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Houston Commercial Real Estate by rwq11953

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									Houston Commercial
Real Estate Market:
What’s Ahead for 2011

Breakfast Forum




www.boyarmiller.com
December 9, 2010
Homebuilding & Land
Development Markets
Joel Marshall
Trendmaker Development Company
Senior Vice President



www.boyarmiller.com
National Housing Starts
Houston Foreclosure History
National Survey by Frank N. Magid Associates
Millennials defined as age 18‐28
Industrial Market
Welcome W. Wilson, Jr.
GSL Welcome Group
President & CEO




www.boyarmiller.com
  “A banker is a fellow who lends you his umbrella when the sun is 
shining and wants it back the minute it begins to rain.” ‐ Mark Twain
2009 Houston           2010 Houston 
Industrial Market      Industrial Market 
Totals:                Totals:

  •482 million SF        •499 million SF

  •3.27 million SF       •219,000 SF under 
  under construction     construction
•Map Courtesy of CoStar
15 Industrial sales transactions in  13 Industrial sales transactions in 
   2009, totaling $26.5 million         2010, totaling $75.5 million




•Photo Courtesy of CoStar
   Location!                  Financing!


 Location!                  Financing!

Location!                  Financing!
                 Equity!


               Equity!

               Equity!
Crude Oil Price (West Texas Intermediate) : $82.28/BBL
  BAKER HUGHES – NORTH AMERICAN RIG COUNT

Year 2000 to Latest Reporting Week as of 11/24/2010
 The Port of Houston reported trade of $154.4 billion in the first 9 
months of 2010, up 26.8% from the same 9 month period last year.
•Slide Information Courtesy of Panama Canal Authority
•Slide Information Courtesy of The Greater Houston Partnership
LENDERS   REGULATORS
Retail Market
Ewing King
Ewing King Commercial Real Estate
Principal




www.boyarmiller.com
State of Local Economy
Houston, Texas: Population Growth




                Over the past decade, Houston has welcomed 1.13 MM
                people ranking 3rd in the nation in population growth.
Unemployment Rate - Houston vs. U.S
• Houston continues to
  have better
  employment than the
  rest of the country with
  the largest 5 year gain
  among U.S. Cities
  according to the U.S.
  Bureau of Labor
  Statistics.

• While the National
  Unemployment
  Average is 9.6%,
  Houston maintains an
  unemployment rate of
  8.7%.



                             Largest 5 Year Employment Gain (June 2005 - June 2010)
                             U.S. Bureau of Labor Statistics (as Reported by the Houston Business Journal) – July 28, 2010
Houston - A Corporate Center for Business
With 25 Forbes Fortune 500 companies                   Fortune 500 Companies Headquartered In Houston
headquartered in Houston, our city ranks               Company/Rank
                                                                                            Revenues
                                                                                                         Company/Rank
                                                                                                                                          Revenues
                                                                                            ($000,000)                                    ($000,000)
3rd in the nation.
                                                       ConocoPhillips (6)                   139515.0     CenterPoint Energy (275)           8281.0

Key fundamental drivers that keep                      Marathon Oil (41)                     49403.0     Smith International (277)          8218.6

Houston ahead of the rest of the country               Sysco (55)                            36853.3     Kinder Morgan (315)                7185.2
include:                                               Enterprise GP Holdings (92)           25510.9     Calpine (338)                      6564.0
                                                       Plains All American Pipeline (128)    18520.0     Enbridge Energy Partners (364)     5905.4
                                                       Halliburton (158)                     14675.0     Cameron International (399)        5223.2
  •   The Texas Medical Center – Largest
      medical complex in the world.                    National Oilwell Varco (182)          12712.0     EOG Resources (434)                4787.0
                                                       Continental Airlines (183)            12586.0     Spectra Energy (437)               4725.0
      Port of Houston – ranks #1 in the United         KBR (193)                             12105.0     El Paso (447)                      4631.0
  •
      States in volume of foreign tonnage and is       Waste Management (196)                11791.0     Group 1 Automotive (457)           4525.7
      poised to increase that margin with the          Baker Hughes (243)                     9664.0     FMC Technologies (467)             4405.4
      completion of the Panama Canal expansion         Anadarko Petroleum (260)               9000.0     Frontier Oil (488)                 4237.2
      in 2014.
                                                       Apache (271)                           8614.8     Source: Fortune, April, 2010

  •   Oil & Natural Gas - Houston is home to
      more than 5,000 energy related firms and is
      considered the Energy Capital of the world.

