Post on 18-Aug-2020
A F T E R T H E R A I N
I N A R E S I L I E N T M A R K E T
MOVING FORWARDMOVING FORWARD
TABLE OF CONTENTSPrevious Page
Summary
The National Economy
The Houston Metro Economy
The Houston Metro Office Market
The Houston Metro Industrial Market
The Houston Metro Multifamily Market
The Houston Metro Retail Market
The Houston Metro Healthcare Market
Next Page
A Transwestern Publication © 2017. All Rights Reserved.You may neither copy nor disseminate this report. If quoted, proper attribution is required. To order your copy of TrendLines, contact the publication administrator at 713.270.7700.
THANK YOU TO OUR 2017 SPONSORS
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FOREWORD NOVEMBER 2017
To our friends, clients and colleagues:We are pleased to provide you with the 17th annual edition of our TrendLines® publication. Our purpose is to examine current trends and forces influencing the region’s
economy and their effect on the Houston commercial real estate market.
As we review 2017 and prepare for the coming year, we are reminded at the remarkable transformation this city has undergone over the last decade. We are bullish about
the opportunities that will continue to present themselves over the balance of the year and through the course of 2018. We relish in seeing Houston post annualized job
growth of 53,500 through August of 2017, even while the energy industry is still finding its footing. Yet we are challenged by some aspects of the downturn, such low
occupancy in select office towers and negative absorption in the office sector. The strength of this city was on display for the world to see, as friends and neighbors joined
together to help those in need during the recovery following Hurricane Harvey. Several members of the Transwestern family were impacted by flooding, yet selflessly
remained at their posts to serve their clients. On November 1st, Houston was rewarded with its first championship in over 24 years, as the astounding Astros hammered
the Los Angeles Dodgers in a thrilling seven game series, marking the first championship of many for the franchise.
The retail and industrial sectors are currently performing on all cylinders. On the retail side, Houston has become a top 3 market nationally and a prime target for expanding
retailers. While overall vacancy rates in the sector are increasing, core property holdings such as mixed-use/lifestyle, grocery-anchored and power centers continue to be
in high demand with vacancy below market averages and increasing rental rates. The industrial sector came into the year on fire and has yet to show signs of slowing. Not
only did the sector manage to make it through Hurricane Harvey relatively unscathed, the immediate impact was to create increasing demand for distribution spaces for
home goods retailers. Furthermore, with the expansion of the Port of Houston and the ongoing transformation in the retail sector, the Industrial markets look to continue
their performance well into 2018. Another benefactor of the storm was the multi-family sector which was prepared for a three year recovery period. While property
damages were limited in the sector, demand created by displaced residents has resulted in leasing activity for the sector, significantly reducing time to recovery by as
much as 6-9 months. We will continue to find creative opportunities throughout 2018 as we leverage the changing market conditions and fundamental strengths of the
metro area.
In 2018, we expect:
• Job growth of approximately 40,000-70,000 payroll jobs. Should energy maintain in the mid-to upper $50's job growth in the energy sector could return by the
second half of the year.
• A bottoming out of the office sector as vacancy and availability peak mid-year and begin to decline thereafter. Office properties will continue to focus on
renovations that target worker productivity and satisfaction as competition for user requirements will be elevated.
• Continued strength in the healthcare, retail, industrial and multifamily sectors as population growth pushes the market both farther in the suburbs and back into the
urban core.
Thank you for your interest in our research materials and services including leasing, development, property management, investment sales, structured finance and tenant
advisory services. We look forward to being your choice for a commercial real estate service partner and look forward to working with you in the period ahead.
Kevin RobertsPresident, SouthwestTRANSWESTERN
Best wishes for a successful 2018.
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RepresentationsTranswestern’s research affiliate, Delta Associates, provided content for the national economy section of this report, and Transwestern prepared the balance of the market analysis and outlook. Although the information contained herein is based on sources that Delta Associates (DA) and Transwestern (TW) believe to be reliable, DA and TW make no representation or warranty that such information is accurate or complete. All prices, yields, analyses, computations, and opinions expressed are subject to change without notice. Under no circumstances should any such information be considered representations or warranties of DA or TW of any kind. Any such information may be based on assumptions that may or may not be accurate, and any such assumption may differ from actual results. This report should not be considered investment advice.
One of the most beloved and admired American First Ladies, for decades
Laura Bush has championed key issues in the fields of education, health
care, and human rights. She has traveled to more than seventy-six
countries, including two historic solo trips to Afghanistan, and has launched
groundbreaking education and healthcare programs in the U.S. and abroad.
The author of the bestselling memoir, Spoken From The Heart, and co-author
of children’s book, Our Great Big Backyard, Mrs. Bush also founded both
the Texas Book Festival and the National Book Festival in Washington D.C.
Today, as the Chair of the Woman’s Initiative at the George W. Bush Institute,
Mrs. Bush continues her work on global healthcare innovations, empowering
women in emerging democracies, education reform, and supporting the
men and women who have served in America’s military.
Born in Midland, Texas to Jenna and Harold Welch, Laura Bush holds a
degree in education from Southern Methodist University and a master’s
degree in library science from the University of Texas. She taught in public
schools in Dallas, Houston, and Austin, and worked as a public school
librarian. In 1977, she married George W. Bush. President and Mrs. Bush are
the parents of twin daughters, Barbara and Jenna, son-in-law, Henry Hager,
and proud grandparents of granddaughters Margaret Laura “Mila” and
Poppy Louise Hager.
Patrick Jankowski is a regional economist and senior vice president of research at the
Greater Houston Partnership. He oversees the research department which provides data
analysis, economic forecasting and mapping functions for the Partnership.
His observations and analysis on the local, regional and U.S. economic trends have
appeared in over 35 newspapers, magazines, radio and television broadcasts, including
ABC Radio, The Atlantic, Bloomberg Business, CBS Radio, CNNMoney, Financial Times,
Forbes, Houston Business Journal, Houston Chronicle, Los Angeles Times, NPR, PBS
Nightly Business Report, Reuters, The New York Times, Newsweek, and USA Today.
Jankowski is president of The Houston Economics Club, a past board member of the
National Association for Business Economics, and a past board member of the Council
for Community and Economic Research.
Prior to working as an economist, Jankowski worked as a business writer for Houston
Magazine, Houston City Magazine, Houston Engineer and Houston Business Journal. He
holds an Energy Certificate from the University Of Texas McCombs School Of Business
Executive Education Program. He received his bachelor’s degree in economics from The
University of Texas at Austin.
AcknowledgmentsKevin Roberts, President-Southwest, wishes to acknowledge and thank the project’s research team: Stuart Showers, Director of Market Research, Rachel Hornbeak, Research Analyst and Jennifer Woodruff, Research Analyst and the creative team: Shannon Bedinger, Regional Marketing Director; Gregorio Barrera, Creative Director; Averegine Sanchez, Graphic Designer and Kathryn Litchfield, Graphic Designer. Your time and effort is invaluable to this process.
SPECIAL THANK YOU TO OUR SPEAKERS
Making Houston Greater .
Mrs. Laura W. BushFormer First Lady of the United States
Patrick JankowskiSenior Vice President, Research Greater Houston Partnership
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Outlook
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Current Q3 17 2018P*
Direct Vacancy 15.4% 14.7% - 15.5%
Rental Rates$35.83/SF FS $35.50-$36.00
Absorption-4,170 700K-2.2M SF
Market Drivers2018 Projection Considerations
20-70K2018 (est.)
Jobs added**
$51.042018 WTI Avg
Price Per Barrel*
100K2018 (est.)Population
Growth
OfficeThe final fallout from the energy downturn should be resolved by mid-year with absorption pushing into positive territory as job growth returns in the second half.
MultifamilyA boost in activity from residents displaced by Harvey will help to accelerate the recovery & bring equilibrium back to Class A properties.
HealthcareContinued job growth in the sector along with healthy supply and demand ratios point to continued strength in performance albeit at a more moderate pace.
RetailCore retail holdings such as Mixed-Use/Lifestyle, Grocery-Anchored, and Power Centers will continue to be in demand with low vacancy and rising rents.
IndustrialWhile the flex sector is under pressure from softness in the office markets, the balance of the industrial sector is performing at all time highs which will continue through 2018.
2017 has presented Houston a whirlwind of activity as the Houston Astros won their first championship (of many), the energy sector volleyed back and forth yet found it's bottom, and Hurricane Harvey poured over 55" of rain on the city, displacing residents and temporarily halting normal citywide activities. As the dust begins to settle and the energy sector level sets to a new normal, focus shifts to the current recovery and where the commercial real estate markets are headed. EIA forecasts currently call for WTI prices averaging $51.04 per barrel in 2018. This price should support moderate growth in the sector with hiring coming in mid-to-late year. To reflect real improvement, the office market will require a significant upturn in hiring to help offset the vast amount of available space. Conversely, sectors such as retail, industrial and healthcare have remained healthy and will simply look to manage supply in balance with demand to maintain balance. Regardless of discipline, the recovering of the energy sector, coupled with increased diversification has Houston solidly on it way to recovery and 2018 should see a return to traditional activity levels.
HOUSTON OUTLOOK
Current Q3 17 2018P
Direct Vacancy 5.8% 4-10.0%
Rental Rates$15.94/SF NNN $16.00/SF NNN
Absorption165,410 SF 4.0-6.0M SF
Current Q3 17 2018P*
Direct Vacancy 11.7% 9.5-10.0%
Rental Rates$1.13/SF $1.15-$1.20/SF
Absorption-4,170 units 10-15,000 units
Current Q3 17 2018P*
Direct Vacancy 6.3% 6.0-7.0%
Rental Rates$6.84/SF NNN $6.90-$7.00/SF
Absorption2.2M SF 4.0-6.0M SF
Current Q3 17 2018P*
Direct Vacancy 12.6% 11.0-13.0%
Rental Rates$23.95/SF $24.00-$24.15/SF
Absorption-17,607 SF 250K-500K SF
* Source: EIA Short Term Forecast ** Based on U of H IRF forecast
* P indicates projected
HOUSTON OUTLOOK
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The National Economy S1
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NATIONAL ECONOMIC OVERVIEWU.S. Economy Rebounds But Policy Uncertainty RemainsAs of the end of the third quarter of 2017, the U.S. economy continues to perform well,
primarily due to strong consumer spending and continued job creation. During the 12
months ending August 2017, the national economy added a total of 2.1 million new jobs,
including 156,000 in August 2017. Most employment sectors continue to see positive
growth, and have been consistently adding new positions to meet renewed demand.
Meanwhile, initial unemployment claims jumped to 268,750 in mid-September, and the
national unemployment rate (seasonally adjusted) ticked up 10 basis points in August to
4.4%. After yet another disappointing first quarter, real GDP rebounded markedly in the
second quarter to 3.0% — the fastest pace of national economic expansion since the first
quarter of 2015 and in line with prior predictions. Consumer spending continues to be
the engine that moves the economy forward, with personal consumption increasing by
3.3% during the quarter. Looking ahead, we expect the disruption and damage caused by
hurricanes Harvey, Irma, and Maria (HIM for short) to have an impact on economic growth in
the third quarter, but the GDP growth rate will still be around 2.5%. This should be a short-
lived impact with a correction in the fourth quarter. The Federal Open Market Committee
(FOMC) has so far followed through on its plans for regular increases to the federal funds
benchmark rate this year. It hiked interest rates by a quarter percent at both its March
and June meetings, with another increase likely coming in December. In addition, the Fed
has indicated that it will shortly proceed to normalize its balance sheets by winding down
its security-purchase program. After an underwhelming spring, price inflation rebounded
during the summer. The CPI for all urban consumers increased 1.9% over the12 months
ending August 2017, just shy of the Fed’s 2.0% target.
Our economic outlook for the balance of 2017 and first half of 2018 remains bullish. The
largest unknowns regarding the future performance of the economy are public policy
and geopolitical unrest. After repeated failed attempts to repeal the Affordable Care Act,
congressional Republicans and President Trump have shifted their focus to long-awaited
tax reform. The President’s proposal to cut corporate taxes drastically from over 40% to
20% is likely to be watered down, as it would cost the government roughly $1.5 trillion
over a decade according to most estimates. Job growth, while still robust, appears to be
slowing to a less aggressive pace. Additionally, mounting concerns on the global front
could result in significant impacts across all industries.
Revolving Credit12-month percentage change
Payroll Job GrowthUnited States | Monthly
12-M
onth
Per
cent
Cha
nge
-15%
-10%
-5%
0%
5%
10%
15%
17*161514131211100908070605040302010099
0
50
100
150
200
250
Aug 17July 17June 17May 17Apr 17Mar 17Feb 17Jan 17Dec 16Nov 16Oct 16Sep 16
In T
hous
and
s
*12-month percentage change through July 2017, data not seasonally adjusted Source: Federal Reserve Board, Delta Associates
Source: Federal Reserve Board, Delta Associates *At Q3 2017
THE NATIONAL ECONOMy
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Job GrowthThe national economy continues to add jobs rapidly, but the pace is beginning to display
signs of slowing. July and August were the only consecutive months to experience
declines in job additions (on a seasonally adjusted basis) during the 12-month period
ending August 2017. In sum, the economy added 2.1 million new jobs during the period.
