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Tighter markets and a strong economy have the Texas city standing high on solid footing. John Daugherty Realtors, the city's luxury real estate firm, sold more than $2 million in residential properties a day in March -- a 50% increase in sales over the same time last year.

"1996 was our best ever, with a sales volume of $450 million. We expect to do even better this year," says John A. Daugherty Jr., president of the 30-year-old firm.

The office market is one of the strongest in years. Industrial has the lowest vacancy rate in two decades. The multifamily segment is experiencing solid growth and rental rate increases. Even retail, where a torrid pace of development over the last few years has left analysts and shoppers struggling to catch their breath, is doing well.

"Houston is back," says Walter Ross, chairman emeritus of PM Realty Group, a Houston-based real estate service firm. "The city is enjoying the best real estate market in years."

So is the Houston economy. "The outlook for Houston is bullish," says Martin Fein, president of Corrigan*Fein Real Estate Services. "We're getting some bullish signs from the oil industry, which is in good health. Having been through boom and bust, it feels like we're on solid footing."

There's no question real estate is experiencing a solid, bankable recovery, says William E. Penland Jr., executive vice president Houston/executive managing officer CB Commercial Real Estate Group. "And unlike the old days when real estate development was driven in large measure by tax incentives, the new development that will begin this year is caused by self-generated, market-driven demand," he says.

Mike Inselmann, president of American Metro/Study Inc., a Houston consulting company that analyzes housing data, notes that a 2.4% job growth is forecast for this year.

"The Houston real estate market's recovery is being driven by very solid and substantial job growth -- 50,000 new jobs per year over three years," adds Larry Heard, president of the southwest division of Transwestern Property Co.

Office rents rising The Houston office market began the year with 1.7 million sq. ft. of positive absorption during the first quarter, according to Trione & Gordon*Oncor International. The citywide vacancy rate has decreased to 15.4%, down more than three percentage points compared to the same period a year ago. Allen Parkway Corridor, the Energy Corridor and The Woodlands have a vacancy rate of less than 10%.

That means there are some profound changes taking place in the commercial sector. "Tenants are beginning to recognize decreased supply, higher rental rates, fewer large blocks of contiguous space," says Jeff Black, first vice president at CB Commercial. Black notes that Class-A rates increased $1 to $2 per sq. ft.

Trione & Gordon notes that Class-A weighted-average annual asking rental rates have continued to increase during the past 12 months. The active Energy Corridor leads the way, increasing their rental rates by $8 to $20.89 per sq. ft. The jump was attributed to BP Plaza putting one floor back on the market with rental rates in the $20 to $22 per sq. ft. range.

In the Greenway Plaza area, rents have increased significantly since Crescent Real Estate Equities' purchase of the mixed-use development, jumping 7% to 18% since the purchase.

"We intend to remain competitive with the city's other financial centers and will continue to maintain the standard of high quality that Greenway has become known for," says Neil H. Tofsky, president and COO of Senterra Real Estate Group.

Despite the rent hikes, space continues to be leased, and developers are talking about new product. Leases so far this year include Prudential in 9009 West Loop South for 113,000 sq. ft., Louisiana Land & Exploration in 1001 Fannin for 94,166 sq. ft., Schlumberger in 12808 W. Airport for 75,000 sq. ft. and CGG American Services in 16430 Park Ten for 61,000 sq. ft.

"We'll probably see new product brought to market in the suburbs this year or next, possibly in the Southwest, Sugarland, I-10 Energy corridor and Woodlands areas," says Heard.

Industrial market tightens Industrial users in Houston are also facing a tight supply and rising rents. "Overall, industrial is the strongest product type in Houston, with a good balance existing of supply and demand," says Matt Khourie, president of Trammell Crow Houston. "We track about 90 million sq. ft. of total space, and overall occupancy is about 90%."

Security Capital, Parkway, Midway, Texas Development and Transwestern are among the companies developing multitenant distribution facilities, most of which are found in Houston's northwest and southwest areas. According to Grubb & Ellis, more than 1 million sq. ft. is under construction.