  •   Business Friendliness – State income tax
      exemption and other fundamentals have
      made Houston the largest metro area with
      the highest level of entrepreneurial activity.




                                                         The Texas Medical Center
Houston Retail Markets at a Glance
Retail Breakdown
Houston’s strong, long-
term outlook is
expected to continue
attracting retailers
seeking to expand
market share in one of
the fastest growing
metros in the U.S.

Approximately two-
thirds of Houston’s
retail inventory is made
of neighborhood and
community centers
Houston Retail Statistics
Market Occupancy                                      Market Rents

Retail occupancy rates are the highest they’ve been   Average Market Rents, currently at $14.38 psf, appear to have
since 2005 at 92.2% led by inner loop properties.     bottomed out and are gradually climbing again. Despite the
                                                      recent downturn, current retail rents are still above the 8 year
                                                      historical average.
Absorption                      Completions and Net Absorption


Appearing to have avoided
the perils of significant
overbuilding, Houston has
absorbed over 5 million
square feet of retail
property in the past year,
while completions have
decreased from the peak of
over 8 million square feet in
2008 to just under 2 million
square feet in the last 12
months.

Positive absorption
numbers are a testament to
an increase in leasing
activity, Houston’s
attractiveness to retailers
and limited development.
Holiday Sales
• Holiday sales account for
  over 20% of Annual Retail
  Sales.

• With only 0.4% year over
  year retail sales growth in
  2009, Holiday Sales are
  back in 2010 with Black
  Friday sales well
  exceeding expectations.

• Cyber Monday hit an all
  time record, exceeding
  over $1 Billion in sales,
  and increasing over 16%
  from last year’s sales.
Changing Market Conditions
Retail Trends
                                        Concerted effort by retailers to increase
                                        profitability and cash flow by resetting their
                                        balance sheets and focusing within their stores
                                        on:

                                            • Reducing the size of stores
Discount and Value Oriented
                                            • Increasing efficiency/reducing operating
retailers are the most active tenants
                                              expenses
in today’s market.
                                            • Limiting capital expenditures on new units
Retailers have exhibited a “Flight to
Quality” mentality with the past two
                                            • Managing inventory levels
years providing opportunity for those
typical Class B tenants to get into
                                            • Remodeling and reformatting
Class A space at relatively same
rental rates.
                                            • Emphasis on increasing internet sales
Emerging Trends
•   Investments Sales – Gap exists between Class A and B
    projects – the market will pay a premium for Grocery
    anchored centers which are the most desirable “top of
    the food chain” retail product. Cap rates have trended
    downward throughout the year for these “trophy
    properties” while the market will pay a lot less or not bid
    at all on Class B product.

•   Distressed properties – A sizeable bid/ask gap still
    remains on foreclosed properties with very little
    transactional volume on these assets which continues to
    hinder banks willingness to lend money on real estate
    deals.

•   New Development – Difficult at best, Debt for new
    construction requires significant pre-leasing with a strong
    development yield and considerable equity.
Challenges Still Facing Us
Challenges Ahead
• National uncertainty and
  policy making.

• Weak consumer
  confidence.

• Job growth.

• Financing.

• Empowerment of
  opportunistic tenants.
What’s Ahead
Future Grocery Anchored Developments 2010 & Beyond
                                                                                            Houston-area
                                                                                            Market Leaders

                                                                                            1. Wal-Mart Supercenter
                                                                                            50 stores
                                                                                            28.5% market share

                                                                                            2. Kroger
                                                                                            101 stores
                                                                                            25.6% market share

                                                                                            3. H-E-B
                                                                                            45 stores
                                                                                            14.7% market share

                                                                                            4. Randalls
                                                                                            36 stores
                                                                                            6.5% market share

                                                                                            5. Fiesta Mart
                                                                                            33 stores
                                                                                            5.6% market share