While the private sector has dominated the public sector in job creation throughout the
Payroll Job GrowthUnited States | Year-Over-Year
Payroll Job GrowthUnited States | 12 Months Ending August 2017
Tho
usan
ds
of N
ew P
ayro
ll Jo
bs
0
500
1,000
1,500
2,000
2,500
3,000Public SectorPrivate Sector
Aug17
July 17
June 17
May 17
Apr 17
Mar 17
Feb 17
Jan 17
Dec 16
Nov 16
Oct 16
Sep 16
Aug 16
July 16
June 16
May 16
Apr 16
Mar 16
Feb 16
Jan 16
-100,000 100,000 300,000 500,000 700,000
Professional/Business Services
Education/Health
Leisure/Hospitality
Construction/Mining
Financial Activities
Manufacturing
Other Services
Wholesale Trade
Transportation/Utilities
State and Local Government
Federal Government
Retail Trade
Information
0
Note: Data not seasonally adjusted Source: Bureau of Labor Statistics, Delta Associates
Note: Data not seasonally adjusted Source: Bureau of Labor Statistics, Delta Associates
recovery period, the public-sector contribution seems to be shrinking even further. Only
a meager 2,000 jobs were added to government payrolls through the entire 12-month
period—the lowest in any 12-month period since May 2014. During the 12 months ending
in August, monthly job growth has averaged 175,000 new positions. Most employment
sectors continue to see positive growth, and have been consistently adding new positions
to meet strengthened demand. This is especially true for the Professional/Business Services
and Education/Health sectors which have a pronounced shortage of qualified workers.
Recently, the labor market has been tightening in the resurgence of the Leisure/Hospitality
sector. These three sectors alone account for exactly one-third of the national job growth
over the 12 months ending in August. On the other side of the coin are the struggling Retail
Trade and Information sectors, both of which are struggling from disruptive competition
via the Internet. Combined, the two sectors saw payrolls drop by just under 100,000
during the year ending August. Unfortunately, there doesn’t seem to be an end in sight
to the hemorrhaging in either sector, as the parade of store closures and newspaper staff
reductions continue apace. It’s not all doom and gloom though. In the Retail sector, some
brick-and-mortar retailers, such as Walmart and Kohl’s, seem to be adapting to the shifting
market successfully. In addition, niche retailers continue to outperform the overall industry.
Another area to watch is public sector job growth, which has been trending downward
for months, due in no small measure to the federal government. President Trump may not
have been successful in implementing wholesale layoffs of federal employees, but seems
to be partially accomplishing his federal workforce reduction goals through attrition.
210,000June 2017
189,000July 2017
156,000August 2017
145,000May 2017
Month-to-month gains
(seasonally adjusted)
from January to August
averaged approximately
175,000 jobs per month:
THE NATIONAL ECONOMy
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Year to date, the federal government has only recorded a single month of positive job
growth. The Construction/Mining sector continues to be the turnaround story of the year,
particularly the Mining subsector. After job losses in 2015 and 2016, thanks to plunging
energy prices, the Mining subsector has entered a period of solid recovery. Unfortunately,
the oil refining component suffered a significant setback in August and September of the
current year, caused by the disruptive and destructive effects of Hurricane Harvey along
the Gulf Coast. Mining aside, real estate construction continued to be the main driver of
growth in the sector, as housing demand remains robust. In sum, the Construction/Mining
sector has added 264,000 new jobs to the economy over the 12 months ending August
2017.
Labor Force And WagesInitial unemployment claims continued to hover around three-decade lows through most
of August 2017, but jumped nearly 32,000 by mid-September. This hike is ostensibly due
to the negative economic effects caused by both hurricanes Harvey and Irma in Texas
and Florida, respectively. Per the Federal Reserve Bank of St. Louis, the four-week moving
average of unemployment claims was 268,750 during the week ending September 16. As
Florida and the Gulf Coast begin the recovery process in the near-term, we expect jobless
claims to tick down some before flattening through the end of 2017 as there is little slack
remaining in the labor market.
After falling to a 17-year low of 4.3% in May 2017, the national unemployment rate
(seasonally adjusted) ticked back up 10 basis points in August to 4.4%. We expect the
unusually low level of unemployment to climb above 4.5% before the end of the year.
In spite of the ever-tightening labor market, wage growth has failed to catch up. While
there have been some gains in wages over the past year, much of this has been lost in
recent months. During the 12-month period ending August 2017, the national average
hourly wage increased by 2.5%. This is still lower than 3.0%+ annualized gains prior to the
recession.
There are several theories explaining the lagging wage growth, including fundamental
shifts in the labor market. Perhaps most apparent is an increasingly younger workforce,
created in part by the retirement of baby boomers with considerably more seniority and
who have been earning higher compensation. Competition from less expensive foreign
labor has also been an issue, as it creates downward pressure on domestic wages. There
is also a mismatch between high-paying open positions and a lower-skilled workforce.
Existing wage growth is largely being driven by high demand for skilled workers; there
remains a shortage of workers with the technical skills required for positions in many
industries, including Healthcare, Life Sciences, and Construction.
Initial Unemployment ClaimsUnited States | Four-Week Moving Average
Unemployment RateUnited States | 1980 - August 2016
Jan
-09
Ap
r-0
9
Jul-
09
Oct
-09
Jan
-10
Ap
r-1
0
Jul-
10
Oct
-10
Jan
-11
Ap
r-1
1
Jul-
11
Oct
-11
Jan
-12
Ap
r-1
2
Jul-
12
Oct
-12
Jan
-13
Ap
r-1
3
Jul-
13
Oct
-13
Jan
-14
Ap
r-1
4
Jul-
14
Oct
-14
Jan
-15
Ap
r-1
5
Jul-
15
Oct
-15
Jan
-16
Ap
r-1
6
Jul-
16
Jan
-17
Ap
r-1
7
Jul-
17
Oct
-16
200,000
300,000
400,000
500,000
600,000
700,000
800,000
Initial Unemployment Claims
15-Year Average= 362,041
Peak in Initial Unemployment Claims (Week of 03/28/09) = 659,250
(Week of 9/16/2017) = 268,750
0%
2%
4%
6%
8%
10%
12%U.S. Unemployment Rate
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
Note: Data seasonally adjusted. Source: Federal Reserve Bank of St. Louis, Delta Associates
Note: Data seasonally adjusted, shaded bars represent recessions. Source: Bureau of Labor Statistics, Delta Associates *Through August 2017
THE NATIONAL ECONOMy
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Average Hourly Earnings12-Month Percentage Growth | 2007 Through August 2017
Employment Levels by Job StatusUnited States | 2010 Through August 2017
1%
2%
3%
4%
07* 08 09 10 11 12 13 14 15 1716
Average 2009-2016 = 2.2%Average 2007-2008 = 3.3%
-6000-5000-4000-3000-2000-1000
01000200030004000
Part-TimeFull-Time
10 11 12 13 14 15 16 17
As of August 2017, there were 125.8 million persons employed in full-time
jobs in the U.S., and 27.6 million persons employed in part-time jobs. During
the 12 months ending August 2017, the number of full-time jobs increased
by 1.5 million, while the number of part-time jobs increased by 347,000. One
recent trend in the U.S. economy is full-time workers receiving substantial
amounts of supplemental income from participation in the “gig” or “sharing”
economy. According to the JPMorgan Chase Institute, nearly 1% of U.S.
adults earned income through a digital sharing platform in October 2015,
compared to just 0.1% of adults in October 2012. Examples of popular
income sources include: part-time driving for Uber, renting out a room on
Airbnb, or selling products on eBay.
Gross Domestic Product (GDP)After a disappointing first quarter, real GDP rebounded markedly in the
second quarter to 3.0%—the fastest pace of national economic expansion
since the first quarter of 2015 and in line with our prior predictions. Consumers
continue to propel the economy forward, with personal consumption
increasing by 3.3% during the quarter. Unfortunately, strong consumer
spending has done little to lessen the turmoil in the brick and mortar retail
sector. Nonresidential fixed investment, federal spending, and private
inventory investment also contributed to robust GDP growth. Holding back
the expansion were slowdowns in residential fixed investment and state and
local government expenditures. Looking ahead, we expect the disruption
and damage caused by HIM to have an impact on economic growth in the
third quarter, but the GDP growth rate will still be around 2.5%. The most
recent report from the Federal Reserve Bank of Philadelphia’s Survey of
Professional Forecasters projects real GDP growth at 2.6% in the third quarter
of 2017. Looking further ahead, GDP growth is expected to be 2.1% in 2017,
2.4% in 2018, and 2.2% in 2019.
Corporate ProfitsFollowing a first quarter decline, corporate profits (before taxes) were back on
the upswing during the second quarter of 2017, ending the period at $2.14
trillion (annualized and seasonally adjusted). Healthy domestic consumer
spending continues to be the major driving force behind corporate earnings
across most industries, while weak exports and meager productivity growth
have weighed on margins. Looking forward, profit growth will remain muted
as continued low unemployment places upward pressure on wage growth,
increasing unit costs. However, a weaker U.S. dollar should boost real net
income from business conducted overseas.
*Data available starting March 2007 Source: Bureau of Labor Statistics, Delta Associates
Note: Data seasonally adjusted Source: Bureau of Labor Statistics, Delta Associates
Number of Unemployed Vs. Job Openings12-Month Average Ending July 2017
Thousands of Jobs 0 200 400 600 800 1000 1200
Number of Job OpeningsNumber of Unemployed
Mining
Information
Other services
Financial activities
Transportation and utilities
Government
Construction
Manufacturing
Education and health services
Professional and business services
Leisure and hospitality
Wholesale and retail trade
Note: Based on 12-month trailing average, data not seasonally adjusted Source: Bureau of Labor Statistics, Delta Associates
THE NATIONAL ECONOMy
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GDP Percent ChangeUnited States | Annual GDP Change in 2009 Constant Dollars
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
Q107
Q307
Q108
Q308
Q109
Q309
Q110
Q310
Q111
Q311
Q112
Q312
Q113
Q313
Q114
Q314
Q115
Q315
Q316
Q117
Q116
20-Year Average = 2.4%
Revolving CreditRevolving consumer credit increased at an annual rate of 3.2% in July 2017
hitting the $1 trillion mark as personal consumption picked up again during
the middle part of the year. Non-revolving credit accelerated markedly at a
6.9% annual rate in July 2017, even as interest rates have steadily climbed,
reflecting the resilience of the recovery. Looking forward, we expect consumer
credit growth to flatten out as interest rate hikes counterbalance strong
consumer spending. Outstanding revolving credit will be most affected as it
is inherently less stable than longer-term non-revolving credit.
Housing MarketHome prices in the 20 major metro areas covered by the S&P/Case-Shiller
index continued their hot streak, increasing 5.8% in the 12 months ending
July 2017. The Pacific Northwest cities of Seattle and Portland claimed the
highest rates of appreciation over the year at 12.9% and 9.3%, respectively.
The continued strong growth in home prices is causing some speculation
of an impending bubble. However, the combined effects of the rebounding
labor market and continued low mortgage rates has kept demand high.
Even with the acceleration of construction activity, supply has struggled to
keep pace. The number of homes on the market relative to the number of
households is still at its lowest level since the 1980s. According to the National
Association of Realtors, the annualized pace of existing home sales was 5.35
million in August 2017, up from 5.34 million a year prior. The current sales
pace is the fastest seen since before the national housing crash in 2007. Sales
would likely be even higher if not for a severe lack of inventory. The average
sale price for an existing home was $294,600 in August 2017, up 4.5% from
$282,000 in August 2016. Mortgage rates have consistently been in decline
since March 2017, but trended upward midway through September. Per
Freddie Mac, the average commitment rate for a 30-year, conventional, fixed-
rate mortgage rose to 3.83% as of September 21, up from a 2017 low of
3.78% in the two weeks prior. The increase mirrored a corresponding seven
basis-point hike in the 10-year Treasury yield. We expect rates to rebound
back above 4% shortly as the Fed winds down its expansionary policy in
the coming period. The 2017 annual average is expected to be significantly
higher than 2016’s, when 30-year rates bottomed out at 3.42% in October,
which was the lowest since April 2013.
U.S. Corporate Pretax Profits
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Corporate Profits
Co
rpo
rate
Pro
fits
In T
rilli
ons S&
P 5
00
12
-Mo
nth EP
S
0
24
48
72
96
120
S&P 500 12-Month EPS
2017*201620152014201320122011201020092008
Note: Quarters are seasonally adjusted at annual rates. Source: Bureau of Economic Analysis, Delta Associates * Through Q3 2017
*Through Q3 2017, seasonally adjusted at annual rates. Yearly data not seasonally adjusted. Source: Bureau of Economic Analysis, Standard and Poor’s, Delta Associates
THE NATIONAL ECONOMy
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The Federal BudgetThe Federal budget deficit for the 2016 fiscal year, which ended on September
30th of 2016, was $587 billion (or 3.2% of GDP), up from 2.5% in FY2015.
