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Texas RE markets rebound, but caution is in the air

Texas markets are strong and are favored by institutional investors, according to speakers at the 18th Annual M/PF Research "Texas Real Estate Market Outlook '95," sponsored by National Real Estate Investor magazine and American Title Company. They generally characterized Texas' five major markets -- Houston, Dallas, Fort Worth, Austin and San Antonio -- as having exhibited broad improvement in 1994 with few signs of weakness.

The consensus of strong markets and continuing growth is tempered by warnings of caution to avoid a possible return to the mid-1980s overbuilding.

Each of the five cities highlighted exhibited its own particular strengths, with activity in multifamily, retail, office and industrials occurring at widely varying levels in each city. In spite of this variance, the state is regarded as strong.

"Texas clearly is a red-hot market in terms of overall investment," said Chuck Leitner. "It is back in most institutional investors' minds. One of the fundamental reasons for this has been that -- for the same reason tenants and users like the market -- it's cheap relative to the rest of the country."

Dr. Harvey Rosenblum said he "Sees substantial growth for Texas with the economy matching somewhat the slower national pace."

Also taking a positive stance on Texas as an investment market was Ron Gray. "Outside of improvement in office occupancy, I would say the overall conditions are about as good as they can get.

"For example," Gray said, "we have strong employment growth in our major cities. Occupancies and rents are on the increase. Interest rates are moderate. Texas is a favored market by investors with plenty of money available."

According to M/PF, Dallas showed strong job growth in 1994 and posted a four-point increase in office occupancy, leading the state in absorption. Houston, M/PF reported, also showed a rebound in employment growth last year, with strong absorption in retail, office and industrial properties.

San Antonio and Fort Worth had strong increases in single family home sales, and Fort Worth recorded 7 million sq. ft. of industrial space demand, bringing occupancy to 94%. San Antonio saw high apartment occupancies and strong office demand.

Austin, said M/PF, also had strong job growth and led the state in apartment occupancy at 98%, office occupancy of 89% and industrial occupancy of 96%.

"Austin is doing great across the board," said Frank Oberlin. "We added 20,000 new jobs last year. Population growth, depending on who you talk to, ranged from 3.3% to 5.6%, with the official number right around 4.6%."

M/PF reported that Texas' mid-1995 population is estimated at some 18.5 million people, with a surge of in-migration over the past two years accounting for the largest population gain on record. The number of residents increased by approximately 310,100 persons annually from 1990 to 1995.

Among the five major metro areas in the state, M/PF reported that Houston, Austin and San Antonio are now growing at about the same rate as they did in the 1980s. Dallas and Fort Worth are trailing the high rates of expansion they posted during the last decade.

Credited with fostering the strong growth are strong financial markets. "It is a very good time to borrow money," said Bill Jackson. "In January, I would not have said that some product types were financeable. Today, just about everything you can think of is financeable at a price. The top products, as always, are apartments, retail and industrial, while offices are coming back into the green very quickly. Hotels, mini-warehouses, mobile home parks and hospitality products are all financeable."

Other strong growth factors exerting a positive influence on Texas' growth, include NAFTA and-on a regional basis-D/FW International Airport.

"We are all benefiting enormously from NAFTA," said Will Penland. "We believe Houston will have an advantage in the Mexican and South American markets because of the Port and our proximity to the Valley. It is literally a one-hour flight to Monterey, one of the industrial capitals of Mexico." But, Penland stressed, everyone will benefit from the effects of NAFTA, and one area will probably not be a clear winner over the others.

According to John Crawford, the Dallas area has grown because of the proximity to D/FW Airport. "We tend to overlook the importance of D/FW International Airport from time to time. It is the greatest economic development magnet we have in this community."


According to M/PF, approximately 31,200 new multifamily units were permitted in Texas in 1994, following several years of low production.

With mortgage rates making single-family ownership more attractive, four of the five major metro areas reported slower multifamily absorption and higher construction in 1995. Dallas was first with both construction and absorption, according to M/PF, while Austin and San Antonio showed the most new supply since 1986.

Rents, M/PF said, rose strongly in San Antonio and from 2% to 5% in the other areas. Occupancy rates ranged from 98% in Austin to 89% in Houston.

Dallas led the state with 10,380 multifamily permits in 1994, more than double the 1993 figure. Houston was second with 6,187 units, that city's highest number since 1984.

