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Stable real estate market sets course for Space City

Stable" is not a word often used to describe the real estate industry in the nation's fourth-largest city. But in contrast to the boom and bust cycles of prior years, the Houston market has remained relatively constant during the past 12 months, a period when restructurings in the energy sector and a slowdown in available funding have fueled uncertainties.

"Before last year, everything was in a boom mode," says Dave Cook, senior director in the Houston office of New York-based Cushman & Wakefield. "We were selling land for new office buildings to the extent that we got a little nervous. That boom mentality came to a screeching halt when oil looked like it was headed toward $10 per barrel. At that point, many developers pulled the plug on many buildings that had been announced."

Cook and others note that there have been thousands of jobs lost in the oil patch nationally, but Houston has not been greatly affected. John Dailey, director of investments in the southeast region for Houston-based PM Realty Group, says that, "Since the early 1980s, we've learned not to get too excited by oil prices fluctuation - one way or another. Houston is still a great city, and an inexpensive place to live, with good, affordable housing."

While the city economy is more diversified today than in the past, says Dean Macfarland, CEO of Dallas-based Macfarland Realty Partners, it is still 50% to 60% oil related. "That's a significant exposure to energy business," he says. "There is no doubt the consolidation in the energy business is going to have a trickle down effect on real estate," he adds, noting that his firm owns 1 million sq. ft. of office and office service center.

Despite the challenges Houston faces in the energy business, it continues to have a vibrant economy. Larry Heard, president of the southwestern region of Dallas-based Transwestern, notes that while so much focus is placed on the energy sector, the region has many dynamic growth companies including industry giants Compaq and BMC Software. "There is also a growing electrical power generation and distribution industry, with the Enrons, Dukes and Dynergys growing at fast pace," he says. "Companies such as these are more than offsetting losses in the energy sector. We still anticipate positive job growth in the 1% range, or about 20,000 new jobs."

According to Dailey, Houston continues to attract outside investors such as pension fund advisors and some REITs. "You've got people looking at the market for sometime, still circling, ready to make deals," he says.

"We saw the recent purchase by Lend Lease of the 777 Post Oak Boulevard building," Dailey continues. "The purchase price was reportedly less than $140 per sq. ft. Buyers these days are only holding on three to five years and they are very concerned about their exit price per square foot. For a long time, Houston has had low rental rates which have only come up within the last several years."

Land prices in Houston are competitive, observers say, and are reflected in lower rents when compared to the rest of the country. A lower cost of living also translates into lower costs of doing business, and business is what the city is about. Houston has generated more new business over the last three years than any other American city.

Office market responds For this reason and others, office construction continues in Space City. Enron Corp. is expected to begin construction on a 40-story office tower later this summer. The 1.2 million sq. ft. building will be the first in the Central Business District in more than a decade. Hines of Houston is handling the development of the $200 million structure, which will be at Smith and Bell. In addition, Century Development plans to build a 37-story, 820,000 sq. ft. tower at McKinney, Lamar, Main and Travis; and Crescent Real Estate is considering building an 800,000 sq. ft. office tower downtown at McKinney, Lamar, LaBranch and Austin.

According to Oncor International, Houston had 32 office buildings under construction at the end of 1998, primarily in the Energy Corridor which has large projects by Mac Haik and MetroNational Corp.

"Absorption in the office sector will be down in 1999, yet still positive, in the 1.5 million sq. ft. range," says Transwestern's Heard. "The office market is so tight today that, in the Class-A sector, there is only 5% vacancy. And as the economy grows, I think we're still going to see a demand for space that may outstrip supply in 2000 and 2001."

There is some concern that downsizing in the energy patch will have an adverse affect on the office market. The BP/Amoco merger, for example, is expected to free up some 700,000 sq. ft. of space in the Energy Corridor and Clear Lake areas.

"We are seeing a softening in the Westchase and Energy Corridor areas where there has been a tremendous amount of space delivered," says Macfarland of Macfarland Realty Partners. "We think the inside of the Loop area will continue to see a lot of demand for office tenants. We don't see rates going down, we see them flattening.

Retail remains active While office construction in Houston continues at a steady pace, retail also has experienced growth. The retail sector remains buoyant thanks to the continuing strength of the city's economy, reports Drew Alexander, president of Houston-based Weingarten Realty Investors, one of the Southwest's major shopping center developers.

For instance, he adds, grocery stores have become extremely competitive in Houston, with companies upgrading formats and offering new conveniences. Alexander cites WRI's River Oaks Shopping Center as an example where Kroger operated in a 35,000 sq. ft. traditional store until last year.

"Kroger expressed interest in doubling its size and changing to its 'signature' concept, which includes more services and products to patrons," he says. "WRI was happy to comply and agreed to renovate the entire east section of this specialty center along with Kroger's redevelopment. The result included a 57,000 sq. ft., state-of-the-art store and a stunning refurbishing of that portion of the center."

