O’Connor & Associates
Land Forecast Luncheon
    October 22, 2008
Services Offered
Situs provides a wide range of commercial real estate
services, including the following brokerage service...
Desired Outcome of Today’s Discussion



• Review the dynamics of activity in Houston from
 the 1980s through today

• Dis...
Flight to the Suburbs (1946 – 1980)
The suburban transformation began in 1946 when the
GIs returned home from World War II...
Houston Population
                      Since 1950, Houston’s* population has increased an
                      average ...
A Tale of Two Cities (1980 – 1990)
The 1980s offered Houston the best and worst of
times – a boom and a bust

            ...
Housing Starts
                          Relatively speaking, there was little new residential land
                      ...
Distressed Land Sales (1990 - 1995)
Distressed asset sales by RTC, FDIC, etc. were the
catalyst for much of the activity d...
Distressed Land Sales (1990 - 1995)
[continued]
The sheer volume of land sold during this period had
an effect in subseque...
Houston MLS Residential Housing
                 Activity
                As a result of the rising costs related to land,...
The Inner City’s Comeback (1995 – 2007)

        Residential                  Commercial

• Many residents – old and    • ...
Still Moving to the Suburbs (1995 – 2007)

         Residential                  Commercial

• Affordability enables      ...
Surging Commercial Land Prices (2000 –
2007)
Commercial land prices were driven up over the past
several years

• Competit...
Cost of Living Index for US Metro Areas
 (Q2 2008)
Houston’s overall after-taxes cost of living is 11%
below the national ...
Houston MSA Residential Population
                     Growth (1996–2006)
                     Houston has experienced st...
Houston MSA Employment Growth
                     (1996–2006)
                     Houston’s residential growth correlate...
How Long Will This Last? (2008 – ?)
We expect some commercial real estate trends to
continue for an unknown period of time...
Reasons for Optimism




                       18
Job Growth by State
Over the past year, Texas has led the nation in highest
job growth among states
               Texas
 ...
Job Growth by MSA & Best Cities to Buy
 a Home (2007)
Over the past year, Houston was among 4 Texas cities
to rank in the ...
Houston MSA Projected Residential
                     Population Growth (2006–2015)
                     Growth is expect...
Diversification

            • Since 1981, the percentage of local economy tied
 Energy       to energy has dropped from 8...
Houston’s Glass is Half Full


    Key Employment Centers                           Affordability
                        ...
Thank You




 Trusted InSight into Global Real Estate
                      4665 Southwest Freeway
Maury Bronstein       ...
Appendix




           25
Residential Construction Permits for Top
                          10 US Metro Areas (2006)
                         In 20...
Median Home Prices for Top 10 US Metro
                          Areas ($1,000)
                         Median home price...
Cost of Living Index for Top US Metro
                         Areas (2005)
                         Low home prices are a...
MLS – Number of Listings & Months
                          Inventory
                         Housing inventory was at it...
Energy Industry
While Houston’s dependence on energy has decreased
since the 1980s, the city’s prospects are still closely...
Texas Medical Center
The Texas Medical Center is a hub of activity
 5.5 million   Approximate patient visits per year
  10...
Port of Houston
The Port of Houston is ranked tenth in the world in
total tonnage, and is growing at a strong pace

• Amon...
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Situs - O\'Connor Land Forecast (Oct 2008)

