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Houston Office and Industrial Markets Report Slow Recovery While Leasing Activity Increase

Houston Office Market
Houston’s office market reported stabilization in the third quarter, according to quarterly market research compiled by Commercial Gateway, the commercial division of the Houston Association of REALTORS®. Several active Houston-area brokers share their comments on what they are experiencing in the marketplace today.

Cody Armbrister, Senior Vice President, CB Richard Ellis 
“Activity is up. Clients are realizing that they have to start making decisions. Tenants are also seeing some soft spots and trying to take advantage of them. The challenge this year has been to close the large gap between landlord and tenant expectations.  Concessions are being offered but on a deal-by-deal basis. We will soon be seeing some large conversions of sublease space into direct space, especially in the Central Business District, although citywide, the vacancy rate is stabilizing and activity is positive.”

David Baker, Executive Vice President, Houston Operations, Transwestern 
“We’ve seen a pickup in large anchor tenant deals being completed in Third Quarter 2010, more so than the previous 18 months combined. Some of the companies within the energy sector are starting to take on expansion space and show signs of growth that should continue through 2011.”

Dan F. Boyles, Jr., Principal, NAI Houston
“Overall I think the market is stable. There is a shift in the landlord mentality (they think it is getting better) in many markets, despite the fact that we really have not seen much in the way of positive absorption. Not withstanding, that shows most landlords are doing what they have to in order to renew quality existing tenants.

“Tenants for the most part have stopped talking about returning space to the market and have started making long-term lease decisions. There were a number of larger long-term lease signings, both new and renewals, in the quarter including:

  • KBR – 75,000 square feet, Eldridge Oaks
  • Weatherford International – 335,000 square feet, 2000 St. James
  • Shell Trading – 316,000 square feet, 1000 Main
  • Mustang Engineering – 248,000 square feet, Ten West Corporate Center
  • Southern Union – 193,000 square feet, Galleria Tower II
  • TGS Nopec – 78,000 square feet,  2500 City West

“Downtown there is still some uncertainty regarding the overall amount of space to be returned to the market as a result of the Continental/United Airlines merger. Questions regarding Exxon Mobil’s planned corporate campus in the Woodlands area have also created more uncertainty regarding Downtown and the Greenspoint Area. Cutbacks in the space program at NASA have left a cloud hanging over the Clear Lake area as well.
 
“In summary, issues like these could have or have had a negative impact in particular submarkets, but overall the Houston market appears to be on the road to recovery. How quickly we get down that road depends largely on overall job growth.”

Charles G. Fertitta, Jr., Principal, Colliers International
“Although obviously one of the strongest office markets in the country, I believe the Houston market will continue to soften. There is a positive attitude from landlords of top-tier assets based on completed transactions and an increased activity as many users are moving past the fear stage of indecision and moving into action. We are seeing an increase in soft-cost concessions and a more creative deal-making perspective from most landlords and their representatives. With this deal-making flexibility, landlords are increasing focus on lease securitization options and tenant credit. The most positive thing I am seeing with our clients is a constant move to high quality of assets and asset ownership, sometimes despite the cost differential. This results in longer term leases with larger tenant improvement allowances which are driven by increased tenant productivity requirements to offset increased costs.

“There appears to be significant landlord competition in the light industrial sector as tenants continue to view this type of space as an increasingly commoditized product.  Tenants not previously focused on relocation are being incentivized by landlords with strong capital structures.  Landlords caught up in the credit crisis are either losing tenants or they cannot compete for new tenants due to lack of liquidity or by stringent lender requirements based on a previous refinance or forbearance.  As in the office market, we are seeing some landlords miss deals that they actually would be ‘willing to do’ because of these constraints. Overall, activity is good in this sector and deals seem to be flowing again after the elections.”

Houston Industrial Market
Houston’s industrial market continues to rebound with large deals getting signed and limited major construction on the horizon, according to statistics released by Commercial Gateway.  Houston-area industrial brokers share their comments on what they are experiencing in the marketplace today.

J. Michael Boyd, CRE, SIOR, Boyd Commercial
“Before seeing Commgate’s statistics, I pegged the bottom of the market, from our perspective, as being around the end of 2009 or the first quarter of 2010. Your numbers clearly reflect that. The first quarter started with slow improvement which has picked up significant steam since then. We recently closed two building sales and are finalizing a couple of build to suits, all with clients coming into Houston from out of town. These are other positive signs for the Houston market.”

John Ferruzzo, SIOR, Principal-Industrial Division leader, NAI Houston
“The Port of Houston continues to be one of the strongest ports in the country, leading the nation in exports in 2009, and import and export figures are showing significant year-over-year improvement. Significant capital improvements in excess of $150 million are also underway, including a needed dredging of the ship channel to enhance ship navigability, which are expected to strengthen the Port of Houston’s position as one of the country’s leading ports. In addition, Houston’s manufacturing sector is gradually recovering and has shown steady increases in employment since the beginning of the year.

