The Fine Art Of Waiting And Seeing In Houston's Economy
While many are predicting that Houston’s going to grind to a halt because of low oil prices, we are once again defying the naysayers. Projects are still being funded, though investors are being more careful in this economy. Come to our 7th Annual Capital Markets event on Feb. 18 to get the full scoop on where the money’s going and how it’s being spent. Read on for a preview from three of our expert panelists.
Hanover Co CIO Brandt Bowden (here on the far right at a previous Bisnow event) says there has been a fundamental erosion in assets and geography due to the energy sector and apartment supply, but there are bright spots to be found in Houston. The Medical Center, for instance, is stronger than other parts of the city. Thanks to industrial, the east side is shrugging off the downswing like it ain’t no thang. In many other sectors though, investors are still kicking tires, waiting to see what’s going to happen.
Hanover is still making investments and developing, despite the murky forecast. It's leasing up two buildings now, and one—the Hanover Post Oak—is 96% occupied. The firm also sold Hanover West University in January.
The data says we’re not in a recession now—Houston added 20,000 jobs last year—but a recession is still possible. Brandt says lots of supply is impacting rents and so acquisition capital is hard to come by for new projects. But wait...and see.
Northmarq managing director Kerry French (right, here with VP Warren Hitchcock) believes there will be plenty of capital available nationally for commercial real estate during 2016, barring any unforeseen events internationally. Rates may rise somewhat, but property fundamentals are still strong overall in all property types.
But Kerry does see Houston facing headwinds for both equity and debt capital for 2016, maybe into 2017, depending on whether oil prices find a bottom and move back up. He emphasizes that doesn't mean that capital will dry up; it means that only the best deals, best locations, best sponsors, with good stories will be guaranteed project funding.
The biggest pitfall is what Kerry calls "headline risk." The right-hand column, front-page Wall Street Journal is a very powerful place, he says. To the extent that we continue to read about massive job cuts at the larger oil and energy-related companies there, and elsewhere in the media, Houston will feel the impact. And yet, we have gone through oversupply and price volatility in the energy sector before, and the center of the oil/petrochemical/energy marketplace continues to be Houston. That will not change during this oil imbalance.
Lionstone Investments SVP Bryan Sanchez agrees there's definite uncertainty in the market right now. Sellers are reluctant to test the market, buyers aren’t yet ready to jump, so there hasn’t been much price discovery—essentially, the market hasn’t been made yet.
But, he says, debt and equity is still available for good assets. It’s much harder to finance new development unless it has been substantially pre-leased though. Historically, Houston’s economy has been driven by primarily oil and gas, but the petrochemical (with $30B being invested in East Houston), and healthcare (which grew 4% last year) industries are strong.
Lionstone has created a portfolio of high-quality Houston assets, including 712 Main and GreenStreet, that benefit from great amenities which are either already in place, or coming. Bryan tells us the next phase of GreenStreet—given its location in Houston’s newly designed retail corridor, its tenant branding opportunities, and the unique attributes of the space itself—is going to provide an unparalleled environment for office users Downtown. And 712 Main is an irreplaceable historic building where they are fully restoring the building and its past prestige. Trend alert: Bryan has seen tenants across the country flock to buildings of this vintage in recent years, but Houston has been slower to embrace this change. Expect both projects to have perception-changing years in 2016.