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Thursday, January 24, 2019

Houston Poised for 2019 Market Challenges & Transformations

By Rand Stephens (Houston)

It was a solid year for the commercial real estate industry in Houston. The office market maintained a slow and steady recovery track, and the industrial market ended 2018 on a strong and healthy note. Houston’s vigorous and diverse economy deserves most of the credit, with unemployment under 4% and nearly 115,000 jobs created over the last year. So, will 2019 continue to bring the Bayou City good (economic) health and prosperity? Several key factors unique to the Houston metro certainly have it well-positioned for another banner year (if not better). Houston’s zoning and land-use regulations are appealing to investors and developers.

Industrial Revolution
Courtesy of Bizjournals.com
The industrial distribution market is undergoing a transformation, not only locally, but around the country, largely due to population growth, e-commerce and great transportation infrastructure. Warehouse/distribution space is expected to account for most new buildings and net absorption for 2019. Distribution centers are being built closer to higher populated areas and designed to serve consumers directly. The Katy area seems to be the hot spot for distribution sites such as Costco, Amazon and CVS. Meanwhile, the areas around the Port of Houston are experiencing a different kind of revolution. There is a large demand for rail-service space due to higher shipping costs. Trains are a more cost-effective means of shipping oil by-products such as resin and plastics. Distribution facilities are the most popular investment category and will continue to be for some time. With a 5% vacancy rate, Houston will continue to be a prime market for development, however, as a result, we may see overbuilding in 2019.

Office Market Two-Step
It’s two steps forward and one step back for the office sector. The recovery is taking place, but oil prices and flight-to-quality factors make it a bit complicated. 2019 will continue to be a tenant driven market and vintage building owners will be facing renovation challenges to compete with newer offices with efficient layouts. The Energy Corridor will see increased leasing activity, as companies seek offices closer to where their employees live. Overall, the office market will continue a slow recovery in 2019, but we don’t see a full recovery in occupancy until late 2020, or even into 2021.

Houston is THE place to invest
Interest rates, energy prices and the trade war are variables that investors will be watching in 2019. Strong economy, continued job growth, and less burdensome land-use regulations make Houston an attractive city for investment, particularly for industrial, retail and anything residential. The live-work-play and e-commerce/retail evolution will benefit from Houston’s adaptable zoning and land-use regulatory environment. Houston will see continued strong investment in all product types from all types of investors.

Forecasts and predictions can always be tricky, but 2019 looks to be like 2018…a straightforward year with nice economic growth.  We don’t see any surprises looming on the horizon.

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

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