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Tuesday, February 7, 2017

Houston Real Estate: A 2016 Review and Predictions for 2017

By Rand Stephens (Houston)

What a difference a year makes! As 2016 got started with $28 oil, there were a lot of glum faces around town and the mood in Houston took on a feeling of pessimism. Houston’s optimism grew over the year as oil prices increased steadily, but even at mid-year the general mood was still gloomy. Prognosticators were already predicting a dire 2017 with no real improvement in the Houston economy until 2018.
However, oil prices have done nothing but rise since that ominous low point and the year turned out much better economically than anyone predicted...

2016

In 2016, the housing, industrial and retail real estate markets have all remained strong. However, multi-family is oversupplied and vacancy rates have increased. Fundamentals also declined in the office market; particularly in west Houston where the drop in the price of oil has had its most damaging effects. Transaction volumes were down across all real estate sectors, which is to be expected, as cautiousness and conservatism has been the prevailing sentiment for the Houston economy as a whole. However, there is not a trend of distress in the real estate markets as acquisition and development have been responsibly underwritten and financed since 2009.

2017

Investment Sales
As a result of the “staying power” property owners have gained from responsible financing, investment sales activity will continue to be slow in 2017 until rental rates, particularly in the office and multi-family markets, recover to a point where buyers can rationalize asset values.

Industrial
The industrial market has held up very well through this downturn with occupancy rates remaining well above 90% and industrial development will start up in 2017. Most of the big industrial developers in Houston are primed with sites and ready to start building; but even for the biggest and best, new development will likely require a lead tenant to kick things off.

Retail
The retail market is complicated because continued growth in online shopping has traditional retailers scratching their heads as to their “brick and mortar” needs. This industry trend that has generally put a damper on development while retailers continue to adapt to consumers use of technology to shop. Nonetheless, like the rest of the country, Houston has strong demand for dining, entertainment and lifestyle alternatives—despite the city’s economic downturn. Since these shopping needs generally can’t be satisfied online, 2017 will likely see growth in specialty retail (adaptive reuse, mixed-use), which thrives in and around Houston’s core. Traditional shopping center development will continue in the suburbs, but the days of vigorous big box retail expansion are over as traditional retailers adjust to the consumers new buying behaviors.

Office
Houston will see improved job growth in 2017 as the upstream energy business has retrenched over the last two years and will slowly start growing again. This along with job growth in other sectors should mean the office market has bottomed-out and occupancy and rental rates will stabilize and possibly see improvement this year. So, with oil at $53 a barrel as we start 2017, and positive job growth since the beginning of the downturn in Q4 of 2014, Houston’s spirits are better, and the mood is now one of guarded optimism.

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