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Monday, December 22, 2014

Houston Market Predictions: 2014 in Review

By: Rand Stephens (Houston)

In January of this year I posted a blog with my Houston predictions for 2014.  I wasn’t that far off!  Below is a recap.  Stay tuned for my 2015 predictions. 
Here were my predictions for 2014:

  • Prediction: 60,000 new jobs will be created
  • End of the year recap: The latest year-over-year job growth is 120,000 jobs (as of November).  I felt there would be a slowdown in the energy industry in 2014.  I am obviously off a year, but the drop in oil price does not shock me.  60,000 new jobs might be a better prediction for 2015.

  • Prediction: Rental rate growth in all class A properties will increase at slower rates than 2013 due to enough new inventory hitting the market to provide a rental rate cap on the high-end of the market.
  • End of the year recap: Right about this one.  Class A rates were $31.18 in 2012, $32.78 in 2013, and $34.34 as of 3Q14.  In 2013, rates grew by 5.13%.  In 2014, they have grown by 4.76%.  Class A rates have fallen slightly in the fourth quarter and will probably end the year around $34.20 which represents a growth rate of 4.33% for 2014.

  • Prediction: Rental rate growth in class B properties will be more substantial than class A as class B properties change hands, get upgraded and become more attractive to the user.
  • End of the year recap: Older buildings attempting to stay competitive through renovations was definitely a trend in 2014. Examples include 600 Jefferson, 800 Bell, Two Shell Plaza, Pennzoil Place and the Esperson building. Class B rate growth was 2.5% in 2013 and 3.88% in 2014 (as of 3Q).  While the rate of growth was not more substantial than Class A (3.88% for Class B vs. 4.76% for Class A), the rate of growth for Class B properties improved in 2014 while Class A’s decreased.

  • Prediction: Vacancy rates in the office market will go up slightly due to new inventory coming online and vacant space left behind as companies relocate to new buildings.
  • End of the year recap: Wrong on this one. Vacancy fell from 10.9% in 4Q13 to 10.3% in 3Q14.  It held steady at around 10.3% throughout 2014 but will increase a little in the fourth quarter to around 10.4-10.5%.

  • Prediction: Lenders in Houston will continue to be conservative with their underwriting of new development and acquisitions; this will insure ongoing fundamental stability in all product types.
  • End of the year recapTrue for the industrial and retail sectors. Multifamily apartments are questionable, although as we saw, condos have strong preleasing.  For office, preleasing was at 70-80% in 2013 and 55-60% in 2014. Speculative construction ground-breakings were about 1.5 msf in 2013 and 3.7 msf in 2014.  Most of the spec construction is in high-demand areas.  Given the low vacancy and high demand, lenders remained conservative in 2014.

  • Prediction:  Houston will continue to grow as a major center for the medical industry leveraging off of the Texas Medical Center’s growth and prominence as one of the top medical centers in the world.
  • End of the year recap: Yes!!! The Education and Health Services sector grew by 7.1% YOY second only to the energy industry which grew at 9.1%. According to Bill McKeon (EVP, COO & CSO at Texas Medical Center)- “We have assembled a highly talented group of individuals from across the medical center to shape the structure of the institutes that will position the Texas Medical Center as ‘the third coast’ for life science research, education, and innovation.”

  • Prediction:  The Port of Houston will grow more than expected due to infrastructure improvements, widening of the Panama Canal and logistical problems in other major US ports.
  • End of the year recap: Yes!!! The Port remains as the largest foreign trade port in the country after it surpassed New York in 2013.  The Port is currently conducting a $68 million expansion that will deepen the terminals from 40 to 45 feet due in part to the Panama Canal.  To speed up the channel dredge projects, the Port of Houston Authority bypassed the federal process and self-funded the projects through the port's operating revenues.

  • Prediction:  Houston Republican congressman, John Culberson, will take over the appropriations subcommittee that oversees the Johnson Space Center.  With Culberson’s appointment, the Johnson Space Center will start growing again and add unexpected job growth.
  • End of the year recap:Yes!!! The NASA/Clear Lake submarket has posted YTD positive absorption for the first time since 2010.  This year, Boeing was awarded a $4.2-billion contract by NASA to transport crews to the International Space Station.  Boeing is now hiring an initial 100 employees who will be based in the NASA/Clear Lake submarket.