Austin posted permit levels roughly doubling last year's figure at 4,398 for an eight-year high. San Antonio levels also doubled to 3,013 units. Fort Worth showed its highest mark since 1985, with 1,366 units, a four-times increase.

"We are optimistic about (Texas) or we would not be buying properties," said Marshall Edwards. The REIT focuses on what Edwards called the affordable sector, the middle market in key cities of Texas. He said that there are some concessions in some markets.

According to James Toal, "The downtown area [of Fort Worth], much like Dallas, has seen a resurgence of interest in multifamily product, so there is a pent-up demand for good quality multifamily projects."


New construction picked up in all five major metro areas of the state, according to M/PF, and demand in several was at its highest since the mid-1980s.

Houston and San Antonio posted 85% occupancy, while Austin had 88%. Fort Worth and Austin recorded the largest gains in occupancy, with a jump of four points during the year.

M/PF said occupancy in 1995 is expected to improve further in all five major metro markets, with one-to two-point gains, while rents should rise in each from 2% to 5%.

In 1994, Houston retail building activity reached its highest level in a decade. Valuations jumped by one-half to $326 million, accounting for a quarter of the state total. M/PF further said that Dallas retail permits reached an eight-year high of $249.5 million last year.

The Fort Worth area, the research firm said, rebounded from a decline in 1994 as construction rose to $123.8 million, a two-thirds jump.

Austin showed a 14% increase in permit activity to $94 million, while San Antonio permits rose to a seven-year high of $76.2 million.

"The retail market has experienced a tremendous surge in activity during the past year," said Herb Weitzman. "With that in mind, I think there is a need for a yellow light of caution. It's important to stick to the good locations and to prelease so that we don't find ourselves in another overbuilt situation."


Regarding offices in Texas, Clayton Elliott said that all markets are now improving and have seen an upward trend since 1992, and he expects it to continue.

M/PF reported that Texas' office building permit valuations rose 4% to $466 million in 1994, with new construction centering mostly on tenant finish-out caused by stronger absorption and some single-tenant building projects.

The Dallas-based research firm pointed out that current permit levels are substantially below the boom period of 1980-1985 when office construction activity averaged between $1 billion and $2 billion annually.

For the fourth year in a row Houston led the state in office permits, posting $96.9 million in valuations, up some 9% from the previous year. M/PF reported that office permits in Dallas were up also up 9%, to $81.3 million. At the same time, San Antonio more than doubled to $46.6 million, while permits in Austin dipped 3% from the previous year to $64.7 million.

In Fort Worth, valuations jumped 42% to $45.4 million, the city's strongest showing since 1989.

"Although we are not using the 'spec' word yet," said Tom Sineni, "I really feel that by the end of the year we are going to see a new ofice building-and probably a sizable one-announced to start construction. It will more than likely be substantially preleased."


Of the five major metro markets, Fort Worth's industrial permits increased to a record $90.7 million in 1994, as strong demand brought increased construction. Dallas industrials remained steady at $48.3 million, while Houston recorded a strong increase of 80% to $47.6 million. San Antonio increased four-fold to a four-year high of $5.5 million.

Austin, which reported $232.9 million in industrial permits in 1993, showed $20.5 million in industrial construction in 1994, signaling a return to more typical levels.

Discussing Dallas, Crawford said, "We have been a major warehouse/distribution center, and now, through a combination of corporate consolidations and reduced trucking costs, the Dallas area has, in fact, become one of the hottest warehouse markets in the country.

"So far in 1995," he said, "no fewer than about 36 new self-storage warehouse projects are headed for construction. That compares to about 14 in 1994."

Marshall Edwards, executive vice president, acquisitions, Walden Residential Properties Inc., Dallas

Clayton Elliott, vice president, Hines Interests Limited Partnership, Dallas

Ron Gray, senior vice president, manager of commerical real estate, Bank of America Texas, N.A., Houston

Chuck Leitner, vice president, The RREEF Funds, Chicago

Dr. Harvey Rosenblum, senior vice president, Federal Reserve Bank of Dallas.

Herb Weitzman, The Weitzman Group, Dallas Also in attendance:

John Crawford, Crawford and Company Real Estate Services, Dallas

Bill Jackson, Stockton Luedeman French Jackson & West, Dallas

Frank Oberlin, vice president and manager, Bank One Texas, N.A., Austin.

Will Penland, executive vice president and general manager, CB Commercial, Houston

Tom Sineni, president, United Commercial Realty, San Antonio

James Toal, chairman, KVG Gideon Toal Inc., Fort Worth

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