  1. 1. O’Connor & Associates Land Forecast Luncheon October 22, 2008
  2. 2. Services Offered Situs provides a wide range of commercial real estate services, including the following brokerage services • Represent individuals, institutions, and public companies buying, selling, leasing and repositioning commercial properties – Land Brokerage – Investment Sales – Project Leasing Rated as a Special and Primary Rated as a Special and Primary – Tenant Representation Servicer by Servicer by – Asset Repositioning / Dispositions – Entitlement & Development Approved by Approved by – Sealed Bid Sales – Note Sales – Highest & Best Use Analysis – Asset Management 2
  3. 3. Desired Outcome of Today’s Discussion • Review the dynamics of activity in Houston from the 1980s through today • Discuss role of land and land development in Houston’s future Note: This presentation has been modified slightly from the version presented at the O’Connor luncheon to include new text slides that provide additional color on the charts 3
  4. 4. Flight to the Suburbs (1946 – 1980) The suburban transformation began in 1946 when the GIs returned home from World War II • Prior to this time, people lived, worked and played in the inner city • First people, then retail, then jobs moved out of the city and into new subdivisions, malls, and office parks in suburban areas • As families moved to the suburbs, they left behind out-of- fashion real estate, a poorer residential base, and rising crime • Once-thriving central-city retail districts were decimated by the regional suburban malls • By the mid-1970s, Houston newcomers generally had little alternative but to locate in the suburbs for desirable neighborhoods and quality public schools 4
  5. 5. Houston Population Since 1950, Houston’s* population has increased an average of 33% per decade, resulting in explosive growth 2% growth in 1980s 4 2,200 4 2,000 Population (1,000) 1,800 4 5 1,600 1,400 Rank among 6 1,200 largest US 7 1,000 cities 800 14 600 21 400 26 68 45 200 85 0 00 10 20 30 40 50 60 70 80 90 00 e 06 19 19 19 19 19 19 19 19 19 19 20 20 * Figures represent the City of Houston and not the MSA Source: U.S. Census Bureau (2007) 5
  6. 6. A Tale of Two Cities (1980 – 1990) The 1980s offered Houston the best and worst of times – a boom and a bust • Early-1980s saw a significant level of suburban residential development Boom • Suburban retail and office development followed • A major catalyst was unrealistic optimism that the oil boom would continue – oil bust began in 1982 • 1985 was the beginning of the S&L crisis that led to creation of FADA & RTC Bust • Real estate industry was further exacerbated by the Tax Reform Act of 1986 and national recession in the early-1990s 6
  7. 7. Housing Starts Relatively speaking, there was little new residential land development in the early-to-mid 1990s Peak reflected artificial 60 demand from Number of Units (1,000) subprime lending Steep decline in 50 housing starts began in 1984 40 30 Steepest drop 20 since 1985 10 Higher levels than 1980s or 1990s 0 83 85 87 89 91 93 95 97 99 01 03 05 07 19 19 19 19 19 19 19 19 19 20 20 20 20 Single Family Units Multifamily Units Source: Texas RECenter (2008) 7
  8. 8. Distressed Land Sales (1990 - 1995) Distressed asset sales by RTC, FDIC, etc. were the catalyst for much of the activity during this time frame • RTC, created in 1989, began mass liquidation of assets taken back from failed thrifts through sealed bid sales and auctions • Many properties, including commercial and residential land, were acquired at distressed prices that were significantly below the cost of developing new raw land – Finished lots – Partially developed subdivisions – Commercial reserves • Commercially, there was not a lot of significant construction as the market was absorbing existing office and retail • Many out of state buyers that were new to Houston 8
  9. 9. Distressed Land Sales (1990 - 1995) [continued] The sheer volume of land sold during this period had an effect in subsequent years • Many raw tracts of land acquired during the early-1990s were later developed in the late-1990s and early-2000s • As pressure increased on homebuilders to produce more lots in the early 2000s, residential builders entered land development business • From 2001-2006, homebuilders drove up the price for residential land 9
  10. 10. Houston MLS Residential Housing Activity As a result of the rising costs related to land, infrastructure, and construction, the average home sales price has continued to increase First decline 90 $250 since 1992 80 Average Price ($1,000) $200 70 60 Sales (1,000) Declining $150 50 prices 40 $100 30 Minimal growth 20 $50 10 0 $0 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 Sales Average Price Source: Texas RECenter (2008) 10
  11. 11. The Inner City’s Comeback (1995 – 2007) Residential Commercial • Many residents – old and • Pent-up demand for urban new Houstonians – have property is evident in moved to the core pricing • Reasons for moving • Inner loop commercial land include traffic issues, has been selling for 6 to 10 proximity to work, and a times more per square foot desire for diverse culture than similar suburban sites • Tremendous price • Many older properties have appreciation in “older” been purchased at land neighborhoods value for redevelopment as higher-density commercial and residential 11
