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Wednesday, December 5, 2012

Energy Fuels Houston's Real Estate Market

By:   Rand Stephens and Jeannie Roberts

Houston gained national attention in 2012 due to its economic vitality and strong job growth.  Driven by the oil and gas industry, Houston left the recession behind and turned its attention towards expansion, development, and acquisition.  Construction activity has substantially increased as developers address the pent up demand brought on by the economic downturn.  While Houston continues to stand out due to its economic environment, in 2012 the city also gained recognition as a desirable place to live.  Forbes ranked Houston as the Coolest City in America due to its cultural diversity and young workforce.  The International Energy Agency projects that the U.S. will overtake Saudi Arabia as the world’s top oil producer, and Houston is poised to take advantage of the oil boom in 2013 and beyond.  This will result in continued job creation and strong market fundamentals in the Energy Capital of the World.
Leasing activity in Houston’s office market picked up in 2012 with the continued expansion in the energy sector.  With rental rates on an upward trend and vacancy rates reaching the single digits in key submarkets, developers were quick to regain their pre-recession bullish approach.  3.9 million square feet (msf) of office space is under construction, with 3.1 msf delivering by the end of 2013.  45% of the construction is taking place in West Houston where the energy industry is concentrated.  The demand for new development is largely driven by tenants moving out of older buildings in an effort to retain a talented workforce and consolidate into efficient space.  A number of mergers and acquisitions within the energy industry are projected to occur in 2013.  Although this creates uncertainty in the office market, Houston will most likely benefit as most companies are expected to consolidate within Houston.
The industrial market witnessed significant space gains during 2012.  Strong demand and moderate development have led to a tightening industrial market, a trend that is likely to persist throughout 2013.  In an effort to find quality land, developers are expanding further north and west.  As drilling activity picks up, Houston’s industrial market can expect to see an increase in manufacturing volume, particularly in oil field equipment.  In anticipation of the Panama Canal expansion in 2014, the Port of Houston is making $206 million in capital improvements this year.  The industrial market is projected to benefit from this increased activity, resulting in increasing rental rates and decreasing vacancy through 2013. 
The retail market accounts for roughly $165 billion of Houston’s gross metropolitan product.  While retail jobs in most major metro areas have yet to recover, Texas created 24,500 retail jobs between August 2011 and August 2012.  Houston’s growing population is fueling the retail market, resulting in new development, particularly in West Houston.  Vacancy in the retail market is expected to decrease in 2013 as tenants capitalize on the renewed consumer confidence.
Driven by the energy industry, Houston has long been characterized by its boom and bust cycles.  However, the city’s focus on diversification in the past decade has led to a stable and growing economy.  Investors, both foreign and domestic, demonstrated their renewed confidence in Houston with record-breaking transactions in 2011 and 2012.  The Hess Tower sold for a record $524 per square foot in 2011, while the Shell Plaza Towers sold for a record $550 million in 2012.   High-profile assets, such as the Williams Tower and the Kinder Morgan building, have returned to the market in 2012.  As Houston continues to stand out among other major metropolitan areas, the city is projected to gain increasing amounts of investor interest.

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