Diversified markets keep Houston's economy healthy

Thanks to a more diversified economy, an upswing in the energy industry, and a surprising degree of restraint by bankers and builders, real estate development in Houston is experiencing some heady times. Often cited during the 1980s and 1990s as an example of unbridled development, Space City currently reports low vacancy rates in virtually all sectors of the real estate industry and an upbeat outlook for development.

“Houston has done a very good job in diversifying its economy from just oil and gas,” said Drew Alexander, CEO of Houston-based Weingarten Realty Investors. “We have a strong tech sector, we have the Medical Center and we have a growing entrepreneurial sector. Energy is still important — and that industry is good right now — but Houston is not as reliant on oil and gas as it once was.”

In fact, the city's continuing economic vitality is the envy of other municipalities, including Houston's rival to the north. “Houston has a much stronger economy than Dallas, with a lower unemployment rate, a strong energy sector, a more vigorous housing market, and sturdier oil field services and manufacturing sectors,” said Bernard L. Weinstein, director of the Center for Economic Development and Research at the University of North Texas in Denton.

For years, Houston's economic performance ran contrary to the national economy because of its oil and gas business, said David Cook, senior director at Cushman & Wakefield of Texas Inc. “But other parts of our economy are performing nicely, too. The [Texas] Medical Center is doing well. NASA and the [Johnson] Space Center are pretty healthy. We're having positive job growth,” he said.

According to Lee Moreland, vice president and southwest regional manager at Chicago-based CMD Realty Investors, the current real estate market is healthy in contrast to years past. “The market, so far, appears to be very stable,” Moreland said. “We are still seeing positive job growth, and there has not been an overabundance of sublease space.”

Glenn Clements, group president of Stewart Title of Houston, agreed the future looks bright for Houston development. “Everybody I talked to feels very good about Houston. Unless there are any major bumps down the road that we don't see, I think Houston will continue strongly for another 18 months or two years,” he said.

Limited office construction

Houston's commercial market is in decent shape because there hasn't been any real spec construction for several years now, said Dan Bellow, president of Dallas-based Staubach Co.'s Houston office. “Consequently, Houston's vacancy/occupancy ratio is good,” he said. With Class-A occupancy at more than 90%, the appetite for large spec development just doesn't exist, Bellow added.

Construction is occurring at a normal pace as well. Fort Worth-based Crescent Real Estate is building the 27-story, 577,000 sq. ft. 5 Houston Center, scheduled to open in third-quarter 2002. “Downtown occupancy rates for Class-A space are at historically high rates. The demand for quality office space is growing, and we're happy to be in a position to respond to our customers' needs,” said Jane Page, senior vice president of asset management and leasing for Crescent's Houston office.

Local developer Hines has begun construction on a 689,000 sq. ft., 32-story office tower for Calpine Energy at 717 Texas in the city's theater district. “The fundamentals are there. Houston is one of the better office markets around. A lot of cities have higher vacancy rates, but in downtown Houston we didn't get ahead of ourselves in overbuilding,” said Charles M. Baughn, executive vice president at Hines.

Baughn said a revitalized downtown has drawn more development. “The new Enron Field has really helped and the new basketball arena, the new convention hotel, the convention center expansion — all are the icing on the cake,” he said. “There also is a lot more residential development downtown because the city is putting in new streets and parks. Downtown Houston is being transformed.”

Locally based Century Development also is contributing to the building boom with its $150 million, 36-story 1000 Main Building, the future home of Reliant Resources, a development that includes a trading floor on top of the 10-story parking garage.

Houston has fared well in relation to many U.S. office markets, according to Bill Goeke, senior vice president & director of Newport Beach, Calif.-based PM Realty Group's central division. “However, while most submarkets have performed exceptionally well, other submarkets have been flat or have even seen negative absorption,” he said.

Retail sector expanding

The Houston retail market continues to attract more national retailers that want to establish a presence in the nation's fourth largest city, said Alexander of Weingarten Realty Investors. “Perhaps the biggest news is that Kohl's, a department store, is coming to Houston and plans to open 10 to 12 stores by next spring,” said Alexander. Wal-Mart, Target and San Antonio-based H-E-B also are opening several superstores in Houston, he added.

Houston's retail real estate market will finish on a strong note, said George Weatherall, executive vice president in charge of Houston operations of The Weitzman Group. Weatherall observed that during the first half of 2001, the market experienced active leasing and construction, as well as notable expansions by major retailers. “The retail market is benefiting directly from a strong housing and job market in the greater Houston area,” Weatherall said.