  12. 12. Still Moving to the Suburbs (1995 – 2007) Residential Commercial • Affordability enables • The residential growth in people to buy bigger the suburbs has resulted in homes on larger lots significant commercial growth • Many suburbanites prefer to live in new homes in • Desire for suburban living master-planned has increased due to the communities existence of suburban employment centers • Desire for quality public schools • Prevalent trend of locating companies closer to • Proximity to employment employees centers 12
  13. 13. Surging Commercial Land Prices (2000 – 2007) Commercial land prices were driven up over the past several years • Competition for prime corners and sites significantly drove up prices • Pricing was no longer based on comparables; rather, it was based on planned use • Flow of information (transparency) has impacted how business is done • Expectations among buyers and sellers have risen 13
  14. 14. Cost of Living Index for US Metro Areas (Q2 2008) Houston’s overall after-taxes cost of living is 11% below the national average, largely due to housing costs that are 23% below the average Houston Dallas Atlanta Phoenix National Average of 318 urban areas Denver Miami Boston Washington New York San Francisco 15 0 15 30 45 60 Source: ACCRA (2008 Q2 ) 14
  15. 15. Houston MSA Residential Population Growth (1996–2006) Houston has experienced steady growth over the past decade, with the largest one-year surge occurring in 2006 5,600 5,400 Annual Average Growth: 120,500 residents Population (1,000) 5,200 Total Growth: 27.8% 259.9K 103.4K 5,000 102.5K 106.1K 4,800 5.54 123.0K MM 4,600 129.7K 70.9K 109.6K 4,400 107.6K 4,200 4.33 93.4K MM 4,000 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2006 Population Population Source: U.S. Census Bureau (2007) 15
  16. 16. Houston MSA Employment Growth (1996–2006) Houston’s residential growth correlates directly to its strong employment growth over the same period 2,500 Annual Average Growth: 46,400 jobs Population (1,000) 2,400 Total Growth: 23.4% 2,300 95.8K -5.1K -14.3K 15.6K 60.4K 39.0K 2,200 2.45 52.6K MM 34.5K 2,100 103.0K 2,000 1.98 82.7K MM 1,900 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2006 Jobs Jobs Source: Texas Workforce Commission and Real Estate Center at Texas A&M University (2007) 16
  17. 17. How Long Will This Last? (2008 – ?) We expect some commercial real estate trends to continue for an unknown period of time Trends Impact • Risk being re-priced • Land prices decreasing • Cap rates increasing • Contract terms softening • "Easy" financing no longer • Sales activity slowing available • Development activity decelerating • Financing only available for strong and experienced borrowers • Transactions being re-traded • Retailers slowing growth with • Owner financing on horizon some closing stores • Investors with cash on sidelines, • Banks and drug stores pulling waiting to see how far prices drop back • Housing starts slowing • Foreclosures / REO properties increasing 17
  18. 18. Reasons for Optimism 18
  19. 19. Job Growth by State Over the past year, Texas has led the nation in highest job growth among states Texas Texas Strong Oklahoma energy industry Colorado employment Louisiana Texas Maryland accounted for Washington 52.6% of all Utah new jobs North Carolina created New York nationally Massachussetts National Average -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% % Growth Source: Texas State Data Center (2007) 19
  20. 20. Job Growth by MSA & Best Cities to Buy a Home (2007) Over the past year, Houston was among 4 Texas cities to rank in the top 10 nationally in job growth and to make Forbe’s list of the 10 Best Cities to Buy a Home Forbe’s 10 Best Cities to USA Total Buy a Home (Rank) Dallas-Fort Worth 6 Houston Houston 1 Seattle Washington, D.C. New York City Atlanta 10 Charlotte 7 San Antonio 5 Austin 2 Raleigh 170,000 130,000 90,000 50,000 10,000 30,000 70,000 Number of Jobs Added Source: Texas State Data Center (2007) 20
  21. 21. Houston MSA Projected Residential Population Growth (2006–2015) Growth is expected to continue with solid population increases forecasted 6,400 Annual Average Growth: 92,800 residents 6,200 97.3K Population (1,000) Total Growth: 15.1% 95.8K 6,000 94.4K 92.9K 5,800 91.5K 93.0K 6.38 91.5K 5,600 MM 90.1K 88.6K 5,400 5.54 5,200 MM 5,000 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2015 Population Population Source: Texas State Data Center (2007) 21
  22. 22. Diversification • Since 1981, the percentage of local economy tied Energy to energy has dropped from 84% to 48% • Grown to encompass: Texas – 73,600 employees Medical – 37 million sq. ft. of physical space (including Center construction) – $2 billion of construction underway • 10th in the world in total tonnage • 60 million people live within 700 miles Port of Houston • Intermodal transportation - ample truck, rail and air connections • Weak dollar has bolstered exports 22
