After being battered by a one-two punch from Hurricane Harvey and a sharp drop in oil prices, Houston is ready to prove to investors that it is ready for a comeback.
Houston Commercial Real Estate Investment History
The Houston metro has long been a popular target for investors. It ranks as one of the top 10 largest regional economies in the U.S. with a population of nearly 7 million and 21 Fortune 500 companies. Despite those impressive stats, Houston is – above all else – a top global energy market. Based on 2016 data, nearly half of the local economy, 44 percent, was dependent on the oil & gas industry, according to a new research report by Morningstar Credit Ratings.
Houston rides the highs and lows of the oil & gas industry, and the local economy was hit hard when the price of crude oil dropped from more than $100 per barrel in 2014 to about $30 a barrel in 2016. During that period, Houston oil companies shed an estimated 60,000 oil-related jobs, according to Morningstar. Yet the economy is now riding the upswing on improving oil prices, which have rebounded to about $75 per barrel. In addition, rebuilding efforts in the wake of Hurricane Harvey have produced additional jobs and strengthened consumer spending. Harvey hit the region in August 2017 with a devastating impact that resulted in over $100 billion in damage in Texas.
Despite its setbacks, Downtown Houston has been a hotbed of development and redevelopment activity with more than $9 billion in public and private investment that has been made over the past two decades, according to the Houston Downtown Management District. The Downtown District credits the city’s focus on increasing its urban residential population and creating a vibrant live-work-play destination downtown as a key driver behind much of that activity. There are currently more than 65,000 residents in Greater Downtown and over 8,000 within the urban center, according to the Downtown District.
Investment sales also have remained robust throughout the metro. According to Reonomy, office, multifamily and industrial sales jumped 48% in 2017 to reach $4.5 billion. Year-to-date sales remain strong at $3.2 billion.
Developers focus on Downtown
Last year, 17 projects were completed Downtown that produced 1,555 residential units, 1,680 hotel rooms and 1.5 million sf of office space. This year, another 31 projects are underway or planned that will add another 3,259 apartment and condo units, 665 hotel rooms and 4.45 million sf of new office space. Major projects include:
The completion of the roughly 140,000 sf (3.5 acre) Avenida Plaza adjacent to the George R. Brown Convention Center created a new, walkable dining, entertainment and arts destination.
New York-based Skanska Commercial Development is building a new 35-story office tower at 811 Rusk St. that will span about 775,000 sf. The estimated completion date is set for second quarter 2019.
Camden Property Trust is developing a new 21-story, 271-unit residential building at 1515 Austin near the Toyota Center that is expected to be completed by the end of 2018. A second phase on this 3-block site will include an additional twin tower. However, Camden has not announced a start date on its second phase.
AC Hotel by Marriott:
Located at 723 Main, Newcrest Image is redeveloping the former Houston Bar Center into a 10-story, 195-key luxury hotel. The project is expected to be completed in fourth quarter.
Investors Favor Apartments
Houston-area apartments have benefited from a spike in demand for rental housing from people who were displaced due to hurricane flooding damage to homes. Although that demand is likely to be short-term, it has helped to absorb some of the excess supply that has been built in recent years and reduce concerns about overbuilding. According to Marcus & Millichap, the Houston metro saw the addition of more than 44,000 units in 2016 and 2017 with another 10,800 units expected to be completed by the end of this year. That new supply is expected to push vacancies slightly higher to 5.5% by year end.
Yet the building boom has not dampened buyer demand. Multifamily has dominated property sales in recent years, including $3.8 billion in multifamily assets that traded last year, according to Reonomy. Year-to-date sales have slowed to $1.9 billion but remain at relatively high levels compared to other metros.
Meanwhile, the office sector is still struggling under a heavy load of vacant space. The downturn in the oil market was ill-timed with a spec building boom that has resulted in a surge of surplus inventory. Vacancies peaked at more than 20% in 2017. The lack of new building along with employment growth is expected to spur more positive absorption this year with vacancies improving 50 basis points to 19.8%, according to Marcus & Millichap.
According to JLL’s 2018 North America Energy Outlook, energy companies are once again hiring. However, they are taking a more conservative approach to office leasing with shorter, more flexible leases to mitigate risk of another slump in oil & gas production.
Although oil continues to play a significant role in the local economy, it also is clear that the region is working to diversify its business base. According to the Downtown District, Houston is home to a growing tech hub. For example, the New York-based Flatiron School, an accelerated programming school, opened a new campus in a Downtown Houston WeWork location with $250,000 in full scholarships from Facebook for the inaugural class. Chevron Technology Ventures, the Houston-based venture capital arm of Chevron Corp., also has created a new $100 million “Future Energy Fund” to invest in research and innovation of new and alternative energy technologies.
The continued diversification will help to create a more stable economy over the long-term. However, investors and developers are proceeding cautiously in the near term. There continues to be a mix of risks and opportunities in the market related to the new supply that has brought added competitive pressure to the market.