“On the industrial property sales front, transaction volume has shown modest improvement as the lending market slowly thaws and reasonable loan terms are beginning to be offered by select banks. Prospective buyers are steadily emerging as confidence in the economy is restored. Companies are once again able to evaluate long-term growth plans and are more willing to provide the larger down-payments required by lenders. The disparity between buyer and seller expectations is lessening, although the sale transactions that are occurring are still commanding a realignment of expectations from both sides and are transacting at aggressive terms. Nonetheless, increased sale activity is furthering the market towards equilibrium.”

Billy Gold, Senior Vice President, CB Richard Ellis
“The Industrial Market continues on a path of recovery by achieving positive absorption and near historical occupancy levels during the third quarter. The market does not exhibit any signs of an end-of-the-year slowdown with increased leasing activity, prospective buyers touring properties, and an uptick in the number of build-to-suit projects being quoted. Institutional as well as private investors have designated Houston as one of their core investment markets and are aggressively trying to source investment opportunities. The prospects for the First Quarter 2011 look positive.”

Graham D. Horton, SIOR, CCIM, Vice President, Stream Realty Partners, L.P. 
”Demand for industrial space in Houston continues to be modest but sustained, causing vacancy levels across the city to remain on a downward trend for the second quarter in a row.  With BP’s Deepwater Horizon now permanently capped in the Gulf and the midterm election behind us, we are cautiously optimistic that Houston is on the road to recovery and that business owners will feel more comfortable spending and making long-term decisions once again.”
 
Gary A. Mabray, SIOR, Principal, Colliers International
“In talking and meeting with industrial brokers around the country along with institutional owners and investors, there is no doubt that Houston enjoys the strongest – and safest – industrial market in the country. During the last six months we have seen a marked increase in activity from both users and deep-pocketed investors seeking properties in our area. Of particular note are users in the oil and gas industry looking for larger, heavy crane-served properties for fabrication and assembly. The reality is that the inventory of those types of buildings is almost zero, resulting in several large build-to-suits and design-build projects coming out of the ground.

“The same can be said for rail-served properties – increasing demand and very limited supply. There is also a significant increase in activity on the east side of the County near the two container ports as the global shipping industry begins to show signs of a recovery and more companies are recognizing the Houston area as the gateway to the Midwest for distribution. We believe 2011 will show continued strengthening in all sectors of the Houston industrial market.”

Lang Motes, President, Indermuehle & Co.
“Compared to most U.S. major industrial markets, the Houston industrial market ended Third Quarter 2010 well with few significant changes, a reasonably stable footing and trends pointing toward continued, gradual growth for the upcoming quarters. Lease rates softened slightly this quarter, largely influenced by landlords sharpening their pencils to strike deals and cut losses. Owners and asset managers have one eye on profitability and the other eye on future absorption outpacing availability – the shift from the tenant advantage (soft lease market with high availability and low absorption) to the landlord advantage (strong lease market with low availability and high absorption).

“New construction deliveries in 2010 will total more than 2.0 million square feet – levels we last experienced more than 16 quarters ago in late 1986-1993. Significant transactions for the quarter include Trans Hold leasing 251,600 square feet in the northeast, Pointsmith’s delivery of its phase one 180,000-square-foot new facility in Katy, Exel Logistics leasing 120,000 square feet in the northeast and CVS renewing its 113,000-square-foot distribution lease on the north side. All things considered, compared to other U.S. industrial markets, Houston has among the lowest vacancy rates, few construction starts and nearly the strongest absorption in the nation. The economy is far from being robust again, but Houstonians are working hard to turn things around. Houston remains the best city in the U.S. to live, work and play.”

Mark Nicholas, SIOR, Senior Vice President, Jones Lang LaSalle 
“Reports of consumer confidence have increased as retailers have re-stocked their inventories, which should drive more demand to warehouse space. Given that energy, chemicals, plastics, engineering services and manufacturing goods are produced in Houston, there is continued interest from companies looking to relocate or consolidate significant operations from other parts of the country and internationally.

“In fact, several international companies recently completed deals to move into Houston. Flair Packaging from Calgary, Canada, just purchased a 50,000-square-foot building in Lakeview Business Park in the Southwest and Barrett Steel from the UK just purchased 2445 Peyton, a 33,600-square foot building, in the Greenspoint/IAH area. I am currently working with a French company looking to locate in Houston by either leasing or purchasing a 35,000-square-foot manufacturing facility.”

Ron Roberson, Executive Vice President, Caldwell Companies 
“We have experienced a marked increase in activity since the beginning of the second quarter, both on the leasing side and acquisition side. Optimism in the sales market is increasing for users, and we have seen both investment grade assets and user industrial properties selling at remarkable prices. This tells me that we all believe the market has bottomed out and started to rise. The same can be said for leasing. Activity is up from the previous year by approximately 20% and although that doesn’t necessarily translate to higher prices, we are seeing some indication that for the right property, tenants are willing to make some longer term decisions for their business than they were last year. Over the next six months, I expect to see continued absorption of industrial space, and less concessions being offered by owners.”

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