  23. 23. Houston’s Glass is Half Full Key Employment Centers Affordability • Enabled by relatively short land • World center of oil & gas industry entitlement process • World’s largest medical center • Key driver of population growth • One of world’s largest ports • Housing affordability is attractive to major employers Great Place for Business Resources • Home to second largest number of Fortune 500 companies • Proximity to oil & gas wells and refineries • Taxes are relatively low to other • Access to water parts of country • International & domestic • Texas' electricity grid has limited interconnection with other states relocation destination 23
  24. 24. Thank You Trusted InSight into Global Real Estate 4665 Southwest Freeway Maury Bronstein Houston, Texas 77027 Martin Bronstein 713-328-4400 Randall Tuller brokerage@situscompanies.com www.situscompanies.com 24
  25. 25. Appendix 25
  26. 26. Residential Construction Permits for Top 10 US Metro Areas (2006) In 2006, Houston issued over twice as many construction permits than the average issued by the other top 10 US metro areas Houston (4) Houston (4) 71,719 New York (1) 60,987 City (Population Rank) Dallas (9) 56,514 Chicago (3) 46,722 Phoenix (6) 44,280 Los Angeles (2) 33,505 San Antonio (7) 19,761 Philadelphia (5) 17,212 Average: 32,702 San Diego (8) 9,191 (excludes Houston) San Jose (10) 6,150 5,000 20,000 35,000 50,000 65,000 80,000 Source: U.S. Census Bureau (2007) 26
  27. 27. Median Home Prices for Top 10 US Metro Areas ($1,000) Median home prices in Houston are less than half of the average median cost for homes in other large US metro areas San Jose (10) $775 City (Population Rank) San Diego (8) $602 Los Angeles (2) $585 New York (1) $469 Chicago (3) $274 Phoenix (6) $268 Philadelphia (5) $230 Average: $388 Dallas (9) $150 (excludes Houston) Houston (4) Houston (4) $149 San Antonio (7) $142 $100 $200 $300 $400 $500 $600 $700 $800 Source: U.S. Census Bureau (2007) 27
  28. 28. Cost of Living Index for Top US Metro Areas (2005) Low home prices are a key factor in Houston’s favorable Cost of Living Index New York (1) 213 San Francisco (14) 177 City (Population Rank) Los Angeles (2) 153 San Diego (8) 141 Chicago (3) 129 Average of Top Metro Areas: Philadelphia (5) 119 136 (excludes Houston) Phoenix (6) 98 Dallas (9) 95 US Average: 100 San Antonio (7) 94 Houston (4) Houston (4) 88 80 100 120 140 160 180 200 220 Source: ACCOR (2006) 28
  29. 29. MLS – Number of Listings & Months Inventory Housing inventory was at its highest level during the early-1990s Highest inventory 45 12 40 10 Total Listings (1,000) 35 Months Inventory 30 8 25 6 20 15 4 10 2 5 0 0 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 Total Listings Months Inventory Source: Texas RECenter (2008) 29
  30. 30. Energy Industry While Houston’s dependence on energy has decreased since the 1980s, the city’s prospects are still closely tied to the industry’s health 84 In 1981, percentage of local economy tied to energy 48 Today, percentage of local economy that is related to energy Number of energy-related establishments that are located within the 3,000+ Houston MSA, including more than 500 E&P firms and 150 pipeline transportation companies Number of publicly traded oil and gas E&P firms (out of 144 total) with a 43 presence in Houston, including 10 of the top 25 Percentage of the nation’s jobs in crude petroleum and natural gas 29 extraction Number of the nation's top 20 natural gas transmission companies with 15 corporate or divisional headquarters in Houston Number of the nation’s top 20 oil pipelines that have corporate or 12 divisional headquarters or ownership interests in Houston 30
  31. 31. Texas Medical Center The Texas Medical Center is a hub of activity 5.5 million Approximate patient visits per year 10,000+ Number of international patients 6,500 Number of beds 10,000+ Number of MDs, PhDs and other doctorates Number of RNs, LVNs, clinical caregivers, technicians, and medical support 26,000+ staff 73,600 Number of employees 13,500 Number of volunteers 108,150 Number of full-time (33,150) and part-time (75,000) students Number of acres in the South Main area plus other locations throughout 1,000 Houston and internationally Collection of hospitals (14), research centers, and medical schools (2) 46 comprising Texas Medical Center Number of square feet of existing, under construction, and programmed 37 million physical plant space $2 billion Approximate cost of buildings under active construction 52,500+ Number of existing parking spaces and those under construction 31
  32. 32. Port of Houston The Port of Houston is ranked tenth in the world in total tonnage, and is growing at a strong pace • Among U.S. ports, ranked first in foreign waterborne tonnage and second in total tonnage • During 2007, it had the second highest growth rate among U.S. ports relative to the previous year • Centrally located on the Gulf Coast, Houston is a strategic gateway for cargo originating in or destined for the U.S. West and Midwest. – More than 17 million people live within 300 miles of the city, and approximately 60 million live within 700 miles • Fuel prices have increased the importance of intermodal transportation – Ample truck, rail and air connections allow shippers to economically transport their goods between Houston and inland points • Houston stands to benefit from the Panama Canal expansion 32

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