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2013 CCIM Forecast Competition

Bullish. Cautious optimism.

Those words along with other positive and enthusiastic responses were repeated frequently by participants during the 2013 CCIM Forecast Competition at Shell Auditorium at Rice University on Feb. 7.  Sponsored by the CCIM Houston/Gulf Coast Chapter, the annual competition offers two perspectives by local experts on market trends in the office, retail, industrial, land and multi-family markets.  This year moderators prepared specific questions for each land use and kept contestants on track.

Dr. Mark Dotzour, Chief Economist at the Texas Real Estate Center at Texas A&M University, offered a positive outlook for both Houston and the state during the keynote address. “I am bullish on the economic recovery, not because of Congress or the President, but because business men and women in America have decided to do business.  They are tired of delaying decisions – especially on hiring,” Dotzour said.

“And this is not a ‘fake’ economic recovery, like when tax credits were offered to buy a house.  Businesses are expanding in spite of Congress and the President’s damper.” Sales for homes and cars and retail are rebounding due to pent-up demand brought on by the last five years, Dotzour said.

“Residential markets in the state are stabilizing, and it is time to re-think housing and what affect that will have on the suburban commercial markets. We are in the early stages of a big change in residential and will see title companies and other real-estate related firms opening offices in the suburban markets,” he said.

Dotzour also predicts a robust increase in home prices across the country as the economy recovers. He noted several reasons why this is happening:

• Employees’ fear of losing jobs is diminishing
• Pent-up demand for the last five years
• Home prices are increasing
• Low mortgage rates
• Low inventory levels bring on increased demand with higher prices

He also noted that consumers are still paying down debt, with the median family debt currently six months. “Consumers have more disposable income, but we need wage hikes.  Wages are currently predicted to go up only 2% this year. Corporate profits are not up because corporations and business owners have a fear of health care costs and taxes, which is preventing many firms from hiring.”

Multi-family

Moderator: Clay Hicks, Senior Director, Greystar
Contestants:  Gregory W. Austin, Managing Director, Jones Lang LaSalle and Ryan Epstein, First Vice President, CBRE

multifamily

Houston’s solid job growth and nation-leading population growth are spurring new apartment development.  Businesses are in an expansion mode and are hiring. Predicted rents range from $1.52 to $1.58 PSF for Class A and $0.99 to $1.00 for Class B.  Austin’s 2013 absorption prediction is 13,000 units and an 89% occupancy while Epstein predicted absorption of 16,824 units with a 90.6% occupancy.

Both agreed the future for apartments in Houston is bright because single-family housing is generally not affordable in areas where apartments are currently being developed, primarily because of tax rates in those areas.  Austin noted that with land prices increasing in areas such as the Galleria, apartment developers are offering smaller unit sizes but with upscale amenities; the overall rent per square foot may be high but the total rent will not be as much because of size.

Both agreed that bank loans are starting to come back, and developers are starting to look at suburban areas, such as Clear Lake, due to land pricing.  Both speakers noted that such a high apartment occupancy rate means that not only Class A and B units are doing well but Class C properties have also recovered and are leasing up.

Land

Moderator: Robert C. Watson, CCIM, President, Robert C. Wilson Assoc., Inc.
Contestants:  Joel C. English, President/Partner, SITERRA Properties, LLC and Carlos Bujosa, Vice President, Transwestern.

land

Both English and Bujosa agreed that land sales are coming back, with English reporting 52% more land sales across the board in 2012 than 2011. Bujosa noted he completed deals in many areas last year ranging from land sales in both the Galleria and West University to land purchased for retail, multi-family and a senior housing project.

Both agreed on the overall increased optimism, but English pointed out that larger land tracts ready to be developed are very difficult to find. Bujosa noted that he is seeing pricing escalate quickly in some areas, but the investment sales outlook is good. He sees the greatest challenges as the government, i.e., taxation, while financing is still a problem for raw land. Bujosa said land is plentiful but issues such as environmental, flood plain and detention requirements are making some deals difficult.

Regarding land sales around the ExxonMobil project, Bujosa noted that development will be moving to the east side of the freeway where land is available. This will create extensive infrastructure for the whole area; with the residential development announced, school districts are going to have to work quickly to buildi schools to handle all the new students.

Both contestants agreed on the price of Midtown land at $55. Bujosa predicted 27,000 single-family starts in 2013, while English predicted 18,558. However, English believes more lots, 35,294, will be developed while Bujosa said around 30,000 will be developed 2013.

