2016 Predictions From 8 Houston Experts
Houston’s 2016 forecast isn’t as rosy as years past, but at least it’s less uncertain than 2015 started out. And there’s a lot of upside still. Eight commercial real estate pros busted out the crystal balls, and most found reason to smile.
1. Co-Working Takes Hold
While co-working is all the rage around the country, it hasn’t found a foothold in Houston yet. That’ll start to change this year, Transwestern EVP David Baker predicts. He’s seeing huge interest in Downtown and Midtown from traditional executive suite firms that are looking to target young professionals in new ways and from co-working companies that are focusing heavily on Houston because of the new tech companies springing up around the energy and medical industries. At Central Square alone, which he leases, he’s talking to several co-working companies that could take down 50k to 60k SF combined of office space. Central Square will be a creative/techie building overall; David’s also close to signing a couple of prominent architecture and engineering firms and has strong interest from a new business accelerator focusing on IT, medical and energy startups.
2. Land Prices Soften...Except in Western Midtown
Overall, the land market should dip in 2016, according to ARA Newmark executive managing director Tom Dosch (right, with land teammates David Marshall and Tim Dosch). But don’t expect a bargain on that tract you’ve been eyeing in western Midtown—you’ll still likely pay $150/SF or more. Rents are still strong in that area, and even with new deliveries, he doesn’t expect overbuilding in any asset type. There are few remaining contiguous tracts still available, leaving few viable options for new development. Over the last few years, pricing has risen from $80/SF to $150/SF. And although financing for new deals has tightened significantly over the last 12 months, there are several developers making Midtown plays with their own money, private capital and international capital sources.
3. Office Investment Sales Pick Up
JLL managing director Rudy Hubbard (center, with colleagues Kevin McConn and Rick Goings) predicts there will be more office sales transactions in 2016, particularly of older buildings and buildings with maturing loans. However, the dollar value may not exceed 2015 levels—with core buildings like BBVA Compass Plaza, Energy Center and Life Science Plaza trading last year, 2015 nearly reached $2B in sales. Why the increase? Rudy says some undercapitalized or less patient owners would rather take some chips off the table, even if it means a loss, rather than slog through the weakened office environment.
4. Anemic Office Fundamentals
Granite executive managing director Scott Martin doesn’t see good things this year in the office market. He’s forecasting around 20,000 jobs added in 2016, driving negative absorption of 2M SF. That’ll push office concessions up (we’ll start to see six months free on five-year leases and 12 months on 10-year, plus increased TI allowances). The end result—10% decline in rents and 10% to 12% decrease in values. Scott thinks ’17 will look a little better (he’s crystal-balling 1M SF of positive absorption and flat rents), but he doesn’t expect the office market to fully recover until 2020 or 2021.
5. More Outlets?
Transwestern managing director Nick Hernandez wouldn’t be surprised if another outlet project is announced this year, probably in North Houston. He hasn’t heard rumblings of such, but it’s a very hot segment; even retailers that aren’t in growth mode will open new outlet locations. The market can sustain it, Nick tells us; our construction levels are so far below demand that we can add a 500k SF outlet and still not reach our pre-recession level of development. Retail landlords are loving it, though; insufficient construction will continue to push rents higher this year. Nick's pictured here with sons Jack and Hunter in Colorado this summer.
6. More Mixed-Use Retail
The urbanization of retail will continue to gain momentum in Houston in the form of mixed-use projects, according to Streetwise Retail Advisors managing partner Ed Page. That’ll mean a lot of residential over retail projects. In addition, two vertical power centers—a concept that has never been done in this market—are in pre-development in Midtown and the Washington Avenue/Heights area. Rents are higher for these types of projects, Ed tells us, and those generally translate into higher sales. As mixed-use grows and evolves in Houston, there will be more opportunities for specialty/lifestyle retailers, which mostly rent these types of projects and love Houston’s young, fashion-forward population. They have something unique to offer, don’t typically sell commodities and generally have higher profit margins.
7. Senior Housing Joins Mixed-Use
Independent, assisted and memory care facilities will start being included into lifestyle mixed-use developments, Gensler principal Ross Conway predicts. They’re great assets to mix in, he says. They add diversity, provide support to a typically weak daytime population, pay higher rents than multifamily and use less parking. It'll be a big shift for the senior housing segment—Gensler principal Peter Merwin tells us housing projects specifically branded at seniors have had a stigma because they're generally seen as a budget alternative. Going forward, especially within mixed-use, they'll be geared more to health, fitness, leisure, learning and lifestyle. Peter predicts that any housing built this year will be higher-end or on better land (or both) with market differentiation. Now that the housing market has softened in Houston, he expects development to become less formula-driven and more narrative-driven.
8. Some Previously Obscure Sustainability Topics Will Hit The Big Time
Kirksey Director of EcoServices Julie Hendricks says 2016 will be a big year for sustainability, with LEED putting out a new version and a new City of Houston energy code. They’re stressing product transparency, life cycle analysis and plug loads, which will move the previously somewhat-unheard-of topics to the forefront of design discussions. Products are starting to label their health and environmental impacts, and Julie thinks consumers will start to use them as they do food nutrition labels. Life cycle analysis will go beyond cost to consider the environmental impacts of a product from manufacturing through disposal, and plug loads (how many devices are being plugged into a socket) are growing so rapidly, they have to be addressed to save energy. The City of Houston codes are now requiring buildings to use automatic controls and other measures to address this. Julie's in Bangkok now, where she snapped this fun pic.