The budget shortfall in FY2016 was a $148 billion increase over the deficit in
FY2015, and marked the first federal budget deficit increase since FY2009.
While the Congressional Budget Office (CBO) projects that the deficit will
decline in fiscal years 2017 and 2018, it will resume its upward trajectory over
at least the following eight years. The growing shortfalls would occur mainly
because, under current law, growth in revenue would be outpaced by growth
in spending for large federal benefit programs (primarily retirement and
health care programs targeted to older people) and for interest payments
on the federal debt. Prior to being elected, President Trump proposed
major increases to infrastructure and defense spending, and he has already
attempted to follow through on the latter of these promises in his initial
FY2018 budget proposal, which increases military spending by $54 billion.
In order to fund the increase in defense spending, as well as $2.6 billion to
construct a wall on the U.S.-Mexico border and $1.4 billion to fund a new
private “school choice” program without increasing revenues, the budget
proposes an equivalent amount of cuts in discretionary spending across
nearly every federal department. Under the president’s proposal, only the
departments of Veteran Affairs, Homeland Security, and Defense would see
funding increases. The Environmental Protection Agency, State, Agriculture,
and Labor departments would see massive cuts exceeding 20% of their
current budgets. The scale and time line of the administration’s proposed
infrastructure investment remains up in the air, and the president recently
abandoned his plans to focus on P3 partnerships, claiming that “they’re more
trouble than they’re worth.” In September, congressional Republicans and
the Trump administration presented a tax reform plan with steep rate cuts.
Specifically, the proposal:
1. Reduces the corporate tax rate from 35% to 20%.
2. Reduces and consolidates the individual tax rates into three
brackets: 12%, 25% and 35%, doubles the standard deduction,
and eliminates the personal exemption.
3. Reduces the tax on S corporations, partnerships, and sole
proprietorships to 25%.Most economists contend that the tax
plan is unrealistic as proposed, since it would drastically widen
the federal deficit even more than projected. This makes it
unlikely that it will pass Congress in its current form.
Annual Change in Existing Home Sale PricesUnited States
Baseline Budget ProjectionsUnited States
U.S. Existing Home Sales vs. Sales Prices
-20%
-15%
-10%
-5%
0%
5%
10%
15%
Perc
ent C
hang
e Fo
r M
edia
n Pr
ice
of S
ing
le -
Fam
ily H
om
es
08 09 10 11 12 13 14 15 1716
Fed
eral
Defi
cit (
$ B
illio
ns)
Defi
cit A
s A
% o
f Rea
l GD
P
-1600
-1280
-960
-640
-320
0Deficit
2625242322212019181716-5%
-4%
-3%
-2%
-1%
0%% of GDP
2625242322212019181716
Num
ber
of S
ales
– T
hous
and
s o
f Uni
ts
Ave
rag
e Sa
les
Pric
e
3000
3700
4400
5100
5800
6500Number of Existing Home Sales**
17*1615141312111009080706$200,000
$220,000
$240,000
$260,000
$280,000
$300,000Average Existing Home Sale Price
17*1615141312111009080706
Note: Data reflects 20-city composite index. Source: S&P/Case-Shiller, Delta Associates * Through August 2017
*At August 2017 **Seasonally adjusted annual sales rate Source: National Association of Realtors, Delta Associates
Baseline budget projections as of June 2017. Source: Congressional Budget Office, Delta Associates
THE NATIONAL ECONOMy
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Interest Rates and InflationThe Federal Open Market Committee (FOMC) has followed through on
its plans for regular increases to the federal funds benchmark rate this
year. It hiked interest rates by a quarter percent at both its March and June
meetings, with another increase likely coming in December. In addition,
the Fed has indicated that it will shortly proceed to normalize its balance
sheets by winding down its security-purchase program. The decision to end
quantitative easing is driven mainly by strong consumer spending and the
tight labor market. Unfortunately, weak inflation continues to be a concern,
at least in the short term. Consumer price inflation started off the year strong,
but weakened in the spring. However, the rate of price growth has shown
signs of rebounding over the summer. The CPI for all urban consumers
increased 1.9% over the 12 months ending August 2017, just shy of the Fed’s
2.0% target. The increase was driven heavily by a 10.4% jump in gas prices as
well as 3.3% increase in shelter costs. The personal consumption expenditure
price index (PCEPI), which takes into account changes in consumption habits
as people substitute some goods and services for others, experienced a
lesser increase of 1.4% during the 12 months ending July 2017.
Financial MarketsU.S. financial markets have continued the strong bull market run through
2017, and the third quarter was no exception. The stock market returned to
stability for much of 2016 as the economic recovery continued unhindered
by turmoil overseas. Immediately following the presidential election, the
stock market began a strong rally, in the process breaking record highs.
On August 2, 2017, the Dow Jones Industrial Average crested 22,000 for
the first time. The S&P 500 index stood at 2,496.84 as of market close on
September 26, 2017, up 16.3% from a year ago. By comparison, total S&P
500 price returns in 2016 were 12.0%. Much of the recent stock market gains
can be attributed to the promises of President Trump to cut corporate taxes
and alleviate federal regulations in the coming years. As such, continued
positive performance in the marketplace is heavily dependent on the timing
and framework of the new administration’s policies. In September, the Trump
administration proposed a tax reform plan that would lower the corporate
tax rate to 20% and the pass-through business rate to 25%. The plan already
faces stiff opposition from Democrats in Congress and skepticism from
analysts. If promised tax cuts, which are a major factor behind the current
lofty market caps, don’t materialize as planned, there could be a profoundly
negative reaction in financial markets.
Selected U.S. Government Interest Rates
U.S. Inflation and Personal Consumption Expenditure Index
Inte
rest
Rat
es (%
)
0%
1%
2%
3%
4%
5%
6%
7%30-Year Treasury10-Year TreasuryEffective Federal Funds Rate
171615141312111009080706050403020100
12
-Mo
nth
Perc
enta
ge
Cha
nge
-3%
0%
3%
6%
9%
12%
15%Real PCEInflation
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
Data are non seasonally adjusted monthly averages, 30-Year Treasury not issued between March 2002-Dec. 2005. Source: Federal Reserve Economic Data (FRED), Delta Associates
Source: Federal Reserve Economic Database (FRED), Delta Associates *Through July 2017
THE NATIONAL ECONOMy
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Economic OutlookWe continue to remain bullish in our view of the economy over
the next several months. Consumer sales, the labor market,
and business spending remain fundamentally strong. Lost
economic activity due to severe weather in some parts of the
country will result in a modest pullback in GDP growth in the
third quarter, but we expect it to rebound quickly in the fourth.
Overseas, the outlook is murkier and less upbeat, but a number
of G7 nations—particularly Canada, Japan, and Germany—have
recorded robust economic growth so far this year. Domestically,
the largest unknown regarding the future performance of the
economy is public policy. After repeated failed attempts to
repeal Obamacare, congressional Republicans and President
Trump have shifted their focus to long-awaited tax reform.
However, the president’s proposal to cut corporate taxes
drastically from over 40% to 20% is likely to be watered down,
as it would cost the government roughly $1.5 trillion over
a decade according to most estimates. The administration
has also pledged to boost infrastructure spending across the
nation, which would provide another considerable boost to the
economy. However, in September, President Trump abandoned
his preference for public-private partnerships in rebuilding the
nation’s infrastructure, preferring instead to increase the burden
of states and localities. Overall, non-defense federal spending
is expected to be flat in the period ahead. Job growth, while
still robust, appears to be slowing to a less aggressive pace. We
expect positive payroll growth to continue for the time being,
but believe that the days of 200,000 monthly net additions
may be behind us. With a prolonged recovery cycle comes
a prolonged wait for wage increases, but there remain other
fundamental factors at play that could be placing downward
pressure on wage growth. Nevertheless, we believe material
wage growth will arrive before the end of the cycle. Based on the
Fed’s schedule of future funds rate hikes and plans to shrink its
balance sheet, higher interest rates in the near future is a given.
However, relatively flat price inflation and continued uncertainty
should keep long-term interest rate increases modest. Despite
the higher cost of borrowing, we expect consumer spending
to remain robust and remain the cornerstone of the national
economy for the foreseeable future.
Real GDP growth Housing
Unemployment Rate Federal Funds Rate
Inflation
Long-term interest rates
Payroll jobs
2.4%In 2018
5.0 to 6.0%Price appreciation in 2018
4.9%Year-End 2018
2.2MAdded in 2018
Specifically, we believe the economic outlook is as follows:
Slightly lower than last year’s total
Two-to-Three 25 basis-point increases in 2018
Moderately up in 2018
2.0% for 2018
National Payroll Job Growth Summary
year Job Change %Change
2017* 2,097,000 1.4%
2016 2,463,000 1.7%
2015 2,885,000 2.1%
2014 2,577,000 1.9%
2013 2,206,000 1.6%
2012 2,243,000 1.7%
2011 1,571,000 1.2%
2010 -952,000 -0.7%
2009 -5,929,000 -4.3%
2008 -757,000 -0.5%
2007 1,546,000 1.1%
* 12 months ending in August 2017; others are comparisons of annual averages. Note that Bureau of Labor Statistics has re-benchmarked figures since their initial publication. The figures presented above are the most recent estimates.
U.S. Payroll Job GrowthPayroll Jobs
25-year Annual Average
2.10MU.S. payroll jobs
gained
1.3MPayroll jobs
gained
1.4%Growth rate
1.1%Average
growth rate
Over the 12 months ending August 2017
THE NATIONAL ECONOMy
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Metro AreaJob Change
Metro AreaJob Change
# % # %
New York 145,900 1.5% Tampa-St. Petersburg 39,600 3.1%
Dallas/Ft. Worth 96,700 2.8% Phoenix 34,900 1.8%
Atlanta 86,400 3.2% Denver-Boulder 33,900 2.1%
LA Basin Las Vegas 30,300 3.2%
Los Angeles/Long Beach/Glendale 37,200 0.9% Charlotte 30,200 2.6%
Orange County (Santa Ana/Anaheim/Irvine) 900 0.1% Raleigh-Durham 30,100 3.3%
Riverside/San Bernardino/Ontario 34,100 2.5% Cincinnati 29,900 2.8%
Total LA Basin 72,200 1.0% Portland (OR) 29,100 2.5%
Washington, DC 67,600 2.1% Nashville 28,700 3.0%
Boston (Metropolitan NECTA) 63,400 2.3% Chicago 24,700 0.5%
South Florida San Antonio 23,000 2.3%
West Palm Beach/Boca Raton 15,700 2.6% Columbus (OH) 22,300 2.1%
Fort Lauderdale 26,200 3.2% Austin 21,200 2.1%
Miami/Miami Beach/Kendall 19,300 1.7% Indianapolis 19,200 1.8%
Total South Florida 61,200 2.4% San Diego 19,200 1.3%
Houston 53,500 1.8% Baltimore 19,100 1.4%
Seattle 52,400 2.7% Kansas City 17,200 1.6%
Philadelphia 51,500 1.8% Jacksonville 16,900 2.5%
San Francisco Bay Area Salt Lake City 16,800 2.4%
San Jose/Sunnyvale/Santa Clara 11,000 1.0% Sacramento 16,000 1.7%
San Francisco/San Mateo/Redwood City 19,000 1.7% St. Louis 15,500 1.1%
Oakland/Fremont/Hayward 19,400 1.7% Pittsburgh 10,300 0.9%
Total Bay Area 49,400 1.5% Cleveland 9,700 0.9%
Detroit (Detroit/Warren/Livonia) 44,900 2.3% Memphis 9,500 1.5%
Minneapolis-St. Paul 44,800 2.3% Oklahoma City 9,200 1.5%
Orlando 40,000 3.3% New Orleans 1,500 0.3%Note: Data not seasonally adjusted.Source: Bureau of Labor Statistics, Delta Associates
12-Month Payroll Employment Change Through August 2017
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The Houston Metro Economy
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HOUSTON ECONOMYTurning the corner to recovery?The Houston economy experienced a roller coaster third quarter, as it came in primed to expand, but was met with a hurricane that forced over 800,000 residents to file claims with FEMA given damages from the storm. While year-over-year totals of 53,500 jobs created through August 2017 appears strong on the surface, much of this growth occurred in the fourth quarter of 2016 as Houston geared up for the holiday season and SuperBowl LI. That said, office using employment sectors such as Professional and Business Services and Financial Activities have shown continued growth on year-to-date and year-over-year basis. Additionally, the aftermath left by Hurricane Harvey will create jobs that will boost fourth quarter numbers and help to offset some of the impacts from the storm. Construction jobs will likely see a significant spike in job growth as workers are hired to help repair damage to both commercial and residential properties throughout the city. Auto sales should also surge, with up to 300,000 cars flooding during Harvey’s visit to the city.