Sunday, December 21, 2014

Strong National Demand and Shortage of New Construction Push Industrial Sale Volume and Pricing into 2015

by Erik Foster (Chicago)

The US outlook for industrial capital markets remains strong as we approach year-end.  The investor demand continues to outpace supply of assets coming to market. While we have seen a return of speculative construction in many of the major and secondary markets, it has not filled the void quickly enough from the leasing perspective as many markets are reaching historically low vacancy rates.

Among the key trends to look for in 2015 are:

  • Look for a three to seven percent increase in pricing for industrial assets in many markets nationally as supply continues to lag behind demand. While there is more than 100 million square feet of speculative construction underway in the top 30 markets nationally, there can be a 12 to 18 month lag time for construction, leasing and potential investment activity.  As the fourth quarter push in 2014 to get leases done will benefit the market overall, there is still significant demand from tenants.
  • There will be a sustained demand in secondary markets, such as Indianapolis, Columbus, Miami and Charlotte.  Trends such as this will continue to provide positive leasing, and consequently sales momentum, into 2015.  This is due to a shortage of core product and more favorable pricing in secondary markets.  Some of these markets, such as Seattle, are reaping aggressive pricing at peak levels, yet the development pipelines in some of these supply constrained markets will continue to push rents and per square foot prices past the historical market highs.
  • The growth in equity from Canada, South Korea, Germany, the United Kingdom and other Western European countries will continue at a brisk pace.  International investors are particularly focused on the U.S. market, as it offers tremendous stability and growth potential.  Given the different vehicles that are now available for investors to access the industrial marketplace from across the world, there will be sustained interest in US industrial product from capital sources that we have not historically seen.  More, and different, equity will continue to put demand side pressure on pricing keeping overall cap rates at, or in some markets beyond, current levels for the best product.  This demand will continue to keep upward pricing pressure on industrial assets in secondary markets as well.

Thursday, December 4, 2014

Dallas Real Estate Market Benefits from Job Growth

By Greg Langston (Dallas)

Healthy job growth is helping drive investment in the Dallas real estate market, with the office market in particular experiencing nation-leading expansion. This growth is driven by a significant number of corporate relocations and expansions, increasing the value of existing space while promoting additional development. Demand is expected to remain high for the remainder of 2014, but current construction projects are expected to be complete in 2015, freeing up additional space and relieving the tight demand.

These trends, and others, are explored in greater detail in Avison Young’s Dallas Office Market Monitor for the Third Quarter of 2014. Read the full report here.

The Dallas-Fort Worth market is experiencing steady job growth, with 101,500 jobs being added over the 12 months ending in August 2013. In fact, every economic sector--excluding manufacturing and information--has experienced employment gains over the period. As you might expect, these factors have also led to robust growth in single-family and multi-family construction and, ultimately, the Dallas office market.

We can connect this job growth to the significant number of corporate relocations and expansions in the market, with corporations like FedEx and Toyota expanding their D-FW holdings. Although Downtown Dallas remains a top market, we’re seeing marked growth in the suburbs, most notably North Dallas. All in all, there are over 7.4 million square feet of office space currently under construction, 70% of which is already pre-leased.

All of these factors have combined to make the Dallas office market one of the nation’s top performers. The market absorbed over 1.8 million square feet of space during the third quarter, bringing year-to-date absorption numbers above 2013’s final tally with months to go. Although vacancy is down and gross asking rates are up, we expect to see some relief in terms of asking rates once major construction projects are completed in 2015.

In summary, the Dallas office market has continued its trend of steady growth through the third quarter of 2014. Thanks is no small part due to favorable business conditions in the region--and the job growth that comes as a result--we can look forward to the next year with some degree of optimism.

Read the full Dallas Office Market Monitor for the Third Quarter of 2014. or send us an email to learn more.

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