project financings with significant experience in corporate finance, mergers and acquisitions, private equity and structured finance. Cassie B. Stinson Counsel, Business Group My practice focuses on commercial real estate and finance, public/private projects, business transactions and public law, with a particular emphasis on complex projects and multi-party transactions. I have significant experience with office, heavy industrial and manufacturing, multi-family, hospitality and restaurants, institutional facilities and governmental infrastructure. 14
  16. 16. My practice has been primarily devoted to commercial real estate law, transactional law, commercial transactions and general corporate representation. My real estate practice includes the financing, acquisition, development and disposition of commercial real estate, with an emphasis on hospitality and commercial office and retail. Timothy J. Heinrich Shareholder, Business Group My focus is on real estate law and commercial transactions. My real estate practice is devoted primarily to the acquisition, development, financing and disposition of all product types of commercial real estate. Lee A. Collins Shareholder, Litigation Group A significant focus of my practice relates to the representation of developers, owners and managers of commercial real estate in state and federal court, including tenant disputes, easement and restrictive covenant enforcement, condemnation, adverse possession, construction litigation, lien enforcement and creditor bankruptcy representation. 15 PRACTICE LEADERS Stephen L. Johnson Shareholder, Business Group
  17. 17. BoyarMiller 4265 San Felipe, Suite 1200 Houston, Texas 77027 TEL 713.850.7766 FAX 713.552.1758 boyarmiller.com

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