Additional retailers are expanding in Houston, and developers are delivering retail space. According to E. D. "Ed" Wulfe, president of Wulfe & Co., a Houston-based retail real estate brokerage firm, construction of some 5.3 million sq. ft. of new retail space will be completed in the city this year.

"The 5.3 million sq. ft. of new retail space we have projected for 1999 will represent the largest amount of shopping center construction in Houston since the mid-1980s," he adds. "When this 5.3 million sq. ft. is added to the area's overall retail building inventory, the total will be in excess of 135 million sq. ft. of retail in Houston."

Wulfe notes that a major chunk of the space is Mills Corp.'s 1.6 million sq. ft. Katy Mills development in West Houston. In addition, Albertson's will open eight new supermarkets: Kroger with five, and HEB Pantry with three. New construction and expansion of the multi-screen, mega-theater complexes with stadium seating will continue with the addition of five to open in 1999, bringing the total of these super theaters in Houston to 18.

Interfin Corporation, a Houston-based real estate development company founded by Giorgio Borlenghi, has completed a European shopping destination in the Galleria area with the look and feel of an urban village. The 149,000 sq. ft. luxury retail center was designed with different elevations and facades for each individual store, coupled with a variety of materials.

Located west of Loop 610 and north of the Galleria, Uptown Park is immediately adjacent to Villa d'Este, Interfin Corporation's 27-story residential condominium tower. The project includes a 10,000 sq. ft. Accessories Of Benetton Sportsystem Tricaffe as well as restaurants including McCormick & Schmick and Champps Americana.

One of the major retail renovations in Houston will be Gulfgate Shopping Center, the oldest shopping mall in the city. Wulfe is managing partner for the redevelopment of the property, which is located at the Gulf Freeway and South Loop 610 East. The Wulfe team plans to rebuild the project into a new regional power center with 550,000 sq. ft.

Industrial charges ahead The Houston industrial sector is also experiencing hardy activity. Cook of Cushman & Wakefield notes that industrial leasing absorption for the first quarter was 218,000 sq. ft. "It's not a huge number, but it's still net absorption," he says. "Our leasing activity was 3.3 million sq. ft., because we've been building a good number of buildings."

According to Cushman & Wakefield, the city's 240 million sq. ft. of industrial space reported a vacancy rate of 7.1% in the first quarter of this year. Construction remains strong with 3.4 million sq. ft. under construction and another 1.6 million sq. ft. proposed. The firm reports some 80% of this space is speculative.

For instance, Houston-based InSite Realty has completed three warehouse projects in the World Houston Business Park, east of JFK Boulevard and north of the North Belt. The company also expects to build two other warehouses in the area, both structures exceeding 100,000 sq. ft.

Dallas-based Trammell Crow Co. and San Francisco-based AMB Property Corporation are planning a 350,000 sq. ft. warehouse complex, Northwest Crossing Distribution Center, at West Little York and Langfield. Two buildings are already under construction, and two more are scheduled to begin later this year.

In addition, Proterra Properties is building a 110,000 sq. ft. warehouse in northwest Houston near U. S. 290 and Pinemont. Chem One Corp. has leased about half of the new building.

Sales of industrial properties are also occurring. Weingarten Realty Investors purchased the Southport Business Park 5, a 157,000 sq. ft. warehouse on South Loop East, from Metropolitan Life Insurance Company. WRI also bought Crosspoint, a 72,000 sq. ft. office/warehouse at 1701 Crosspoint from New York-based Equitable Life Assurance.

In the multifamily sector, Dallas-based developer JPI has begun construction on 309-unit Jefferson Pines in northwest Houston. The project, at the corner of Compaq Center Drive and Louetta Road, is expected to open next spring. Also, the Morgan Group announced plans for The Plaza in the Museum District, which will feature 229 units on 3.4 acres across from the Children's Museum of Houston. The project marks the first major apartment development in the area in more than three decades, analysts say.

According to Houston-based Apartment Data Services Inc., some 1,319 multifamily units were absorbed during the first quarter of this year. That compares with 1,584 units absorbed during the same period in 1998, and 1,188 in 1997.

Ric Campo, chief executive officer of Houston-based Camden Property Trust, one of the nation's largest multifamily REITs, notes that some sectors in the city are strong for multifamily while others are softening.

"There is no question there are some soft submarkets, where more product is being built than is needed," he adds. "But if you build the right product in the right location, the project will succeed. We did 1,000 units of infill product and we're experiencing phenomenal leasing. At Park at Midtown, our 338-unit project at Louisiana and Hadley, we projected leasing about 30 units a month and we're leasing 50. And that's despite how Metro is ripping up the roads around the development."

Despite concern about additional consolidation in the energy industry and worries about potential overbuilding, the Houston real estate market continues on an even keel. Those in the real estate industry are optimistic about the city's short- and long-term prospects, and they are confident that the boom and bust cycles have come and gone.

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