The housing market set records in 2000, with the sale of more than 55,000 homes, and the market this year remains equally strong. New home sales were up 6% in June compared with a year earlier, Weatherall said. Single-family construction also increased by 10% in the month-to-month comparison. As a result of the area's healthy economy, Houston reported a retail market occupancy rate of nearly 90% at mid-year, compared with 88% at year-end 2000.

Construction is continuing at an active pace and could reach 6 million sq. ft. by the end of the year. A significant amount of this space will be freestanding, big-box spaces for retailers such as Home Depot, Lowe's, Target, Sam's Club and Wal-Mart Supercenter, analysts said.

As a result of the positive activity in the market, Houston's retail rental rates have remained steady, with Class-A space generally ranging from $18 per sq. ft. to $19 per sq. ft. annually in the better markets to as high as $20 per sq. ft, excluding taxes and insurance. For second-generation space in a good location, rates generally range from $14 per sq. ft. to $15 per sq. ft., with tertiary space at $10 per sq. ft. to $12 per sq. ft., Weatherall said.

Multifamily sector vibrant

The Houston multifamily market is sound primarily because developers stopped building new units, said Ric Campo, CEO of Camden Property Trust, a national REIT based in Houston. According to Campo, there was a bubble of construction in 1998 with 20,000 multifamily starts, as well as in 1999 when another 10,000 apartments entered the market. But, he added, the pace of job growth in Houston has slowed. In 1998, Houston generated 98,000 new jobs compared with 36,000 in 1999, so 60,000 fewer jobs were created at the time permits peaked.

However, according to Campo, Houston absorbed most of the oversupply by 2001, ending the boom-or-bust mentality and introducing a more gentle cycle. “People could see Houston was going to hit a wall. Capital shut down and developers didn't build more apartments,” Campo said. “Houston did hit the wall but we didn't crash. We only damaged the bumper.”

Although construction still is occurring, it is niche-sensitive. One of the most eagerly awaited condominium projects is locally based Interfin's Montebello, a 30-story high-rise project on Uptown Park Boulevard next to the successful Villa d'Este project, Interfin's 27-story luxury high rise. Montebello's 112 units range in price from $500,000 to $1.8 million and in size from 2,100 sq. ft. to 5,000 sq. ft.

“Our high-rise homes are quite large because our customers are coming from very large Houston homes,” said Giorgio Borlenghi, president of Interfin. “They are ready for a new simplified lifestyle but want to sacrifice space only up to a certain point.”

While the multifamily market appears to be holding firm, there are pockets of overbuilding in some areas, said Jerold Winograd, president of Judwin Properties Inc. of Houston. “We're cautiously optimistic for 2002,” said Winograd. “We like to say the current situation is relative to what we saw in the late 1970s when there was trouble in the economy in other regions, and a lot of people moved to Texas. We're starting to see that happen again.”

That may be. Houston is generating approximately 5,000 jobs each month this year, said Marty McAdams, regional manager of the Houston office of Encino, Calif.-based Marcus & Millichap. “That does two things,” McAdams said. “It helps in both the apartment and the retail business. It helps stave off some of the damage that has occurred nationally.”

More hotel rooms planned

Houston also is experiencing a strong hospitality market, but the softness in the economy could bode ill as more rooms become available. “We had a great first quarter. However, we are starting to see a softening of the business market,” said J. William Sharman, chairman of Lancaster Hotels and Resorts in Houston. “Houston's outlook is stable and better than most areas in the U.S. But the national economy is not doing us any favors.”

Sharman noted that about 700 rooms will be built in downtown Houston, including the 259-room Crowne Plaza in the Cullen Center development and the 171-room Residence Inn and 191-room Courtyard by Marriott in the historical Humble Oil building. Construction has begun on the $285 million Hilton Americas, a new 1,200-room convention hotel slated for completion in the fall of 2003.

Even with the new construction, Houston is the only major market in Texas and one of the few in the U.S. that is seeing occupancy and room rate increases, said John Keeling, senior vice president in the Houston office of San Francisco-based PKF Consulting. “The prognosis for 2001 is good with some softening in 2002,” he said. “However, 2003 should be a soft year as most meeting planners do not want to be in Houston when the entire convention center area will be under construction.”