           Source: Shelby Report of the Southwest, January 2008 edition and Trade Dimensions. Counties included are
           Austin, Brazoria, Chambers, Fort Bend, Galveston, Harris, Liberty, Montgomery, San Jacinto and Waller.
Outlook 2011
•   Increase in number of tenants actively seeking locations.
•   Continued pressure on public retailers to grow externally through new
    store expansion.
•   Legacy assets begin developing junior anchor boxes and
    complementary inline space adjacent to existing anchored
    developments.
•   Few if any full price retail centers from ground up.
•   Outlet center will be announced either in the League City/Texas City
    submarket.
•   Class A, small retail space will be in tight supply and high demand.
•   Rental Rates gradually increasing in the second half of the year.
•   Continued obsolescence of older and poorly positioned retail centers -
    candidates for adaptive reuses.
•   Bid/ask gap narrows for distressed properties.
Office Market
Brandi McDonald
Transwestern
Managing Director & Senior Vice President
Tenant Advisory Services




www.boyarmiller.com
      Houston Office Market Report


 Houston Office Market is in relatively strong position

 The bottom of the market is behind us

 The next peek is outside visual range

 Texas job growth “=“commercial space demand in Houston

 Absorption is positive for the first time in 4 quarters

 Outlook: Steady improvement into 2011
National Office Market
National Office Market
National Office Market
National Office Market
National Office Market
National Unemployment
     October 2010




                   U.S. 9.6%



                 Texas 8.1%

                                        Houston 8.0%


Source: The Texas Workforce Commission, www.texasworkforce.org
                         Texas Job Growth
                        October 2009 – 2010
                                              # Texas                    # Houston 
                                                Jobs                        Jobs

Total NonAg. Employment                      172,800             1.7%       6,200     0.3%
Profess. & Business Svcs                       50,600            4.1%      ‐3,600     ‐1.0%
Education & Health Svcs                        38,800            2.9%       8,800     2.9%
Mining & Logging                               30,800        15.7%          3,700     4.2%
Manufacturing                                  26,400            3.2%       2,600     1.2%
Leisure & Hospitality                          23,800            2.4%       3,600     1.6%
Construction                                   12,900            2.3%      ‐4,700     ‐2.7%
Other Services                                   5,700           1.6%         900     1.0%
Financial Activities                             4,500           0.7%      ‐1,600     ‐1.2%
Trade, Trans. & Utilities                      ‐3,000            ‐0.1%       ‐700     ‐0.1%
Government                                     ‐4,500            ‐0.2%     ‐1,200     ‐0.3%
Information                                   ‐13,200            ‐6.6%     ‐1,600     ‐4.7%

Source: The Texas Workforce Commission, www.texasworkforce.org
                                    Houston Office Market
                                     Current Conditions
                               242M SF, 12th Largest Office Market in U.S.

           Vacancy                       13.3%, down from 13.6% in Q2 2010



           Absorption                    97,000SF YTD



           Lease Rates                   Rents stabilizing with concessions driving effective
                                         rates down

           New                           2.5M SF under construction, down from 4.4M SF
           Construction                  one year ago


           Job Growth                    Private sector employment grew by 10,800 in May
                                         and has grown by 31,000 since January

Source: Delta Associates, Q3 2010
Houston Office Market
 Vacancy/Absorption
                                   Houston Office Market
                                        Absorption

                                       2007: 4,754,000
                                       2008: 4,613,000
                                       2009: (586,000)
                                       YTD:    97,000




Source: Delta Associates Q3 2010
Houston Office Market
    Lease Rates
Houston Office Market
 New Development




                        62.0%
Houston Office Market
                            Houston Office Market
                            Submarket Comparison
           Size (MSF)    Vacancy %      Vacancy (MSF)   Rate (Class A)   Rate Forecast

               CBD        Northwest         CBD             CBD
               50.3        19.6%             5.2           $36.72

           West Loop     Greenspoint      West Loop      Westchase
             35.1          14.2%            3.6           $30.00

          Energy Corr.   Westchase       Energy Corr.    West Loop
             29.1         14.1%              3.4          $29.00

            Westchase     Greenway        Northwest       Greenway
              15.5         13.6%             3.0           $28.00

            Northwest    Energy Corr.    Westchase         NW Far
              15.3         12.6%            2.1            $27.20

          Greenspoint       CBD          Greenspoint     Energy Corr.
             13.4          11.4%             1.7           $26.75

            Greenway     West Loop        Greenway       Greenspoint
              12.1        11.1%              1.5           $20.40

Source: Delta Q3 2010
                                                    Trends/Forecast
                                                     CBD Class A

