by Privcap
May 4, 2015

Pause In Houston’s Growth Good For RE

Amid fears of an oversupply of real estate, Houston may be set to experience a slowdown in its rapid growth thanks to falling oil prices. Local investors and managers argue that’s a good thing, with fundamentals now more in check with capital markets.

The go-go years in Houston real estate may finally be set for a pause.  And that could be the best thing for the Texas metropolis.

Industry murmurs have predicted a possible crash for the red hot energy hub following a rapid rise in pricing and mass development fueled, in part, by the U.S. oil and gas boom, but Houston insiders say fundamentals are in check for Texas’ most populous city.

Bruce McClenny, Apartment Data Services

“This is not a doomsday situation by any stretch,” says Bruce McClenny, president of data provider Apartment Data Services, rejecting mounting concerns of an oversupply in the commercial real estate market and the impact on returns and rental growth. “[If] you compare [today’s market] to 2009 when we lost 108,000 jobs, back then the market retreated only 2 percent in rents and made it up in the very next year. There could be outside events that might occur, but given what I am seeing [in market fundamentals] and the current economic situation globally [a crash is] hard to imagine.”

McClenny describes Houston as a growth market that has been “underserved for many years.” From his perspective, the past few years have seen the market catching up to pent-up demand from population growth and job growth for the whole economy, and not solely driven by the boom in shale oil and gas production.

Brandon Houston, a principal with real estate development and investment firm, Trammell Crow, says many Houston development projects had already been put on hold in the wake of the Organization of the Petroleum Exporting Countries’ decision in November 2014 not to cut oil production amid falling prices, a move that helped push oil prices even lower.

With development now pared back, Trammell Crow’s Houston and McClenny agree demand has had a chance to find equilibrium with new real estate product coming online.

Brandon Houston, Trammell Crow

“Hopefully, the uncertainty of last November and December is behind us,” says Houston. “Today institutional capital sees this market as more stable and they’re beginning to adjust to a new normal. There’s still opportunity in the market even if it’s not exactly the same as the past three years.”

For non-Houstonians, the real estate investment market can be broken into three major areas. The much-publicized Energy Corridor resides on the west side of Houston where large upstream firms focused on energy exploration and production are headquartered.

Meanwhile, the east side of the city is home to companies focused on downstream production, such as petrochemicals, that are driven by a diverse base including manufacturing. The third major area, the Inner Loop, acts as the central business district that houses most of the traditional core assets, including Class A office and luxury residential developments in the city.

Given the rapid rise of prices in the Houston real estate market over the past three years, investors are hard-pressed to find palatable core pricing. “There is enough property in the pipeline to cause a little uneasiness in even the best of times,” McClenny says. However, he argues that Houston will continue to benefit from  predictions of 2 percent job growth following a multiyear run of more than 4 percent, alongside strong population growth trends and an estimated $55B of investments in refinery operations throughout the Texas Gulf Coast. There is also the robust strength of global corporations such as Shell, BP, and Phillips.   

That’s why McClenny recommends looking to value-add opportunities. “Class C and Class B is where Houston is really moving, and there is no new supply there,” he says. “We still have a lot of people moving to the city. It’s a very good situation.”

Similarly, Trammell Crow’s Houston is upbeat about “underserved” real estate food groups, not least retail and industrial. “Right now there has been so much residential growth, retail is trying to catch up,” Houston says. “Also, industrial is growing as more people and industries move here and there is more demand for warehouses, manufacturing and distribution facilities.”

For Houston, though, his namesake is a “growth city and will continue to be a growth city.

“For institutional capital looking for development and long-term investment, it’s a great place,” says Houston. “Over the last three years a lot of capital and development came to the city, but now we’re back to sustainable growth of 2 percent to 3 percent, and that’s where we want to be.” McClenny agrees: “We’re going to see a healthy pause and that is not all bad.”

Amid fears of an oversupply of real estate, Houston may be set to experience a slowdown in its rapid growth thanks to falling oil prices. Local investors and managers argue that’s a good thing, with fundamentals now more in check with capital markets.

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