Industrial overbuilding

Houston's industrial market remains steady, with some pockets of overbuilding in certain sectors, said Greg Murphy, vice president of industrial properties and acquisitions at Weingarten Realty, which has a major industrial presence in Space City. “The city's industrial market seems to be pretty much in balance,” Murphy said. “We're doing pretty well because of our diversified economy. I don't think we'll experience the problems that the slowing economy is creating in places like Dallas, which has been hurt by the dot-com and telecom meltdowns.”

While Houston is not a major distribution market like Dallas, Atlanta or Chicago, it is a strong local and regional distribution market. “We have a lot of third-party logistics providers that are doing public warehousing for a lot of the companies out there that don't want to build or lease their own real estate facilities,” Murphy said.

The city's industrial market is running counter to the national market, noted Brian Gammill, senior vice president in the Houston office of Chicago-based Transwestern Commercial Services. “There has been increased demand in energy the last 12 months, combined with new job growth of 50,000, which translates into absorption of space,” he said. The current occupancy level in industrial is 93%, with nearly 5 million sq. ft. of absorption last year.

Among Transwestern's projects is the Sam Houston Center, a 350,000 sq. ft. building at Beltway 8 and U.S. 290 that includes a 150,000 sq. ft. build-to-suit for Dallas-based Apollo. The 277,000 sq. ft. Claymoore Business Park at Clay and Beltway, of which 184,000 sq. ft. has been leased to Igloo, also was recently finished. “As long as we continue to see strong job growth, and the world and U.S. economies do not bring us down, we expect industrial demand to continue,” Gammill said.

Matt Khourie, area president of Trammell Crow's Houston operations, said the industrial market seems to be in balance overall. “There has been a lot of construction over the past two years and lot of absorption,” Khourie said. “Demand seems to be holding up quite well. Absorption is occurring all around Houston, although there are some submarkets where absorption is slightly slower.”

A positive outlook

Overall, the Houston real estate industry is enjoying equilibrium, according to industry observers. “Real estate activity will be stronger in 2002 because of this year's general economic slowdown of the nation,” said George Carmichael, president of Houston shopping center and land development firm Carmichael Development Co. “We expect things to pick up significantly next year, and I think the economy will be much improved in the first quarter.”

Mike Sheridan is a Houston-based writer.

Galleria undergoes renovation

The Grande Dame of Houston's luxury retail scene, the famed Galleria shopping complex, is undergoing a $125 million facelift and expansion that includes construction of the city's first Nordstrom department store.

The expansion will include the 225,000 sq. ft. Nordstrom, a 250,000 sq. ft. Foley's and 700,000 sq. ft. of additional retail space. The Galleria's current anchors include Neiman Marcus, Lord & Taylor, Saks Fifth Avenue and Macy's. The mall also contains two Westin Hotels, which total 900 rooms, and 1.1 million sq. ft. of office space.

Stan Jewel, first vice president at the Galleria office of Los Angeles-based CB Richard Ellis, said the renovation and expansion of the Galleria is “fantastic.” He added that the Galleria is a premier property known around the world. “It was the first mall in Houston to offer a Neiman Marcus, Marshall Field's and Lord & Taylor,” Jewel said. “Now it will have the first Nordstrom. Adding Nordstrom and expanding the Galleria is a great move.”

The renovation of the Galleria, owned by Chicago-based HG Shopping Centers LP and managed by Chicago-based Urban Retail Properties, will rejuvenate the area and support the center's status as a world-class, upscale shopping complex.

“As Houston's premier shopping center, we felt that after 30 years it was time to update the Galleria and bring about changes to enhance its looks and improve accessibility,” said Todd Casper, vice president and general manager of the Galleria. “We have some very high-end retailers here, and we want them to express themselves individually.”

The Galleria was the nation's first true mixed-use product of its kind, with office space, hotel, shops, restaurants and skating rink, added Gar Muse, principal at the Atlanta design firm of Cooper Carry, which is overseeing the projects. Muse likened the facelift to that of the popular Volkswagen Beetle, when the manufacturer refined its original creation instead of making drastic changes.

“The company streamlined, stylized and softened its curves to make it a more elegant vehicle, which also is our intention: to respect the original design and enhance it into classic modern architecture.”

According to officials, the renovation will be completed by June 2002, with the expansion slated for completion in March 2003.
Mike Sheridan

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