UnemploymentThe Houston area unemployment rate recorded 4.8% in September, down slightly from the 5.3% recorded at the end of the second quarter. With Harvey displacing many residents and impacting jobs in the short run, Houston saw a surge in short-term unemployment claims. However, most business operations were only minimally disrupted through the storm and the ongoing clean up efforts throughout the city will create additional jobs, improving the long-term outlook. The Texas unemployment rate is 4.0%, down 0.7% over the previous year. National unemployment came in at 4.2% in September, down 0.7% year-over-year, but up by 0.4% since the beginning of 2017. These numbers are not seasonally adjusted. This is the sixth straight quarter where the Houston unemployment rate has surpassed both the national and Texas unemployment rates.
Core Industry Employment
Payroll Job GrowthHouston Metro Area
*12-month job growth through September 2017 Source: Bureau of Labor Statistics, Transwestern
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17*
Annual Job Growth (in Thousands)
-80-60-40-20020406080100120 1996-2016 Average
Job Growth = 48,000/Year
Payroll Job GrowthLarge Metro Areas | 12 Months Ending September 2017
Source: Bureau of Labor Statistics, Transwestern
Payroll Jobs in Thousands
19.5
0255075100125150175200
DFW LA Basin NY Atl Bos SF Bay D.C. Phx Denver Miami Hou Chi
Payroll Job Change In Percentage TermsLarge Metro Areas | 12 Months Ending September 2017
Source: Bureau of Labor Statistics, Transwestern
Percent Change in Payroll Jobs
0.7%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
DFW Atl Bos Denver Phx D.C. SF BayLA Basin NY Mia Hou Chi
Energy Manufacturing
Trade & Transportation
Construction
Education & Health Services
1,500Jobs added in the 12 months ending in Sept 2017
13,300Jobs added in the 12 months ending in Sept 2017
6,600Jobs lost in the 12 months ending in Sept 2017
9,000Jobs added in the 12 months ending in Sept 2017
11,000Jobs lost in the 12 months ending in Sept 2017
2.3%
1.8%
5.1%
6.1%
1.1%
THE HOUSTON METRO ECONOMy
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EnergyThe energy sector continued to stabilize in the third quarter as OPEC announced intentions to maintain production cuts through the end of the year and into 2018, allowing WTI prices to rise over $50 per barrel. The rig count activity has been on the rise throughout 2017, particularly within the Permian Basin and the Cana Woodford, but has recently crested, with rig counts declining modestly. Despite rig counts cresting, U.S. production has risen to 9.62 million barrels per day, up from 9.553 million bpd, the highest ouput since EIA began tracking weekly data in 1983. Efficiencies in extraction have resulted in production per rig increasing two-fold over what was capable just five years ago. At the time of publication, rig count stood at 898, down 11 over the month, but up 398 rigs from the same time last year. M&A activity is expected to increase in the near term as the increasing price of oil has more companies making a profit, thus simplifying valuations. In January, EQT announced plans to acquire Rice Energy for $6.7B. In October, Vistra Energy announced that it would acquire Dynegy in a $1.7B all-stock, tax-free acquisition expect-ed to close in the second quarter of 2018.
Unemployment RatesLarge Metro Areas
U.S. Rotary Rig Count
Houston Manufacturing OutlookPurchasing Managers Index
Source: Bureau of Labor Statistics, Transwestern
Source: Baker Hughes, Transwestern *As of 10/07/2017
Source: ISM-Houston *Through September 2017
September 2017 September 2016Unemployment Rate
0%
1%
2%
3%
4%
5%
6%
Den BosSF
Bay DFW D.C. Mia Phx Atl NY ChiLA
Basin Hou
National Average 4.2%
4.9%
MiscGasOilAnnual Average Working Rigs
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 17*0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Exp
ansi
on
Co
ntra
ctio
nInd
ex
303540455055606570
2016 2017*2010 2011 2012 2013 2014 2015
ConstructionCity of Houston construction activity totaled $430.4 million in August 2017, up from $413.0 million in August 2016, an increase of 4.2% on a permit value basis. Construction jobs are still down (4,500 jobs year-over-year), however, with renovations and rebuilds from Harvey, construction job losses should be mitigated over the coming months. This will also have a significant impact on overall construction permits as the reconstruction begins for residential homes and commercial buildings that experienced damage. While this could stave off job losses for the short-term, look for 2018 to see further declines as Houston's construction cycle winds down, while developers look towards the next cycle.
ManufacturingThe manufacturing sector added the second most jobs in Houston amongst major industries, adding 13,300 jobs over the 12-months ending in September, a 6.1% increase. The sector has added 11,000 jobs through the first 8 months of the year alone, pumped up by Houston's booming petrochemical industry. Most of the job growth can be attributed to the durable goods sector which has added 11,700 jobs year-over-year. The Houston Purchasing Managers Index (PMI), a short-term leading indicator of production, was 48.6 in September, up 2.1 from 46.5 in August. In August, PMI saw the first contraction (a reading below 50) in ten months, however, it is anticipated to bounce back about 50 for the remainder of the year as companies and individuals alike replace items lost as a result of the storm.
Significant M&A Activity to date
Total
EQT Corp
Noble Energy
Vistra Energy
Maersk Oil Unit
Rice Energy
Clayton Energy
Dynegy
$7.5B
$6.7B
$3.2B
$1.7B
THE HOUSTON METRO ECONOMy
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2.4MTEUs through Port of Houston in 2017, annualized
$650MMemorial Hermann expansion and renovation of TMC campus
$1.5BNew 30-acre research campus called TMC3
$697MHouston Methodist new hospital tower on TMC campus
$506MTexas Children’s expansion of TMC campus
54.7 MPassengers through Houston Airport System in 2017 at current pace
$73MPort of Houston capital improvement projects in 2016
Trade and TransportationThe Port of Houston continues to experience tremendous growth and strides as they increase capacities through expansion projects. According to the Port of Houston authority, the Port has handled 20 million tons of cargo through July, which represents a 13% increase year-over-year. The dredging of the Barbours Cut Terminal in the second quarter is anticipated to help further increase the amount of cargo handled and pushing the Port to record levels by the end of the 2017. In other Port news, Terminal Link Texas (TLT) broke ground on a 25-acre empty container yard that will be able to increase overall stacking capacity by 80%. This will allow for more container freight station activities and improved repair operations. The container yard is anticipated to be complete by July 2018. In transportation news, Hurricane Harvey had serious impacts on Houston roadways for a good portion of September as some roadways took weeks to reopen after the storm. According to InfoNation, nearly 300,000 cars were damaged by Harvey, likely indicating strong upcoming months for sales in the auto sector.
Education and Health ServicesThe education and health services sector continues to be Houston's primary jobs creator, adding 9,000 jobs over the 12 months ending in September. This is driven by the ever-increasing population base and the trend to provide healthcare services in close proximity to users. As such, large healthcare systems have focused on expanding their footprints to suburban campuses and facilities where population has skyrocketed in recent years.
In education news, Texas A&M University announced that it has authorized the purchase of 1020 Holcombe in the Texas Medical Center and will form a partnership with Houston Methodist. The partnership created between Texas A&M and Houston Methodist, will be used to create a dual engineering and medical program, or EnMed for short. The PhD based program will train students to create inventive medical technology that will further transform the medical sector. While enrolled in the EnMed program, students will be receive a PhD in engineering while also obtaining a M.D.
Notable Healthcare Projects Under Construction
Energy
Trade/Transporation/Utilities*
Manufacturing
Professional/Business Services
Financial Activities
Government
Construction
Education/Health Services
Other
$479Billion Total
GDP10%
20%
17%
14%13%
8%
7%6%5%
Tota
l TE
Us
(Mill
ions
)
06 07 08 09 10 11 12 13 14 15 16 17*
2006-2016 Average = 1.9M TEUs/Year
1.00
1.25
1.50
1.75
2.00
2.25
2.50
Air
Fre
ight
(Met
ric
Tons
)
06 07 08 09 10 11 12 13 14 15 16 17*
2006-2016 Average = 429,057 metric tons/year
300,000325,000350,000375,000400,000425,000450,000475,000500,000
Core IndustriesHouston Metro Area | 2016 Gross Domestic Product
Houston Port AuthorityContainer Traffic
Houston Airport SystemAir Freight
Source: Bureau of Economic Analysis, Transwestern *Number is estimate as actual data not available
Note: TEUs = 20-foot-equivalent container units. Source: Houston Port Authority, Transwestern *Through September 2017, annualized
Source: Houston Airport System, Transwestern *Through September 2017 annualized
THE HOUSTON METRO ECONOMy
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HousingWith Hurricane Harvey hitting Houston in the third quarter, single family home sales suffered, dropping 25% year-over-year. August recorded 5,917 homes sold, down appreciably from the 7,927 homes sold in August '16. The average single-family home price is up 2.6% year-over-year, closing at $296,418 in August. Months of inventory is also on the rise, increasing to 4.4 months, up from 4.0 months at the same time last year. That said, home sales should recover quickly and leave 2017 as a record breaking year, as displaced residents by Harvey look to rebuild or purchase new. Pricing impacts of Harvey are less clear with early estimates placing discounts of up to 20% for homes that took damage through the storm. Considering the increasing frequency of rain events in the Houston metro area, significant improvements will need to drainage systems to ensure public safety and limit property damages in the future.
Economic OutlookEconomy tempered in period ahead 2017 has been a challenging year for Houston as the market continues to bear the fallout from the energy downturn and impatiently waits for the energy sector to return to form. Increased diversification has helped the city maintain job creation on a year-over-year basis, but the replacement wages are a fraction of those lost. This has reduced consumer spending power and resulted in a modest 3.6% decline in GDP, as Houston slid from the 5th largest economy in the nation to the 6th, behind Washington, D.C.. Hurricane Harvey has also posed significant challenges to the market. HP was forced to move it's manufacturing operations out of Houston due to it's facility being damaged from flooding for the second year in a row. HP remains committed to Houston, however, and will look to build a new headquarters facility to replace their operations impacted off 249. Additionally Telecheck, an Atlanta-based check guarantee company, decided to shutter it's Houston operations after 50 years in the market,after their building flooded. Moreover, at least two additional energy firms are anticipated to announce job cuts that were postponed due to Harvey. These gloomy points aside, Houston's underlying core metrics all foretell expansion in the fourth quarter and improvements throughout 2018. WTI prices have stabilized and entered into the mid' $50's, population growth will continue at a strong pace, and increased activity through the Port of Houston will help to propel growth. OPEC has committed to maintaining production cuts in order to maintain/elevate current pricing. Big energy companies such as ExxonMobil, Chevron, Schlumberger and Halliburton all posted third-quarter profits. Additionally, Hurricane Harvey's clean up efforts are anticipated to stimulate growth in the short-term as residents rebuild and repurchase items lost to flooding. The fourth quarter is forecast to see job growth ranging from 35k-50k jobs given seasonal hiring and hurricane recovery efforts. This will result in annual job growth for 2017 to range from 30-45k jobs created, a stunning feat considering energy's slow recovery. 2018 should see Houston return to typical job growth of 50-70k jobs.
Oil Prices & Job GrowthHouston Metro Area
Job ForecastHouston Metro Area | Annual Job Growth
SOURCE Bloomberg, Transwestern *Prices as of 10/11/2017, job growth for 12 months ending in September 2017
Source: Bureau of Labor Statistics, Transwestern
Job Growth (in thousands) WTI Price Brent Price
05 06 07 08 09 10 11 12 13 14 15 16 17* -80
-60
-40
-20
0
20
40
60
80
100
120
140
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
$110
$120
Avg. Annual Growth
2006-16 = 53,000/year
Projected Avg. Annual Growth
2017-19 = 53,000/year
-80,000
-60,000
-40,000
-20,000
0
20,000
40,000
60,000
80,000
100,000
120,000
06 07 08 09 10 11 12 13 14 15 16 17* 18* 19*
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Office TrendLines®
10-Year Trend Q3 2017OFFICE MARKET OVERVIEWHarvey Delays Recovery SlightlyWhile the office market has been under pressure for several quarters, the third quarter saw Hurricane Harvey eclipse the sun and pour fifty five inches of water on the Houston Metro area, slowing activity and slightly post-poning recovery in the sector. Initial reports to the storm's capital impacts were significantly exaggerated as they were tethered to estimates based upon outdated flood maps. However, a detailed review indicated that the storm had minimal impacts on the commercial office market, with damage to just under 70 office buildings. In total, approximately 2.0 million square feet of rentable building area saw damages, less than 1.0% of total supply, and significantly less than initially anticipated. Of the properties damaged, over 75% were fully operational within two weeks of the event and 95% within three weeks. A lack of strong winds spared most office buildings from signifi-cant harm, limiting property damages primarily to parking garages, first and sub-floors as well as minor roof leaks. The most tangible impact that Harvey had upon the Houston office market was essentially delaying the sectors recovery for an additional quarter.