Industrial

Moderator: Rusty Tamlyn, CCIM, SIOR, Senior Managing Director, HFF
Contestants:  Michael G. Wyatt, Managing Director, CORE Real Estate, LLC and Faron Wiley, First Vice President, CBRE

industrial

Houston’s industrial market is doing well, with occupancies as high as 95% for dock-high space, both contestants agree. Rental rates forecast by the two range from $0.40 to $0.46 per square foot for dock-high space and $0.50 to $0.71 per square foot for service-center space. Wiley predicts about 7 million square feet of absorption while Wyatt predicts 5.2 million square feet of absorption for 2013.

Class A sales recorded some record prices last year, and 2013 is starting out slow due to firms taking advantage of re-financing offers. However, development by the local offices of national REITS, including Prologis and Liberty, are getting ahead of others by starting projects now.

Both Wyatt and Wiley agreed a major impediment to industrial development is land pricing. To make numbers work, industrial land prices have to be lower than other asset classes so it is difficult to be competitive. The last couple years, industrial projects have been forced to look at new areas further out due to the radical increases in land purchase prices.

Oil and gas companies and their service companies is one industry that has dramatically impacted both the office and industrial markets here. What could change the expansion and growth? The world economy could derail the marketplace if oil goes below $60 a barrel; this would cause a significant change in investment.

Retail

Moderator: Jason S. Baker, CCIM, Principal, Baker Katz
Contestants:  Edward F. Page, Managing Partner, UCR moodyrambin PAGE and Jeff Read, Principal, Read King Commercial Real Estate

retail

The retail market joins the other commercial asset classes in a positive trend, with contestants forecasting occupancy rates of 93.9% to 95% and absorption ranging from 950,000 square feet to 1,872,000 square feet for 2013.  Asking rental rates in anchored center space is predicted to range from $15.25 to $16 per square foot.

Increased land values from $100 to $150 inside the loop make retail more than just retail – the projects become mixed-use, lifestyle centers. Both Page and Read agreed Houston has a lot more retail than other major cities and most is centralized.  Page noted one reason for this diversity is Houston’s entrepreneur spirit – like the wildcatter mentality.

Reports of downsizing by major retailers appear exaggerated, with most current stores, like Best Buy, staying in their space. Page said new concepts have downsized space, and new centers will have smaller gross leasable areas. Read commented that downsizing is not really an issue because the landlord can increase his rent by dividing the larger spaces, but the landlord will have to spend some dollars on tenant improvements.

The grocery market scene is also changing, with smaller, specialty grocers coming into the city.  These retailers offer a different concept from the consumer standpoint and could change current shopping patterns; not everything will be available in one store. The new stores are bringing in more healthy, organic items and the primary grocery stores will have to compete with convenience and price, Page noted.

Office

Moderator: Dan Bellow, CRE, SIOR, CCIM, President, Jones Lang LaSalle
Contestants:  Scott Martin, Executive Managing Director, Granite Properties and George W. “Trey” Strake III, Vice Chairman, Cushman & Wakefield of Texas, Inc.

office

Both contestants agree on rental rates in both central business district (CBD) and suburban but differ in the amount of absorption for 2013.  Class A CBD rates per square foot are predicted to range from $37 to $37.50 and from $31 to $31.29 in the suburbs. Class B CBD rates will range from $26 to $26.64 per square foot and $20 to $21.16 in the suburbs.  Both predicted occupancy levels to be above 90% for Class A in both markets and above 85% for Class B in both markets.  Absorption forecasts ranged from 1.5 million square feet to 3.5 million square feet.

Strake noted many deals completed in 2012 due to the level of activity in the market could have waited to have been completed in 2013.  He said he is always looking ahead, and anticipates opportunities for CBD sublease space soon to enter the market.

Martin, representing the landlord/developer side, noted that spec building has followed the real estate cycle for 30 years, and today is a good time. He said Granite recently sold 3 million square feet of office space at phenomenal prices and then started the new office building in Westchase.  He said Granite’s proposed building in The Woodlands would break ground soon. He also mentioned that all construction costs are way up, with costs in 2009 that were $200 per square foot are now up to $250 per square foot.

Strake, who is a tenant rep broker, echoed the cost increases as they relate to build out. Rental rates are continuing to change with major concerns regarding operating costs. He said all tenants would like Class A amenities but at current rates, many cannot afford them. He suggested options which could include amenities, such as restaurants, parking, etc., be nearby or adjacent rather than within the building.

During the event, winners of the 2012 CCIM Forecast Competition were announced:
• Multi-family:  Alan Patton, Hines
• Land: Tim Dosch, ARA
• Industrial: David Hudson, Duke Realty
• Office:  Jon Silberman, NAI Houston
• Retail:  Lance Gilliam, UCR moodyrambin PAGE

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