Texas: Bucking the Trend
Nov 1, 2008 12:00 PM, By Patricia Kirk
Energy-rich Texas continues to experience job growth and new residents are flooding to Houston and the Dallas/Fort Worth area. That, in turn, has led to a boom in retail development at a time when construction is slowing in other markets.
Unlike California, Florida and numerous other states across the country, Texas hasn't experienced dramatic numbers of foreclosures. Homes prices may be flat or down slightly, but they are still selling from the influx of people coming for jobs. This year, Houston and Dallas are forecast to add more than 50,000 positions.
As a result, office space is at a premium, causing a boom in office construction throughout the region. Offices for major oil companies are rising from Dairy Ashford all the way west to Katy, according to Bill Forest, senior investment advisor in Houston for Irvine, Calif.-based Sperry Van Ness, who notes that class-A office rents are $22 to $24 per square foot in and around downtown and $28 per square foot to $30 per square foot in the outlying suburbs.
The largest natural gas field in the U.S., North Texas Barnett Shale, has kept Fort Worth's economy buzzing. Meanwhile, Dallas has become a popular destination for relocations and corporate expansions. AT&T moved its offices to the region's Telecom Corridor earlier this year, bringing 6,000 jobs in the process. At the same time, Houston has invested nearly $800 million in infrastructure and capital improvements to its sports, entertainment and convention facilities making its downtown more pedestrian-friendly for visitors and residents. Brokers familiar with Houston and Dallas say, overall, the Texas economy and retail are probably the strongest in the nation.
All of that has helped spur retail development. Overall, developers in Houston will deliver 9.1 million square feet of retail by years' end, and the Dallas/Fort Worth Metroplex will see 7.8 million square feet come on-line.
That doesn't mean the picture is entirely rosy, however. The economic downturn is affecting some of Houston's outlying areas. There are a lot of vacant buildings north and northwest including “stretches along I-44,” says Don Stringham, a retail broker in the Houston office of Los Angeles-based Marcus & Millichap, noting that Bloomfield Hills, Mich.-based Pulte Homes has sold off large tracts of land to local developers very cheaply and retail centers in overdeveloped areas remain vacant, despite lower rents and generous incentives. Gas prices are hurting restaurants, and increased overhead is eating away at retailer profits, according to Forest, who explains that Houston landlords are passing through on average a $6 per square foot rent increase to cover higher utilities and property taxes, due to escalating property values.
Meanwhile, there is some danger that the amount of space coming online may be too much, especially considering that vacancy rates in both cities are not exactly microscopic. Marcus & Millichap's third quarter report forecasts the vacancy in the Metroplex will remain steady at 15.9 percent through years' end and Houston's vacancy rate will rise to 13.4 percent as a result of the new space. Once that supply is absorbed, vacancy rates will drop some because the credit crunch has halted new development.
“Investors are staying on the sidelines to see how this shakes out,” says Stephen Maulden, the manager of sales in the Dallas office for Encino, Calif.-based Marcus & Millichap. As a result, Maulden predicts the markets will slow in 2009.
The credit crunch is also hurting deal activity. “Right now you can't get a lender to give you 15 cents to build anything,” says Forest. Moreover, sellers are offering to partly finance deals, because banks aren't carrying more than 50 percent or 60 percent. Stringham adds, the credit crunch is also affecting the investment side. “I haven't seen anyone carry paper in the last few years, but now we're seeing a lot more of that.”
Cap rates are also moving up, Maudlen says, and there's still a gap between buyers and sellers. Sellers of multi-tenant properties are asking 8.0 percent to 8.5 percent cap rates, but are selling in the high 8s. Before too long, he expects sellers will be offering them in the 9s. Forest adds, asking cap for first-tier Houston properties is 7 percent, but people are buying them at 8 percent.
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