"Tenants rolling over leases made five to 10 years ago have definitely had sticker shock," says H. T. Trey Odom III of CB Commercial. "Leases at rates in the low- to mid-20s (cents per sq. ft.) are now rolling over into the low- to mid-30s. That's $0.30 per sq. ft., per month, industrial gross. The math is simple: It's a 50% increase."

Two submarkets that show the best absorption and best activity are the northwest area and the southwest submarket around Stafford and Sugarland. In those submarkets, rents increased and building is occurring.

"We just completed a 120,000 sq. ft. building, Northwest Place I, that was 100% leased by Scott & Associates, and we are two months from completing another building, a 67,000 sq. ft. multitenant building in Stafford that is 80% leased," says Trammell Crow's Khourie.

The Houston area registered 16.2 million sq. ft. of industrial sales and leasing, a 30% jump from 1995. All that activity left the market tight, with a vacancy rate of just 10%.

Retail construction slows The area's retail real estate market is experiencing moderate growth, with the sector taking a breather from the hectic construction pace of the last few years. "Things are pretty good. New construction has slowed down," says Andrew "Drew" Alexander, president of Weingarten Realty Investors, a shopping center developer. "We've added a fair amount of space with power centers around Houston and malls in First Colony and the Woodlands, so slower growth is appropriate. It's necessary for the city to absorb some of the space."

He adds that Houston retail is extremely competitive in some sectors and that is also having an affect on new development. In electronics, for instance, the city has recently experienced the closing of Incredible Universe, a 200,000 sq. ft. megastore that was a division of the Tandy Corp. Service Merchandise has also closed several Houston locations.

Accordingly, power center expansion will be very selective, according to Stanley E. Jewell, first vice president at CB Commercial. "Good locations with adequate acreage are limited," he adds. "Land prices with sufficient demographics will be higher with increasing construction costs, rents could outpace most tenants' ability to pay."

Brad D. Sondock, president of the Retail Properties Group, says there still is a need for retail development in the city. "Houston still has some outlying areas that have a need for retail," he says.

Realignment and renovation are among the major retail trends in Houston. Saks Fifth Avenue will replace Marshall Fields in the Galleria and Town & Country Mall this year. Sears will relocate to Pasadena Town Square. Dillard's will close in Gulfgate Mall, and the industry is anticipating the renovation of Memorial City Mall.

Houston-based CenterAmerica Property Trust is in a buying and renovating mode. Scott MacDonald, president and CEO, notes the company has embarked on a $100 million renovation and redevelopment program for its neighborhood centers.

"While we're looking at new development sites, renovation will focus on older centers in established neighborhoods," he says.

Multifamily sees new development Retail follows rooftops, and Houston is experiencing new residential developments. Perhaps one of the most dramatic announcements in the residential real estate market recently was by Giorgio Borlenghi's Interfin Corp. Interfin announced plans to develop a 27-story condominium tower.

Interfin's Villa d'Este project is the first high-rise residential tower to be built in Houston since 1984.

"Condominium sales are very strong in Houston, there hasn't been any new development in 15 years," says Borlenghi. "We thought the time was right."

Occupancy in apartments was 94.6% as of year's end, according to REVAC. "We expect construction for the year to be similar to or slightly below the annual level achieved over the past few years of about 5,000 units," says Jeanette Rice, vice president of AMRESCO Research. "Demand should remain strong, enabling occupancy to maintain a healthy rate in the low- to mid-90s range."

In addition, the Houston multifamily market is attracting many outside investors. "There's an oversupply of capital and a shortage of product," says Fein of Martin Fein Interests. "There's more money than good investments."

Already, there are a lot of apartment purchases. For example, Sam Zell's Equity Residential Properties Trust purchased 843 upper-end apartment units in one swoop. Equity closed on the 336-unit Trails of Dominion Park, the 224-unit Trails of Dominion Square and the 283-unit Trails of Dominion Grove.

Today's real estate market in Houston is a far cry from the sea of "see through" office buildings, vacant apartments and abandoned single-family homes of the 1980s.

"We think the real estate market will be strong for some time to come," adds Ross of PM Realty.

Mike Sheridan is a Houston-based writer who contributes to a number of national publications.

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