Total Available Sublease Space
(4.0) MSFYear-to-Date
$35.83 PSFClass A Full Service
2.3 MSF
52.5%Pre-leased
19,500Jobs gained 12 Months ending September 2017
Vacancy
Absorption
Rental Rate
Under Construction
Job Growth
Submarket Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017
Energy Corridor 3,559,264 3,130,327 2,752,434 2,480,480 2,386,277
CBD 2,759,855 2,469,302 2,159,810 2,504,810 2,178,987
Westchase 1,485,336 1,406,051 1,492,575 1,530,831 1,543,705
Greenspoint/North Belt 982,267 1,147,254 1,152,577 890,977 877,698
Galleria 1,092,670 1,158,965 1,115,335 1,002,692 842,634
All Houston Metro 12,173,599 11,649,891 11,248,303 10,772,877 9,829,433
Notable 2017 Leases524,000 SFShort-Term Renewal/Extension2000 Post Oak BlvdGalleria/Uptown submarket
204,500 SFRenewal/ExpansionOne Allen CenterCBD submarket
431,307 SFSubleaseOne Shell PlazaCBD submarket
186,000 SFShort-Term Sublease (Harvey)Northpoint PlazaWest Belt submarket
200,000 SFSublease (Harvey displacement)Two Allen CenterCBD submarket
378,000 SFPreleaseSpringwoods VillageThe Woodlands submarket
209,000 SFPreleaseCapitol Tower CBD submarket
142,000 SFRenewal/ContractionTwo Allen CenterCBD submarket
15.4%Vacant Available
23.3%Total Available
$21.97 PSFClass B Full Service
THE HOUSTON METRO OFFICE MARKET
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VacancyTotal Availability Declines While Vacancy RisesThe overall office availability rate (all space marketed as available for lease, both direct and sublet) decreased 0.3% over the quarter, ending at 23.3%. Class A properties drove the decrease, declining by 0.5% to finish the period at 24.5%. Class B properties ticked up marginally, finishing at 23.0%. Availability is projected to increase in the short-run, prompted by pending space give backs of both Telecheck and Dynegy. After a run of over 50 years in Houston, Telecheck is closing it's Sugar Land operations and relinquishing 90k SF, citing issues with their facility as it was impacted by flooding. Additionally, Irving, Texas based Vistra Energy Corp is acquiring Dynegy in a tax-free, all stock transaction and is rumored to be closing the Houston headquarters at 601 Travis when the deal closes in the second quarter of 2018. With rumors that two major energy companies postponed cuts due to Harvey and could announce further job losses in the coming weeks, additional shadow space remains prevalent in the market.
With respect to vacancy, direct vacancy rose for the twelfth consecutive quarter, up 0.3% and closing at 15.4% overall. Class A properties saw vacancy increase by 0.2%, ending at 15.1%, while Class B properties were up 0.4% to 16.7%. Currently, over 1.5 million SF of sublease space is set to expire over the next 12 months, equating to roughly 20% of total sublease supply. This is especially pronounced in the North Houston District where 868,845 SF is set to expire by end of year 2018. As sublease space expires and tenants in the market look to attain efficiencies in square feet per employee, city-wide, vacancy rates should continue to rise.
Net Absorption2017 year-to-Date Absorption Totals Negative 4.0M SFYear-to-date absorption totals of negative 4.0 million square feet continue to highlight the delayed impacts of the energy downturn as well as the trend of companies striving for efficiency by reducing their space footprint. Absorption for the quarter totaled negative 732,000 square feet and was equally distributed among classes. Class A properties totaled negative 360,000 square feet with the West Loop and Central Business District primarily accounting for the negative absorption. Class B finished the third quarter with negative 398,000 square feet of absorption, due to space reductions in the Houston North District and the West Loop submarkets.
Rental RatesAsking Rates Continue to AscendOverall asking rates increased by 1.5% over the quarter and 2.0% over the year, finishing the period at $30.92 PSF full service. Despite the increase in asking rates, concessions remain elevated throughout the market with generous concession packages and tenant improvement allowances being offered in order to maintain the highest rent figures. Class A rates closed the quarter up 0.6% (+$0.20), ending at $35.83 PSF full service, while Class B asking rates declined by 1.2%, ending at $21.97 PSF full service. The submarkets with the highest asking rents are the Katy Fwy East ($45.00 PSF), the Central Business District ($44.35 PSF) and Galleria/Uptown ($38.83 PSF).
Office Vacancy RatesSelect Metro Areas | Q3 2017
Net Absorption of Office SpaceHouston Metro | 2001 Through Q3 2017
Contiguous Blocks of Available SpaceHouston Metro | Q3 2017
Source: CoStar, Transwestern
Note: Delivery of preleased space counts as positive net absorption. Source: CoStar, Transwestern *Through Q3 2016
Source: CoStar, Transwestern Note: Includes both existing and under construction buildings
National Vacancy Rate: 10.1%
0%
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25%
Ove
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Bos NY Mia Den LA Atl Chi Was Phx DFW Hou
Direct Vacant Available Total Available
-3,000-2,000-1,00001,0002,0003,0004,0005,0006,0007,0008,000
Net
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Sublet Direct
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25,000 SF 50,000 SF 100,000 SF 200,000 SF
174
92
30
284
THE HOUSTON METRO OFFICE MARKET
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Supply and DevelopmentDevelopment cycle comes to a closeHouston area construction activity has slowed greatly due to both the delivery of over 33.0M SF in the past seven years and the downturn in the energy sector. Given the ample amount of space currently on the market for lease, developers are wary of additional speculative construction. Still, as tenants strive to retain talent and attain efficiency both in their space footprint as well as their operating expenses, the potential for additional construction tethered to a lead tenant remains high. Specifically, in core office submarkets such as the CBD, the Woodlands and West Loop. At the close of the third quarter, the Houston construction pipeline totaled 2.3 million square feet and is currently 52.5% preleased. Recently, Hewlett Packard Enterprise announced plans to move out of its current campus due to two-consecutive years of unprecedented flooding where all seven buildings took significant damages due to their location along Cypress Creek. Remaining committed to Houston and is more than 3,000 employees in the Houston area, HPE will instead develop a new campus in a yet to be selected location. HP currently has two buildings under construction in Springwoods Village.
Office DeliveriesHouston Metro | 2005 Through Q3 2017
Office Space Under ConstructionSelected Metro Areas | Q3 2017
The largest projects currently under construction are Capitol Tower (CBD, 778,000 SF - 27% leased to Bank of America), CityPlace 3 (The Woodlands, 378,000 SF - 100% Leased to HP), CityPlace 2 (The Woodlands, 326,000 SF - 100% Leased to ABS) and The Kirby Collection, a mixed-use project with a significant office component (Greenway Plaza, 212,000 SF, 0% preleased).
Lockton Place186,000 SF100% preleasedQ4 2017 delivery
Source: CoStar, Transwestern *Through Q3 2017
Source: CoStar, Transwestern
Largest Projects Under Construction 06 07 08 09 10 11 12 13 14 15 16 17*
SF Leased at Delivery SF Available at Delivery
-
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
47%72% 46% 55% 51%43% 63%68% 73% 52% 70% 69%
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NY WasSF
Bay DFW Atl Den BosLA
Basin Chi Hou Mia Phx
CityPlace 2 326,000 SF94% preleasedQ4 2018 delivery
Capitol Tower778,344 SF27.0% preleasedQ2 2019 Delivery
HP Campus378,000 SF (2 bldgs.)100.0% preleasedQ1 2019 delivery
The Post Oak104,579 SF0.0% preleasedQ4 2017 delivery
Kirby Collection 191,805 SF0.5% preleasedQ4 2017 delivery
THE HOUSTON METRO OFFICE MARKET
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Investment Market OverviewInvestment opportunities feeling the burn Harvey had little impact on Houston's investment market as a flurry of activity took place throughout the quarter. The underlying fundamentals of the market are strong and stabilization in the energy sector should continue to avail itself over the next 9-12 months, keeping sentiment positive amongst the investor community. Year-to-date, sales for the office sector total $3.78 billion and were comprised of 174 transactions. The most significant transactions of the year include Brookfield's pending acquisition of Houston Center (currently under-contract), CPPIB's acquisition of Parkway and it's portfolio, as well as Spear Street Capital's acquisition of the Columbia Portfolio (5 Houston Center, Energy Center I, and 515 Post Oak Blvd). In September it was announced that Brookfield Asset Management would purchase Houston Center for $875 million and an expected close by the end of the year. Houston Center is a 4.2 million square foot - four building portfolio, strategically located in the heart of the Central Business District. In June, Canada Pension Plan Investment Board (CPPIB) announced that it would acquire 100% of Parkway, a Houston-Based REIT whose portfolio included 8.7 million square feet across 19 properties in Houston, including Greenway Plaza. Earlier in the year, Parkway had sold a 49% interest in Greenway Plaza to a joint venture of TH Real Estate and CPPIB. In January, Columbia Property Trust announced the sale of their Houston portfolio to Spear Street Capital. Spear Street acquired the 3 building, 1.2 million square foot portfolio for $272 million. Looking forward, while a delta remains between existing pricing and expectation, unique opportunities for value-add urban infill locations will continue to remain attractive to investors. Furthermore, second generation trophy product is undergoing transformation to their amenities, features and services offerings in order to compete with those of new construction. The required capital for these competitive expenditures could impact owners who are not prepared to invest in their facility, making a sale of the asset possible.
Office Market OutlookLight at the End of the Tunnel?The Houston office market has been in limbo for several quarters as office using job growth has been all but non-existent following the energy sector downturn. Large swaths of expiring sublease space compete head-to-head with direct vacant blocks and recent activity has been a shuffling of tenants as opposed to expansionary. While diversification in industries such as healthcare, petrochemical, distribution and retail/hospitality have helped offset many of the jobs lost in the energy sector, there is little doubt that the market needs a return to form for crude prices or the emergence of an alternative industry to help alleviate the vacant and available supply. As such, eyes will continue to focus upon Houston's strategy to support tech growth, North American crude inventories, OPEC’s willingness to maintain production cuts, and the resulting impacts to the spot price of WTI.
NCREIF Return Index for Office Properties
Office Investment Sales VolumeSelect Metro Areas | January Through Q3 2017
Source: Real Capital Analytics, Transwestern
Metro Area2017 yTD Return (Through Q3)
12-Month Return atQ3 2017
Atlanta 2.48% 5.91%
Boston 3.20% 5.53%
Chicago 2.94% 5.07%
Dallas 6.59% 11.16%
Denver 2.87% 4.48%
Houston 0.04% -1.24%
Los Angeles 4.36% 9.04%
National Average 2.87% 5.57%
New York 0.88% 3.39%
Phoenix 5.05% 5.62%
San Francisco 3.86% 7.56%
Washington 1.73% 3.25%
Note: NCREIF Index includes both current income and capital appreciation returns. Source: NCREIF, Delta Associates
AtlLA ChiDFWWas/Bal HouBos DenNY
SFBay
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THE HOUSTON METRO OFFICE MARKET
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Houston’s office market has been absorbing the impact of lower oil prices that commenced 3 years ago, and absent an unforeseen event, 2017 appears to represent the bottom of the office market statistically and economically. All signals point to 2018 being the year that the office market begins to enjoy recovery and positive absorption although growth will be slower and more measured than previous up cycles.
Overall market activity is projected to remain flat through the remainder of the year as leasing activity continues to fall below historical averages. Tenants with near term expirations are in a favorable market to extend early and lock in favorable terms. The energy sector will continue to see Mergers and acquisitions at a rapid pace leaving the potential for additional blocks of space to be brought online due to redundancies.
Projections for 2018Citing the Institute of Regional Forecasting November 2017 overview for the Houston market, Bill Gilmer, PhD calls for three recovery scenarios that are tethered to a rebounding in the energy sector. Job growth for these scenarios ranges from a low of 20,500 jobs created to a high of 69,900 jobs created over the course of 2018. Thereafter, job growth is forecast to return to historical averages between 40k to 90k jobs a year. Utilizing Gilmer's job growth projections, in conjunction with the historical relationship between job growth and office absorption, as well as known requirements/pending lease roll, we project vacancy to range from 14.7% to 15.5% through 2018 with absorption between 700,000 and 2,400,000 square feet for the year, representing the spread between best case and worst case scenario.