                                                        29 Bldgs, 28M SF
                                                          1.8M SF UC
                                                          7% Vacancy
                                                      -602K SF Absorp. YTD                     2009
                                                                             Subprime
                                                                             Mortgage Crisis    $38.00    $36.00 psf
                                                                                                  psf
                                                                           Oil Hits
                                                                           $145/barrel
                                                                                                         2010

                                 2001
                         9-11
                 Enron

   Tech Bubble                  $32.00 psf



                                                             $24.00 psf


                                                           2004 - 2005
                                                      14 bldgs with over 50K SF
Source: Costar, a select set of buildings 12/6/10
                                                        Contiguous Available
                                               Trends/Forecast
                                                CBD Class A


 690K SF             554K SF           249K SF            388K SF              281K SF             186K SF                664K SF




BG Group Place      Pennzoil North    Two Houston Ctr.    One Allen Ctr.      Two Allen Ctr.      Three Allen Ctr.       Continental Ctr. I
811 Main Street     700 Milam         909 Fannin          500 Dallas Street   1200 Smith Street   333 Clay Street        1600 Smith Street
690K SF Available   Shell             Shell Trading       Hess                Devon Energy        Devon Energy           Continental Airlines
                    554K SF           249K SF             388K SF             281K SF             186K SF                414K SF
                    Expires 12/2013   Available Q3 2013   Available 9/2011    Available 4/2011    Sublease Thru 1/2020   Expires 12/2014
                                                                                                                         Chevron
                                                                                                                         250K SF
                                                                                                                         Expires 3/2011


                               3M SF = 11% Class A Market
                                                         Trends/Forecast
                                                        West Loop Class A
                                                                    36 Bldgs, 14.6M SF
                                                            302K SF Proposed SKANSKA
                                                                      10% Vacancy
                                                                                                             2009
                                                                   170K SF Absorp. YTD     Subprime
                                                                                           Mortgage Crisis              $29.00 psf
                                                                                                             $30.00
                                                                                         Oil Hits
                                                                                         $145/barrel
                                                                                                             psf      2010




                             2000-2001
            Tech Bubble                             Enron
                                                            9-11
                                $22.00 psf
                                                                           $19.00 psf



                                                                          2004 - 2005
                                                                    5 bldgs with over 50K SF
Source: Costar, a select set of buildings 12/6/10
                                                                      Contiguous Available
                        Trends/Forecast
                       West Loop Class A




3009 Post Oak        Bechtel                  Apache                    Southern Union Tower
SKANSKA New Dev.     3000 Post Oak            2000 Post Oak Blvd.       5444 Westheimer
302K SF GB 1Q 2011   439K SF Expires 6/2011   340K SF Expires 12/2013   BG/Southern Union
                                                                        220K SF Expires 5/31/2012
                                                   Trends/Forecast
                                                Energy Corridor Class A
                                                      33 Bldgs, 8.1M SF
                                                         1.6M SF UC
                                                        30% Vacancy
                                                     30K SF Absorp. YTD
                                                                                         2008 - 2009
                                                                           Subprime
                                                                           Mortgage Crisis   $28.25      $26.75psf
                                                                                             psf
                                                                         Oil Hits
                                                                         $145/barrel                   2010




                                 2001-2002
                          9-11
                  Enron                                     $20.00 psf
       Tech Bubble                 $22.00 psf

                                                          2004 - 2005
                                                     13 bldgs with over 50K SF
Source: Costar, a select set of buildings 12/4/10      Contiguous Available
                    Trends/Forecast
                 Energy Corridor Class A




Three Eldridge Place    Eldridge Oaks    Reserve at Park Ten
737 Eldridge            1080 Eldridge    15721 Park Row
305K SF                 272K SF Avail.   136K SF
                                                     Trends/Forecast
                                                    Westchase Class A
                                                        26 Bldgs, 7.2M SF
                                                           14% Vacancy
                                                         291K SF Absorp.
                                                                                                         $30.00 psf

                                                                                                              2010

                                                                                           $27.75
                                                                                Subprime    psf
                                                                                Mortgage Crisis
                                                                                                  2009
                                                                            Oil Hits
                                                                            $145/barrel
    1998 - 1999
                        Tech Bubble
      $24.00 psf               Enron
                                       9-11



                                                        $20.00 psf

                                                     2004 - 2005

                                                     6 bldgs with over 50K SF
Source: Costar, a select set of buildings 12/4/10
                                                       Contiguous Available
                      Trends/Forecast
                     Westchase Class A




Oak Park Center IV              Westchase Park
6005 Rogerdale                  3700 W Sam Houston
158K SF                         144K SF
                                                      Trends/Forecast
                                                    Northwest Far Class A
                                                           24 Bldgs, 4.6M SF
                                                             39% Vacancy
                                                            785K SF Absorp.


