Has Houston Hit A Turning Point For Investors?
Houston's market may have strong fundamentals and plenty of resilience, but good luck getting anything done. Since the price of oil plunged in 2014, capital markets have redlined Houston, creating headaches for developers and investors.
But in the second half of 2017 several notable projects received financing. Are the deals a sign of the market turning or will Houston’s financing struggles continue another year?
“We’re enjoying healthy financing activity. The market has turned and improved as compared to the last few years, especially on the multifamily side," JLL Managing Director Paul House said.
Projects are starting, showing signs of Houston's turnaround. Construction starts in the Houston region totaled $1.2B in September. That is down 22.8% from $1.55B in September 2016, according to the latest report from Dodge Data & Analytics.
But year-to-date totals show signs of improvement over last year. Construction starts totaled $13.6B through September of this year, up 5.2% from $12.9B over the same period last year, according to research from the Greater Houston Partnership. Another positive: City of Houston construction activity totaled $430.4M in August 2017, up from $413M in August 2016, an increase of 4.2% on a permit value basis.
On the multifamily side, Midtown's newest high-rise secured financing and broke ground. The project is Australia-based Caydon's first U.S. development. With limited supply thanks to disciplined financing, the team thinks now is the time to get into Houston.
"Other significant deals such as the refinancing of 717 Texas, Market Street at The Woodlands and, more recently, Meyerland Plaza, indicate confidence in Houston’s long-term success and growth. Projects have been receiving strong lender interest and we expect this to continue into 2018," House said.
Houston's investment market has enjoyed a flurry of activity over the year, showing resilience against oil sluggishness and Hurricane Harvey. Year-to-date, sales for the office sector total $3.8B and were composed of 174 transactions.
The most significant transaction was Brookfield Properties' acquisition of Houston Center from JPMorgan Asset Management. The four-building portfolio in Houston's Central Business District totals over 4M SF and is under contract for approximately $875M. Early this year, a 49% stake in Parkway's 5M SF Greenway Plaza portfolio was sold to a JV. In August, Lincoln Property Co. purchased the 2M SF Greenspoint portfolio.
Brokerages have been largely optimistic. A Colliers research report said most of the investor community believes the downturn in the energy industry has reached the bottom and has begun to rebound, so they now see Houston as offering limited downside and the potential for healthy returns. Though the average sales price per square foot is increasing, it is still well below the historical average.
In its most recent report, JLL's investment team said deals in the market have been competitive and there is a significant amount of capital looking for assets in Houston with the thought we have seen the bottom (or close to it) and better yields can be realized in Houston relative to other major metros. Quality, well-located assets are seeing good touring activity and multiple offers.
Transwestern said the Houston office market remains full of potential with a plethora of well-located infill properties representing value-add opportunities to investors. As such, investment activity should remain strong through the balance of 2017, it predicts.
Houston is not out of the weeds yet, but with money starting to return to the metro, the city is chopping its way through.
Hear more about Houston's capital markets forecast at Bisnow's Houston: 2018 event on Dec. 6.