Office Vacancy Rate ForecastHouston Metro | 2008 Through 2020
Office Absorption and EmploymentHouston Metro Area
*12-month job growth through September 2017, net absorption through Q3 2017. Source: Bureau of Labor Statistics, Transwestern
Source: CoStar, Transwestern Note: Dotted lines represent weak, moderate and strong demand forecasts *At Q3 2017
06 07 08 09 10 11 12 13 14 15 16 17*
Net Absorption (Thousands of SF) Payroll Job Growth (in Thousands)
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20P19P18P17161514131211100908
Note: Dotted trend lines represent demand projections based upon conservative job growth to absorption ratios of approximately 35.0 SF/job. All models assume construction pipeline to be delivered in timely manner. All models assume sublease availabilities with expirations through 2018 to become direct vacancy. Job growth projections based upon three distinct 2018 scenarios utilizing forecasts from the IRF. Red - Job growth of 20.5K through 2018 as energy reverses direction with rig count and oil prices falling.Yellow - Job growth of 42.1K through 2018 as energy sees a moderate reversal with activity increasing in the second half of 2018. Green - Job growth of 70k through the course of 2018 rig counts and pricing increase through mid-2017 and then stabilize.
Eric Anderson - EVP Agency Leasing
THE HOUSTON METRO OFFICE MARKET
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Submarket Total Bldgs InventorySF Available Immediately
Direct Vacancy 2016
Total Availabilty
2016
Direct Vacancy Q3
2017
Q3 2017 Total
Availability
Net Absorption
2016
Net Absorption
Q3 2017
Net Absorption
yTD 2017
Under Construction
Conroe 13 920,281 49,898 10.2% 10.6% 5.4% 9.8% (14,000) 116 49,451
Central Business District 62 43,693,078 7,023,493 12.6% 20.6% 16.1% 25.8% (61,000) (62,154) -1,473,646 778,344
Midtown 32 5,664,375 639,580 15.0% 17.6% 11.3% 17.3% - (32,479) 52,843 -
Downtown 94 49,357,453 7,663,073 12.9% 20.3% 15.5% 24.8% (61,000) (94,633) -1,420,803 778,344
FM 1960 / Champions 23 1,900,382 335,845 19.2% 32.3% 17.7% 21.5% (69,000) (26,340) 1,339 -
FM 1960 / Highway 249 37 5,148,719 483,854 18.7% 20.5% 9.4% 15.9% 69,000 (9,937) -9,539 -
FM 1960 / I-45 North 15 1,325,458 361,994 11.2% 11.2% 27.3% 34.2% 78,000 (48,238) -35,966 -
FM 1960 75 8,374,559 1,181,693 14.1% 14.1% 14.1% 20.0% 78,000 (84,515) -44,166 -
Greenway Plaza 48 11,095,766 1,413,238 12.8% 12.8% 12.7% 19.4% (21,000) 4,920 -111,005 188,547
Gulf Freeway/Pasadena 33 2,642,527 294,851 11.8% 17.6% 11.2% 17.4% 53,000 2,042 16,224 -
Katy Far West 27 2,954,733 360,241 13.7% 16.1% 12.2% 16.7% 125,000 15,234 137,815 72,045
Katy Freeway East 60 9,674,691 935,320 9.4% 15.2% 9.7% 16.4% 44,000 (81,816) -136,869 -
Katy Freeway West 141 26,654,315 4,484,804 16.1% 28.1% 16.8% 28.5% (479,000) (95,822) -540,187 86,255
Katy Frwy / Energy Corridor 201 36,329,006 5,420,124 14.3% 24.7% 14.9% 25.3% (435,000) (177,638) -677,056 86,255
Kingwood / Humble 11 1,234,389 30,190 3.2% 3.4% 2.4% 2.6% 39,000 6,497 3,174 -
NASA / Clear Lake 53 5,613,374 1,006,896 16.0% 20.3% 17.9% 22.6% (24,000) 25,788 -30,925 -
North District / IAH 20 2,759,860 767,085 19.1% 29.1% 27.8% 30.6% (136,000) (16,346) -176,722 -
North District / North Belt W 75 10,184,568 4,290,148 36.0% 51.0% 42.1% 53.7% (490,000) (155,687) -434,901 -
North District / North Belt 95 12,944,428 5,057,233 32.1% 46.0% 39.1% 48.8% (626,000) (172,033) -611,623 -
Northeast 11 1,370,813 85,167 15.3% 17.5% 6.2% 10.0% 540,000 (32,465) -23,029 115,601
North Loop West 29 3,955,285 673,622 17.9% 20.3% 17.0% 20.9% (134,000) 3,436 -39,389 -
Northwest Near 30 3,339,250 739,776 1.4% 2.2% 22.2% 27.9% (8,000) 30,761 56,167 -
Northwest Far 12 1,290,803 28,959 24.3% 28.2% 2.2% 3.4% (52,000) 1,153 -10,968 -
Northwest 71 8,585,338 1,442,357 17.9% 20.6% 16.8% 21.0% (194,000) 35,350 5,810 -
South Main / Medical Center 47 10,338,924 616,556 8.5% 8.5% 6.0% 7.9% (30,000) 19,648 6,440 -
E Fort Bend Co / Sugar Land 47 6,284,708 457,834 14.2% 22.9% 7.3% 15.9% 127,000 (46,534) -28,854 187,200
Southwest Beltway 8 41 5,546,947 814,433 16.0% 22.4% 14.7% 22.9% 44,000 16,526 -14,400 60,000
Southwest / Hillcroft 36 4,321,807 612,462 8.2% 13.5% 14.2% 23.7% 79,000 5,889 -29,672 -
Southwest Fwy / Sugar Land 124 16,153,462 1,884,729 12.5% 19.1% 11.7% 20.4% 250,000 (24,119) -72,926 247,200
The Woodlands 96 16,485,335 1,609,344 10.5% 13.8% 9.8% 12.4% 506,000 23,886 -44,655 515,800
West Belt 37 5,387,946 784,684 16.8% 27.1% 14.6% 36.7% 118,000 26,910 75,278 -
Bellaire 28 4,302,857 433,933 8.8% 13.0% 10.1% 14.9% (104,000) (75,343) -53,386 -
Galleria / Uptown 58 16,833,939 2,266,941 18.6% 28.1% 13.5% 21.3% (80,000) (128,316) -441,417 104,579
Post Oak Park 27 4,581,030 1,025,783 10.2% 21.8% 22.4% 28.5% 418,000 (76,997) -290,005 -
Riverway 11 829,982 157,202 12.3% 22.9% 18.9% 10.7% (31,000) 12,883 28,970 -
Richmond / Fountainview 16 2,868,522 594,885 21.9% 23.2% 20.7% 24.4% (10,000) (20,378) -256,789 -
San Felipe / Voss 33 5,060,157 917,168 13.0% 20.9% 18.1% 24.5% (172,000) (74,428) -91,718 -
West Loop 173 34,476,487 5,395,912 12.0% 21.4% 15.7% 21.9% 21,000 (362,579) -1,104,345 104,579
Westchase 89 17,585,648 2,873,713 16.3% 26.3% 16.3% 29.0% 263,000 55,368 -147,367 187,011
Total Houston 1,298 241,850,469 37,169,899 14.2% 21.9% 15.4% 23.3% 588,000 -732,223 -3,993,708 2,295,382
SOURCE Inventory and vacancy from analysis of CoStar data, net absorption computed by Transwestern NOTE: Includes buildings 50,000 SF RBA and greater; does not include buildings under construction or owned by the government
Office Market Indicators - All SpaceHouston Metro Area
THE HOUSTON METRO OFFICE MARKET
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Submarket Total Bldgs InventorySF Available Immediately
Direct Vacancy
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Total Availabilty
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Direct Vacancy
Q3 2017
Q3 2017 Total
Availability
Net Absorption
2016
Net Absorption
Q3 2017
Net Absorption
yTD 2017
Rental Rates 2016
Rental Rates Q3
2017
Under Construction
Conroe 2 128,832 13,011 7.2% 10.6% 10.1% 14.3% -14,000 (3,763) (3,763) $29.12 $31.05 -
Central Business District 37 34,033,274 4,366,244 10.2% 20.6% 12.8% 23.3% -61,000 (99,593) (1,160,237) $43.47 $44.35 778,344
Midtown 8 2,486,094 394,782 18.0% 17.6% 15.9% 25.0% 0 (20,358) (23,305) $34.09 $34.49 -
Downtown 45 36,519,368 4,761,026 10.8% 20.3% 13.0% 23.4% -61,000 (119,951) (1,183,542) $42.35 $43.47 778,344
FM 1960 / Champions 1 150,000 0.0% 32.3% 0.0% 0.0% -69,000 - - $- - -
FM 1960 / Highway 249 17 3,729,412 296,314 10.9% 20.5% 7.9% 10.5% 69,000 19,013 12,705 $27.09 $27.94 -
FM 1960 / I-45 North 2 206,705 54,512 16.3% 17.8% 26.4% 26.4% 78,000 (25,387) $23.69 $25.00 -
FM 1960 20 4,086,117 350,826 10.8% 20.7% 8.6% 10.9% 78,000 19,013 (12,682) $26.84 $27.44 -
Greenway Plaza 20 7,356,944 991,921 14.0% 21.4% 13.5% 22.4% -21,000 25,460 (22,416) $35.44 $37.50 188,547
Gulf Freeway/Pasadena 0 - - 0.0% 17.6% - - 53,000 - - $- - -
Katy Far West 15 1,560,283 358,018 27.3% 16.1% 22.9% 31.1% 125,000 15,234 120,782 $32.89 $26.85 72,045
Katy Freeway East 24 5,761,894 648,374 10.2% 15.2% 11.3% 18.4% 44,000 (56,676) (127,936) $37.78 $45.00 -
Katy Freeway West 72 18,772,511 2,846,601 15.9% 28.1% 15.2% 28.1% -479,000 (10,403) (290,885) $36.66 $37.05 86,255
Katy Frwy / Energy Corridor 96 24,534,405 3,494,975 14.6% 24.7% 14.2% 25.8% -435,000 (67,079) (418,821) $36.83 $37.85 86,255
Kingwood / Humble 2 144,312 7,466 6.5% 3.4% 5.2% 6.5% 39,000 1,927 1,927 $32.09 $31.94 -
NASA / Clear Lake 15 2,028,136 102,561 6.4% 20.3% 5.1% 13.6% -24,000 12,699 (17,066) $24.58 $25.29 -
North District / IAH 8 1,213,677 563,373 32.9% 29.1% 46.4% 48.6% -136,000 (12,657) (165,750) $21.75 $23.09 -
North District / North Belt W 17 4,334,810 2,213,029 40.2% 51.0% 51.1% 66.5% -490,000 14,091 (148,064) $28.38 $25.37 -
North District / North Belt 25 5,548,487 2,776,402 38.6% 46.0% 50.0% 62.6% -626,000 1,434 (313,814) $27.15 $24.93 -
Northeast 3 640,700 32,465 0.0% 17.5% 5.1% 5.1% 540,000 (32,465) (32,465) $- -
North Loop West 6 1,240,544 355,226 26.3% 20.3% 28.6% 30.2% -134,000 10,736 (28,636) $26.90 $26.84 -
Northwest Near 4 797,237 326,246 0.0% 2.2% 40.9% 42.7% -8,000 (10,157) 9,509 $- $19.48 -
Northwest Far 1 237,384 - 40.4% 28.2% 0.0% 0.0% -52,000 - - $19.14 - -
Northwest 11 2,275,165 681,472 28.5% 20.6% 30.0% 31.4% -194,000 579 (19,127) $23.05 $23.34 -
South Main / Medical Center 16 4,810,992 179,545 4.8% 8.5% 3.7% 6.3% -30,000 18,818 (15,745) $29.40 $34.27 -
E Fort Bend Co / Sugar Land 21 3,867,531 277,757 7.8% 22.9% 7.2% 14.8% 127,000 (44,458) (50,191) $21.62 $31.06 94,200
Southwest Beltway 8 3 566,699 82,955 8.6% 22.4% 14.6% 16.3% 44,000 (34,000) (34,355) $22.60 $20.18 -
Southwest / Hillcroft 6 1,487,219 225,793 15.3% 13.5% 15.2% 35.2% 79,000 (1,392) 2,656 $29.50 $19.58 -
Southwest Fwy / Sugar Land 30 5,921,449 586,505 9.8% 19.1% 9.9% 20.1% 250,000 (79,850) (81,890) $25.77 $23.80 94,200
The Woodlands 44 11,752,920 1,219,960 11.4% 13.8% 10.4% 12.3% 506,000 (15,665) (32,754) $39.98 $36.82 704,800
West Belt 23 4,085,321 633,381 16.7% 27.1% 15.5% 34.8% 118,000 26,910 29,999 $31.86 $32.58 -
Bellaire 8 1,470,637 167,634 12.3% 13.0% 11.4% 21.3% -104,000 (1,882) 17,851 $26.91 $27.67 -
Galleria / Uptown 35 13,491,405 1,899,069 26.2% 28.1% 14.1% 22.8% -80,000 (106,168) (433,814) $37.11 $38.83 104,579
Post Oak Park 9 2,617,868 810,471 10.5% 21.8% 31.0% 37.9% 418,000 (37,037) (259,074) $37.52 $37.61 -
Riverway 0 - - 10.5% 22.9% - - -31,000 - - $33.14 - -
Richmond / Fountainview 5 1,885,813 408,974 0.0% 23.2% 21.7% 25.6% -10,000 (19,644) (233,225) - $33.10 -
San Felipe / Voss 3 1,720,793 397,299 15.7% 20.9% 23.1% 31.7% -172,000 (39,729) (8,130) $34.92 $36.50 -
West Loop 60 21,186,516 3,683,447 12.7% 21.4% 17.4% 25.5% 21,000 (204,460) (916,392) $36.22 $37.10 104,579
Westchase 33 9,958,830 1,637,676 16.1% 26.3% 16.4% 32.4% 263,000 40,941 (118,260) $38.08 $36.79 187,011
TOTAL - Houston 460 142,538,777 21,510,657 13.7% 21.9% 15.1% 24.5% 588,000 (360,218) (3,036,029) $35.50 $35.83 2,026,781