                                                                                                                      $27.20
                                                                                             Subprime
                                                                                             Mortgage Crisis
                                                                                                                        psf
                                                                               Oil Hits
                                                                               $145/barrel                             2010
                                                                                                               2009
                2000 -2001
    Tech Bubble
                     $22.74 psf             $21.00 psf

                                              2002




                                                         10 bldgs with over 50K SF
                                                             Contiguous Available
Source: Costar, a select set of buildings 12/4/10
                       Trends/Forecast
                     Northwest Far Class A




Beltway Lakes II         Westway Park II      Two Westway
5875 N Sam Houston       4424 W Sam Houston   11025 Equity
162K SF                  82K SF               72K SF
                                                     Trends/Forecast
                                                    Greenspoint Class A
                                                       19 Bldgs, 4.7M SF
                                                           7% Vacancy
                                                      61K SF Absorp. YTD




                                    2001-2002

                             9-11                                                       2008 - 2009     $20.40 psf
                     Enron           $21.50 psf
                                                                                          $20.50 psf   2010
        Tech Bubble

                                                       $18.75 psf          $18.70 psf

                                                     2003 - 2004            2006



                                                       1 bldg with over 50K SF
Source: Costar, a select set of buildings 12/4/10
                                                        Contiguous Available
                                                         Trends/Forecast
                                                        Greenway Class A
                                                             15 Bldgs, 6.0M SF
                                                                14% Vacancy
                                                            24K SF Absorp. YTD
                                                                                                           2009
                                                                                         Subprime
                                                                                         Mortgage Crisis   $30.50
                                                                                                           psf         $28.00 psf
                                                                                       Oil Hits
                                                                                       $145/barrel
                                                                                                                    2010




      Tech Bubble      2000-2001
                                             Enron
                                                     9-11
                         $21.75 psf
                                                                  $19.50 psf


                                                                    2005
                                                            5 bldgs with over 50K SF
Source: Costar, a select set of buildings 12/4/10
                                                              Contiguous Available
                        Capital Markets



 $1.2T Debt tsunami is farther offshore and weakening
 Distressed loan levels stabilized in Q3
     New delinquencies decreasing and more banks putting
     assets on market*
 Special services are resolving troubled loans faster this year
     (2009 ave 21mos/2010 ave 18)**
 CMBS market is slowly returning




Source: *Costar Advisor 10/27/10
        ** Globe Street 10/27/10
                       Capital Markets



Sellers:    Houston is still the ‘place to be’ (not overbuilt + job growth)
            Foreign investors continuing to enter market

Buyers:     Cash is King – 55-65% LTV
            More buildings expected to go on the market in Q1 2011

Tenants:  Special servicers not motivated to spend capital
          Know your lease
                                         Capital Markets
                                          Notable Sales

 Date       Building                          SF          $/SF     % Cap   Buyer

Jun-10      17000 Katy Fwy                   174K         $174      9.5%   Black Forest Ventures
                                               SF
Jun-10      Energy Center I                  332K         $283      7.2%   Wells Real Estate Funds
                                               SF
Jul-10      3 Sugar Creek                    153K         $186      TBD    American National Insurance
            Blvd                               SF
Sep-10      Energy Crossing I                239K         $119      TBD    Lincoln Property Company
                                               SF
Oct-10      3900 Essex                       235K         $144      8.0%   Beacon Investment Properties
                                               SF
 UC         Lakes on Post Oak                440K         $145      8.0%   Five Mile Capital
                                               SF
 UC         Heritage Plaza                1.1M SF         $285      6.2%   Brookfield




      Source: Real Capital Analytics; Transwestern; CoStar Comps
   Corporate Space
Strategies for Tenants


 Renewing:     Go Long
 Downsizing:   Restructure Lease
 Expanding:    Go Long
 Subleasing:   Go Ugly Early
 Relocating:   Set Aside 3 Days for Tours




  Don’t judge a building by its market
  The watch list is a must see
Questions & Answers

								
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