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Monday, October 30, 2017

Houston, We Have a Problem

By Rand Stephens (Houston)

Jack Swigert suits-up
Jack Swigert Suits Up by NASA via Wikimedia Commons
The famous quote from the 1995 movie, Apollo 13, is a phrase that is often used to indicate an unforeseen problem. However, this iconic Hollywood tagline from Tom Hanks, who played Mission Commander Jim Lovell, is not only a misquote, it’s attributed to the wrong astronaut.

It was Jack Swigert (played by Kevin Bacon), who radioed NASA Mission Control Center and said, “Ok, Houston, we’ve had a problem here,” after they discovered an explosion had crippled their spacecraft.

Although Hollywood may have changed the tense of the phrase for dramatic effect, it didn’t change the substance of the event, but Swigert may have felt slighted for not getting the credit for his famous quote.

This brings to mind the recent unforeseen flooding problems brought on by Hurricane Harvey to the Greater Houston area. The famous tagline once again echoed throughout the city, and, the country. However, Houston’s resiliency demonstrated that we can take a hit, regroup and continue to grow and prosper even after being struck by the worst storm to hit Texas in more than a generation.

It’s not surprising that Houston can “take a licking and keep on ticking”. It has built a strong foundation with economic engines centered around energy and medicine, exemplary post-secondary education with world-class universities, an outstanding transportation system and an affordable cost of living.

Amazingly, commercial real estate was unaffected by Harvey’s flood waters. And, based on the market activity, investors are still very bullish on Houston.

Unfortunately, Harvey did the most damage to homes, flooding approximately 100,000 homes and causing tremendous personal loss. Also, there were an estimated 300,000 cars lost to the flood waters.

Going forward, the City of Houston, Harris County, as well as the state and federal governments will undoubtedly invest in a new water drainage infrastructure for the residential areas that were hardest hit. I am confident the system will be able to withstand future storms of Harvey’s magnitude. Downtown Houston and the Medical Center flooded badly during Allison, but withstood Harvey because of the infrastructure improvements that were made after Allison. We learned from Tropical Storm Allison and we will do the same with Harvey.

Owners of multi-family projects benefitted most from Hurricane Harvey, as occupancy has soared due to displaced homeowners leasing apartments. Many investors are concerned that there is a huge roll-over risk as short-term leases expire. However, by offering short-term leases to homeowners, and staggering lease expirations, many owners have ensured they are not burdened with a big inventory of units to lease at one time. Prior to Harvey, there was a balance of supply and demand, so it looks like natural absorption will buffer short-term lease expirations, thus, paving the way for another good development cycle for multi-family.

Harvey may have resurrected the phrase, “Houston, we have a problem,” but it also created a new one, “Houston Strong.”

Click here for third quarter reports on the Houston market.

(Rand Stephens is a Principal of Avison Young and Managing Director of the company’s Houston office.)

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