SOURCE Inventory and vacancy from analysis of CoStar data, net absorption computed by Transwestern NOTE: Includes buildings 50,000 SF RBA and greater; does not include buildings under construction or owned by the government
Office Market Indicators - Class A SpaceHouston Metro Area
THE HOUSTON METRO OFFICE MARKET
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SubmarketTotal
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Direct Vacancy
Q3 2017
Q3 2017 Total
Availability
Net Absorption
2016
Net Absorption
Q3 2017
Net Absorption
yTD 2017
Rental Rates 2016
Rental Rates Q3
2017
Under Construction
Conroe 10 688,859 36,887 13.1% 13.1% 5.4% 10.4% -15,000 3,879 53,214 $23.86 $22.92 -
Central Business District 23 9,439,750 2,634,092 17.5% 19.3% 27.9% 35.1% -59,000 37,439 (304,898) $29.36 $29.58 -
Midtown 20 2,955,580 188,485 6.0% 6.0% 6.4% 10.3% -19,000 (12,121) 82,461 $27.59 $34.54 -
Downtown 43 12,395,330 2,822,577 15.5% 16.9% 22.8% 29.2% -78,000 25,318 (222,437) $29.24 $30.26 -
FM 1960 / Champions 20 1,630,186 325,905 24.5% 24.5% 20.0% 24.4% -60,000 (16,400) 4,939 $13.76 $14.04 -
FM 1960 / Highway 249 18 1,315,795 181,048 21.2% 21.7% 13.8% 31.3% 69,000 (29,458) (34,032) $20.75 $19.48 -
FM 1960 / I-45 North 11 968,736 256,253 11.7% 16.2% 26.5% 35.9% -24,000 (48,238) (14,923) $17.70 $18.07 -
FM 1960 49 3,914,717 763,206 18.7% 20.5% 19.5% 29.6% -15,000 (94,096) (44,016) $16.59 $17.01 -
Greenway Plaza 26 3,598,525 370,629 6.7% 7.0% 10.3% 12.6% -50,000 (20,540) (87,063) $26.07 $26.91 -
Gulf Freeway/Pasadena 27 2,179,493 203,993 11.8% 11.9% 9.4% 16.9% 53,000 3,951 17,539 $22.74 $21.82 -
Katy Far West 11 1,275,188 2,223 2.0% 2.0% 0.2% 0.7% 19,000 - 17,033 $23.94 - -
Katy Freeway East 26 2,879,196 284,287 8.6% 9.6% 9.9% 17.4% -12,000 (26,811) (33,943) $22.81 $28.06 -
Katy Freeway West 66 7,640,290 1,631,426 19.9% 21.4% 21.4% 30.1% -255,000 (85,419) (249,302) $22.98 $24.32 -
Katy Frwy / Energy Corridor 92 10,519,486 1,915,713 16.8% 18.2% 18.2% 26.6% -267,000 (112,230) (283,245) $22.96 $24.84 -
Kingwood / Humble 9 1,090,077 22,724 2.7% 2.7% 2.1% 2.1% 19,000 4,570 1,247 $18.88 $20.36 -
NASA / Clear Lake 37 3,532,220 904,335 21.5% 22.2% 25.6% 28.1% -11,000 13,089 (12,375) $18.32 $18.22 -
North District / IAH 10 1,343,858 203,712 28.9% 34.3% 38.4% 47.4% 35,000 (3,689) (10,972) $15.78 $15.27 -
North District / North Belt W 46 4,831,938 1,853,094 14.3% 14.3% 15.2% 18.9% -74,000 (193,747) (279,975) $14.49 $16.41 -
North District / North Belt 56 6,175,796 2,056,806 25.7% 29.9% 33.3% 41.2% -39,000 (197,436) (290,947) $14.65 $16.29 -
Northeast 6 554,309 47,734 23.5% 23.5% 8.6% 12.2% -57,000 - 14,404 $17.18 $22.71 115,601
North Loop West 21 2,596,620 317,893 14.6% 14.8% 12.2% 16.8% 28,000 (8,437) (11,009) $21.31 $21.84 -
Northwest Near 23 2,294,586 413,530 2.1% 2.1% 18.0% 25.8% -8,000 40,918 46,658 $17.11 $15.25 -
Northwest Far 9 873,086 28,959 22.7% 23.5% 3.3% 5.1% 14,000 1,153 (10,968) $16.61 $19.45 -
Northwest 53 5,764,292 760,382 23.1% 16.2% 13.2% 18.6% 34,000 33,634 24,681 $18.60 $17.82 -
South Main / Medical Center 19 4,025,606 409,601 15.6% 15.7% 10.2% 11.5% 4,000 830 25,493 $25.23 $27.87 -
E Fort Bend Co / Sugar Land 25 2,343,177 180,077 17.9% 17.9% 7.7% 18.3% 117,000 (2,076) 21,337 $14.39 $22.40 93,000
Southwest Beltway 8 33 4,622,364 709,681 17.2% 17.0% 15.4% 24.7% 39,000 53,262 18,312 $16.62 $19.05 60,000
Southwest / Hillcroft 19 1,794,770 315,337 9.1% 9.9% 17.6% 20.9% 6,000 7,281 (21,376) $21.68 $17.27
Southwest Fwy / Sugar Land 77 8,760,311 1,205,095 15.2% 15.3% 13.8% 22.2% 162,000 58,467 18,273 $16.91 $19.10 153,000
The Woodlands 50 4,451,730 389,384 9.7% 10.9% 8.7% 13.3% 28,000 39,551 (11,901) $25.48 $24.75 -
West Belt 14 1,302,625 151,303 17.5% 24.4% 11.6% 42.4% -24,000 - 45,279 $23.86 $21.86 -
Bellaire 16 2,448,714 227,568 7.2% 7.2% 9.3% 11.9% -58,000 (73,461) (68,127) $22.39 $23.56 -
Galleria / Uptown 22 3,266,742 367,872 10.4% 10.7% 11.3% 15.7% 138,000 (22,148) (7,603) $28.08 $28.35 -
Post Oak Park 16 1,803,120 215,312 9.8% 10.0% 11.9% 17.3% -76,000 (39,960) (30,931) $27.40 $26.33 -
Riverway 7 570,270 147,558 17.4% 17.9% 25.9% 12.9% -23,000 (969) 14,608 $25.68 $19.70 -
Richmond / Fountainview 9 870,153 183,011 28.5% 28.5% 21.0% 24.6% -3,000 (534) (31,725) $17.75 $25.30 -
San Felipe / Voss 30 3,339,364 519,869 13.0% 13.1% 15.6% 20.8% -150,000 (34,699) (83,588) $23.76 $25.22 -
West Loop 100 12,298,363 1,661,190 11.5% 11.7% 13.5% 17.0% -172,000 (171,771) (207,366) $24.45 $25.56 -
Westchase 52 7,132,965 1,204,713 17.5% 17.6% 16.9% 25.7% -614,000 14,427 (15,299) $21.23 $19.32 -
TOTAL - Houston 731 89,659,892 14,928,495 15.4% 16.4% 16.7% 23.0% -1,023,000 (398,357) (957,486) $21.95 $21.97 268,601
SOURCE Inventory and vacancy from analysis of CoStar data, net absorption computed by Transwestern NOTE: Includes buildings 50,000 SF RBA and greater; does not include buildings under construction or owned by the government
Office Market Indicators - Class B SpaceHouston Metro Area
THE HOUSTON METRO OFFICE MARKET
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The Houston Metro Industrial MarketS1
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250,000 SFRenewalAlamo Crossing CommerceNorthwest Near submarket
Industrial TrendLines®
10-Year Trend Q3 2017
Total Available Sublease Space
6.9 MSFYear-to-Date
$6.69 PSFNNN
4.9 MSF
19,500Jobs gained 12 Months ending September 2017
Vacancy
Absorption
Rental Rate
Under Construction
Job Growth
Submarket Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017
North Far 946,464 968,658 1,018,667 1,032,428 1,046,148
Northwest Far 849,724 846,207 673,455 570,967 601,670
Northwest Near 319,881 895,803 555,743 610,166 577,376
Southwest Near 174,173 261,022 211,481 287,747 347,671
South Far 145,854 145,854 128,354 142,479 189,873
All Houston Metro 4,666,569 5,198,265 4,326,056 4,145,760 4,039,277
Notable 2017 Leases
INDUSTRIAL MARKET OVERVIEWHarvey Property Impacts are Minimal, Spurs DemandThe implications of Hurricane Harvey on the industrial sector have been minimal as far as building damage is concerned. In fact, demand for warehouse/distribution space has increased, as recovery is in full swing and need for building materials is high. The only sore spot for the industrial sector is the flex market as the softened office market continues to put downward pressure on the property type. The overall vacancy rate (including sublet) was 5.0% at the close of the third quarter, up 0.2% from the previous quarter, due to a large amount of deliveries and the flex market softening. The current development pipeline sits at 4.9 million square feet and is 48% preleased. It is anticipated that the preleased deliveries will increase in the coming months as tenants search for new warehouse/distribution space to expand following Harvey. Deliveries for the quarter totaled 3.4 million SF driven by several large deliveries including the Amazon North Houston distribution facility (855,000 SF in North Far) and the FedEx facility (800,000 SF in Northwest Far). With the demand for space increasing due to the Port expansion and the continued need for distribution space as households recover from Harvey, the industrial market looks to remain healthy through 2018.
1,000,000 SFPreleaseInt. Hwy 90 & Woods RdNorthwest Far submarket
600,000 SFNew LeasePinto Business ParkNorth Far submarket
500,000 SFBuild-to-SuitCedar Port Industrial ParkEast-Southeast Far submarket
465,851 SFNew LeaseBayport Logistics ParkEast-Southeast Far submarket
415,272 SFNew leasePort Crossing Commerce CtrEast-Southeast Far submarket
303,281 SFRenewalGreens Port Industrial ParkSoutheast Near submarket
296,839 SFNew LeasePrologis Jersey VillageNorthwest Far submarket
4.8% Direct Vacant Available
THE HOUSTON METRO INDUSTRIAL MARKET
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VacancyOverall Market Remains Tight, Flex StrugglesThe overall industrial vacancy rate (including sublet) ended the third quarter at 5.0%, up from 4.8% to close the second quarter. Direct vacancy rose by 0.2% as well, closing the third quarter at 4.8%. At third quarter, vacancy for warehouse/distribution space was 4.9% overall and 4.8% for direct, increasing marginally over the quarter due to deliveries that were not preleased. The manufacturing sector continued to post the lowest vacancy within the industrial sector coming in at 2.3% overall and 2.0% for direct. Direct vacancy for flex currently stands at 10.1% with total vacancy at 10.3% at the end of the third quarter. This has resulted in vacancy increasing by 0.9% over the quarter and 3.3% since end-of-year 2016, within the product type. Overall industrial vacancy is anticipated to remain low and is positioned well for future growth.
Net AbsorptionPrelease Deliveries Help Drive Absorption Net absorption for the third quarter totaled 2.3 million SF, bringing annual absorption totals to 6.9 million SF. Warehouse/Distribution space recorded 2.6 million SF of absorption in the third quarter, the most of any property type. Manufacturing came in at a positive 29,000 SF absorbed, while flex space posted negative 335,000 SF of absorption. This marks the third straight quarter of negative absorption for flex space as they continue to feel the pressure from the softened office markets. The Northwest Far submarket helped to drive absorption in the third quarter, recording 1.2 million SF mainly a result of the new 855,000 SF Amazon distribution center. Furthermore, of the 3.4 million square-feet of deliveries, 80% were preleased at the time of delivery, totaling 2.7 million square-feet of positive absorption. Looking ahead, absorption figures are anticipated to remain high as projects deliver to the market with high prelease percentages and demand remains high for warehouse/distribution space.
Rental RatesRental Rates See Slight DeclineOverall industrial asking rates declined by 0.7% over the quarter, closing the period at $6.69 per SF NNN, down from $6.74 NNN from mid-year 2017. The flex market has caused much of the decline as rates drop to compete with office pricing to attract new tenants. Although rates declined this quarter, rents will likely increase over the period ahead as need for space increases amongst distributors and new construction projects break ground to meet demand.
