November 19, 2018
Houston – Transwestern today announces it held the 18th annual Houston TrendLines® event Nov. 8 at the River Oaks Country Club in partnership with its sponsors: Chicago Title Commercial, D.E. Harvey Builders, O'Donnell Snider Construction Inc, JPMorgan Chase & Co., Kirksey Architecture, Amegy Bank and Locke Lord LLP.
More than 500 people attended the event in which Greater Houston Partnership Senior Vice President and Regional Economist Patrick Jankowski gave an economic overview highlighting forward-looking trends and opportunities in the Houston commercial real estate market.
The keynote speaker was George Blankenship, former executive at Tesla Motors, Apple Computer and GAP Inc. Blankenship brings 30 years of real estate and international strategy experience to his audiences. In his executive capacities at Tesla Motors, Blankenship successively served as vice president of design and store development, vice president of worldwide sales and ownership experience, and vice president of worldwide retail. Prior to his achievements at Tesla, Blankenship served as the senior executive of real estate at Apple. Recognized as the architect of Apple’s brand-building retail methodology, he formulated and executed one of the most successful retail growth strategies in history. Blankenship has also functioned as a real estate consultant for Microsoft and served as a senior executive for real estate strategy at GAP.
“TrendLines allows us to share with our key clients and friends of the firm our analysis of the driving forces behind Houston’s real estate market, as well as forecast trends that will impact the local commercial real estate market,” said Kevin Roberts, Transwestern’s Southwest President. “We are pleased to bring in forward-thinking leaders to provide valuable insight into many of America’s important issues. We are extremely honored to have had George Blankenship keynote our annual TrendLines event to enhance the overall experience for our clients.”
Guests of the event received a copy of the 18th edition of the TrendLines publication, Capitalizing on a Transforming Commercial Real Estate Market, which distills the trends of 2018 and sheds light on issues affecting the region’s future economy and commercial real estate industry in 2019 and beyond. A summary of those economic trends is detailed below.
Through the third quarter of 2018, the Houston economy has displayed marked improvements after weathering the impacts of both Hurricane Harvey and the 2014 oil crash. As energy has recovered over the past year and stabilized with West Texas Intermediate trading in the mid- to high $70s, the job market has turned sharply positive. As of September, year-over-year job growth totaled 128,700, marking an all-time high for the metro.
Rig count is up by 143 year over year, and the Permian Basin is producing more than 3.3 million barrels per day with a forecast to reach 5.4 million barrels per day by 2023, a tremendous benefit to the regional economy. The strengthening of the energy sector only further complements the ongoing diversification and transformation Houston has displayed during recent years. Record breaking year-over-year job growth has highlighted the resurgence of the economy and is currently on pace to finish 2018 with approximately 100,000 net new jobs. In the commercial real estate sector, the economy sets a favorable environment for the future, although each property type has its own unique set of market conditions.
The Houston office sector is beginning to show signs of recovery as job growth continues to make strides and the energy industry finds its long-term footing. However, headwinds remain prevalent for the sector, with more than 25 percent of the market listed as available and strong demand for new construction prompting additions to supply in the face of contracting business trends such as rightsizing, telecommuting and hoteling. Despite these concerns, leasing activity is expected to continue to gain momentum.
A full recovery is still down the road and will be measured and submarket driven; however, Houston has shown the ability to absorb large blocks of space in a very short time. It is anticipated that well-located Class A properties will recover first, followed by the backfilling of value-play submarkets. During the near term, absorption should begin to trend in a positive direction with 2019 anticipated to create net positive absorption annually and fourth quarter 2018 remaining positive.
The industrial sector looks to continue its hot streak as market fundamentals remain strong, activity at the Port of Houston continues to rise, and the evolution of the retail market is increasing demand for last-mile warehouse/distribution space. A robust construction pipeline should only continue to expand during the near term as developers look to satisfy the needs of the market. The rise of new product in conjunction with escalating land costs will continue to apply upward pressure on rental rates; however, price sensitivity of users will constrain growth rates.
Looking to 2019, Transwestern anticipates another strong year for the industrial sector with absorption slightly higher than 10-year averages, ranging from 7 to 10 million square feet. A wave of speculative construction should result in modest increases to vacancy rates, though they will still stay near all-time lows, ranging from 5.1 to 5.4 percent.
The Houston multifamily market has continued to display significant increases to occupancy and rental rates following Hurricane Harvey. At the close of the third quarter, market occupancy reached 90 percent, the traditional threshold indicating a stabilized market. This has been driven by solid year-to-date absorption of 9,199 units.
Rental rates have also continued to trend upward year over year, but growth slowed during the quarter with average rates holding steady at $1.17 per square foot. Since Hurricane Harvey, occupancy has increased 2.3 percent, and rental rates have increased by 4.5 percent. Given the market’s rapid improvements and strong underlying fundamentals, investors and developers have a sharp focus on the metro area.
Third-quarter activity saw the retail sector continue to thrive as vacancy rates remained below 6.0 percent for the 18th consecutive quarter. Despite the shock waves e-commerce has sent through retailers globally, the Houston retail sector has maintained favorable market conditions while growing rapidly. The market’s stability can be attributed to a combination of strong population growth, the intelligent phasing of large developments, and the utilization of prelease commitments prior to construction. As population growth pushes market boundaries further, retail will continue to thrive as it follows rooftops, particularly with grocery-anchored and mixed-use/lifestyle centers.
During the third quarter, Houston medical office metrics strengthened across the board with an increase in asking rents, decreases in both vacancy and total availability, and positive absorption. Year-over-year direct vacancy decreased 50 basis points to 11.4 percent, and total availability decreased 60 basis points to 14.6 percent during the same period. As both vacancy and availability have declined, asking rental rates have increased to $27.46 per square foot, a 460-basis-point jump from $26.26 in third quarter 2017.
Mergers and acquisitions remain elevated as hospital networks look to gain efficiencies of scale to cover rising operational costs and lowered reimbursement rates. With Houston's economy heating up, the underlying fundamentals of high population growth, low cost of living, and urban sprawl place healthcare real estate as a top-tier investment.
Transwestern is a privately held real estate firm of collaborative entrepreneurs who deliver a higher level of personalized service – the Transwestern Experience. Specializing in Agency Leasing, Asset Services, Occupier Solutions, Capital Markets and Research, our fully integrated global enterprise adds value for investors, owners and occupiers of all commercial property types. We leverage market insights and operational expertise from members of the Transwestern family of companies specializing in development, real estate investment management and research. Transwestern has 35 U.S. offices and assists clients from more than 221 offices in 37 countries through strategic alliances with France-based BNP Paribas Real Estate and Canada-based Devencore. Experience Extraordinary at transwestern.com and @Transwestern.