Industrial Vacancy RatesSelect Metro Areas | Q3 2017
Net Absorption of Industrial SpaceHouston Metro | 2005 Through Q3 2017
Industrial Space Under ConstructionSelect Metro Areas | Q3 2017
Source: CoStar, Transwestern
Note: Delivery of preleased space counts as positive net absorption. Source: CoStar, Transwestern *Through Q3 2017
Source: CoStar, Transwestern
Ove
rall
Vac
ancy
Rat
e
0%
2%
4%
6%
8%
10%
12%Total AvailableDirect Vacant Available
Was/BalChiAtlDFWHouNJSF Bay LA Basin
National Vacancy Rate: 5.6%
Net
Ab
sorp
tio
n in
Tho
usan
ds
of S
F
0
3000
6000
9000
12000
15000Net Absorption
2017*20162015201420132012201120102009200820072006
10-Year Annual Average = 7.1 Million SF
0
5
10
15
20
25
SF Bay HouLA BasinWas/BalChiAtlNJDFW
Under Construction Nationally = 283.3 Million SF
Mill
ions
of S
F
THE HOUSTON METRO INDUSTRIAL MARKET
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Supply and DevelopmentBuild-to-Suit Projects Drive ConstructionAt the close of the third quarter, the Houston industrial construction pipeline totaled 4.9 million SF, down 9.0% from 5.4 million SF at mid-year. The current pipeline is currently 48% preleased, driven by large build-to-suit and owner-occupied facilities such as Amazon, Kururay, and Vinmar International. The East Southeast Far (2.0M SF), the Northwest Far (1.9M SF) and North Far (402,000 SF) submarkets accounted for the largest portion of construction activity.
Industrial DeliveriesHouston Metro | 2005 Through Q3 2017
Investment Market OverviewInvestment Increases in Q3 The metro recorded $305.4 million in industrial sales transactions during the third quarter, a 93% increase from the second quarter which recorded $158.4 million in sales. While cap rates covered a wide range, depending on the type and class of product, they averaged 6.8% in the third quarter. Given the stable fundamentals of the market, Class A property cap rates hover in the 5-6% range, while Class B rates are in the 7-9% range. Downward pressure on Class A cap rates (core holdings) will likely continue as the economy strengthens, energy prices further stabilize and the demand and allocations of capital from investors increases. Investment activity is likely to rise over the period ahead as investors look to capitalize on demand from tenants and the growing industrial market. Based on the NCREIF Property Index, returns on investments in industrial assets in Houston fell in the middle of the pack, with assets only generating at 3.55% through the first three quarters of 2017. This is a significant decrease from assets generating 7.37% during the same period in 2016.
Currently, the largest projects under construction are the 1.1 million SF Amazon distribution center in the Northwest Far submarket and the 500,000 SF Vinmar International facility in the East-Southeast Far submarket. With Harvey driving demand for warehouse/distribution space and filling some large vacancies, there could be several additional projects that begin construction in the coming quarters. Of note, Best Buy recently announced that they would build a 550,000 square foot distribution facitility in Missouri City.
NCREIF Return Index for Industrial Properties
Metro Area2017 yTD Return (through Q3)
12-Month Return at Q3 2017
Atlanta 4.96% 9.59%
Boston N/A N/A
Chicago 5.55% 10.58%
Dallas 4.79% 10.66%
Denver 7.27% 14.44%
Houston 3.55% 7.37%
Los Angeles 6.92% 15.97%
National Average 5.99% 12.37%
New York 7.68% 15.63%
Phoenix 2.58% 7.95%
San Francisco 7.41% 16.02%
Washington 6.49% 9.66%
Note: NCREIF Index includes both current income and capital appreciation returns. Source: NCREIF, Delta Associates
Source: CoStar, Transwestern *Through Q3 2016
0
5,000,000
10,000,000
15,000,000
20,000,000SF Available at Delivery SF Leased at Delivery
17*161514131211100908070605
31%76% 33% 29% 81%24% 71%82% 62% 60% 46% 43% 67%
Largest Projects Under Construction
Vinmar International500,006 SFOwner occupiedWarehouse/distributionEast-Southeast Far
Northwest Logistics Center411,442 SF0% preleasedWarehouse/distributionNorthwest Far
Cutten Distribution Center293,280 SF0% preleasedWarehouse/distributionNorth Far
Energy Commerce2 buildings,0% preleased334,360 SFWarehouse/distributionEast-Southeast Far
Amazon1,100,000 SFOwner occupiedWarehouse/distributionNorthwest Far
THE HOUSTON METRO INDUSTRIAL MARKET
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Industrial Market OutlookIndustrial Outlook StrongThe Houston industrial sector continues to be one of the strongest performers amongst the Houston commercial property types. The city is in full recovery mode from Harvey, prompting a significant durable goods purchasing spree and a corresponding need for Distribution/Warehouse locations near heavily impacted areas. Additionally, the expansion of the Port of Houston has already lead to a significant increase in TEU traffic. Overall vacancy rates will remain extremely tight, even with 4.9 million square feet of projects in the pipeline. Considering these factors, and the underlying strength of the industrial sector, the market is well positioned to continue its strong performance well into 2018. Utilizing the IRF projections on job growth through 2020, in conjunction with the historical relationship between job growth and industrial absorption, we forecast vacancy to range from 4.5 to 4.7% in 2018 and lowering all the way to 3.6% by the end of 2020, should current trends hold.
Industrial Vacancy Rate ForecastHouston Metro | 2007 Through 2020
The Houston industrial market continues to perform well due to the continued growth of our population, having a world class port and the nation’s largest petrochemical base. In addition, with the convergence of Industrial/Logistics and E-Commerce, we will see increased demand for industrial space as these users continue to serve the consumer.
Source: CoStar, Transwestern
Note: Dotted trend lines represent demand projections based upon historical job growth to absorption ratios of approximately 29 SF/job. All models assume construction pipeline to be delivered in timely manner. Job growth projections based upon three distinct 2017 scenarios utilizing interpretations of forecasts from the IRF.
Ove
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Vac
ancy
Rat
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3%
4%
5%
6%
20f19f18f171615141312111009080706
Industrial Investment SalesHouston Metro | 2002 Through Q3 2017
Source: CoStar, Transwestern *Through Q3 2017
Mill
ions
of $
0
500
1000
1500
2000
17*161514131211100908070605040302
Brian Gammill - Managing Director, Houston Industrial Division
THE HOUSTON METRO INDUSTRIAL MARKET
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Central Business District
Flex/R & D 424,307 42,855 9.3% 12.8% 10.1% 10.1% - (20,000) 11,000 4,000
Manufacturing 6,049,521 30,248 0.4% 4.1% 0.5% 0.5% - (227,000) 224,000 206,000
Warehouse/Distribution 22,924,813 1,306,714 6.0% 7.0% 5.7% 5.7% - (234,000) (92,000) 23,000
Total - Central Business District 29,398,641 1,379,817 4.9% 6.5% 4.7% 4.7% - (481,000) 143,000 233,000
East-Southeast Far
Flex/R & D 1,805,825 171,553 13.5% 11.3% 9.5% 9.5% - 41,000 62,000 99,000
Manufacturing 6,073,738 163,991 5.1% 7.1% 2.7% 2.7% - - 42,000 42,000
Warehouse/Distribution 50,235,718 2,511,786 5.7% 7.6% 5.0% 5.0% 2,002,031 3,404,000 1,051,000 1,918,000
Total - East-Southeast Far 58,115,281 2,847,330 5.9% 7.7% 4.9% 4.9% 2,002,031 3,445,000 1,155,000 2,059,000
North Far
Flex/R & D 7,992,405 855,187 6.3% 7.9% 10.7% 11.1% - (66,000) (136,000) (208,000)
Manufacturing 8,914,885 320,936 3.4% 5.6% 3.6% 3.9% - 280,000 - 98,000
Warehouse/Distribution 52,329,411 4,448,000 11.3% 14.6% 8.5% 9.0% 402,630 142,000 731,000 1,139,000
Total - North Far 69,236,701 5,624,123 9.7% 12.6% 8.1% 8.6% 402,630 356,000 595,000 1,029,000
North Near
Flex/R & D 1,184,777 119,662 6.9% 6.9% 10.1% 11.0% - (1,000) (7,000) (21,000)
Manufacturing 3,440,704 41,288 1.4% 2.0% 1.2% 1.2% - (20,000) (21,000) 24,000
Warehouse/Distribution 13,280,169 664,008 7.2% 7.4% 5.0% 5.0% 23,645 119,000 146,000 86,000
Total - North Near 17,905,650 824,959 6.1% 6.3% 4.6% 4.7% 23,645 98,000 118,000 89,000
Northeast Far
Flex/R & D 22,500 0 0.0% 0.0% 0.0% 0.0% - - - -
Manufacturing 215,720 33,005 0.0% 0.0% 15.3% 15.3% - - - -
Warehouse/Distribution 936,381 0 0.0% 0.0% 0.0% 0.0% - - - -
Total - Northeast Far 1,174,601 33,005 0.0% 0.0% 2.8% 2.8% - - - -
Northeast Near
Flex/R & D 312,735 49,725 7.5% 6.4% 15.9% 15.9% - 4,000 18,000 13,000
Manufacturing 6,291,880 12,584 0.0% 0.0% 0.2% 0.2% - 120,000 - (13,000)
Warehouse/Distribution 25,303,931 632,598 1.4% 1.5% 2.5% 2.5% 164,500 276,000 (25,000) (227,000)
Total - Northeast Near 31,908,546 694,907 1.2% 1.3% 2.2% 2.2% 164,500 400,000 (7,000) (227,000)
Northwest Far
Flex/R & D 5,967,929 674,376 3.5% 6.5% 11.3% 11.4% - (167,000) (68,000) (139,000)
Manufacturing 14,554,211 349,301 1.5% 2.2% 2.4% 4.0% 53,720 3,857,000 (58,000) (43,000)
Warehouse/Distribution 51,297,415 2,770,060 8.7% 7.5% 5.4% 5.4% 1,870,306 1,485,000 1,242,000 1,443,000
Total - Northwest Far 71,819,555 3,793,737 7.2% 6.4% 5.3% 5.6% 1,924,026 5,175,000 1,116,000 1,261,000
Northwest Near
Flex/R & D 11,664,924 1,038,178 8.3% 9.6% 8.9% 9.2% - (138,000) (117,000) (140,000)
Manufacturing 10,431,394 198,196 1.5% 1.7% 1.9% 2.0% 19,000 18,000 (73,000) (63,000)
Warehouse/Distribution 66,493,781 2,593,257 3.5% 4.5% 3.9% 4.0% 154,661 (607,000) (532,000) (266,000)
Total - Northwest Near 88,590,099 3,829,632 3.9% 4.8% 4.3% 4.4% 173,661 (727,000) (722,000) (469,000)
South Far
Flex/R & D 1,314,915 38,133 1.9% 3.1% 2.9% 2.9% - (16,000) 17,000 (8,000)
Manufacturing 7,086,696 141,734 1.0% 1.7% 2.0% 2.0% - (31,000) (85,000) (99,000)
Warehouse/Distribution 22,606,406 610,373 3.5% 2.7% 2.7% 97,593 19,000 94,000 342,000
Summary of Industrial Market Indicators - All SpaceHouston Metro Area
THE HOUSTON METRO INDUSTRIAL MARKET
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Submarket InventorySF Available Immediately
Direct Vacancy
2015
Direct Vacancy
2016
Direct Vacancy
Q3 2017
Overall Vacancy
Q3 2017
Under Construction
Net Absorption 2016
Net Absorption Q3 2017
Net Absorption yTD 2017
Total - South Far 31,008,017 790,239 2.4% 3.1% 2.5% 2.5% 97,593 (28,000) 26,000 235,000
South Near
Flex/R & D 674,506 273,175 20.0% 7.9% 40.5% 40.5% - 84,000 1,000 (29,000)
Manufacturing 1,507,640 16,584 1.1% 1.1% 1.1% 1.1% - - - -
Warehouse/Distribution 9,493,425 218,349 2.4% 4.1% 2.3% 2.4% - (169,000) 28,000 94,000
Total - South Near 11,675,571 508,108 3.2% 3.9% 4.4% 4.4% - (85,000) 29,000 65,000
Southeast Near
Flex/R & D 386,732 10,828 3.0% 0.0% 2.8% 2.8% - 10,000 (11,000) (11,000)
Manufacturing 9,880,007 0 0.0% 0.0% 0.0% 0.0% - - - -
Warehouse/Distribution 19,601,710 392,034 2.5% 1.2% 2.0% 2.1% - 267,000 137,000 19,000
Total - Southeast Near 29,868,449 402,863 1.7% 0.8% 1.3% 1.4% - 277,000 126,000 8,000
Southwest Far
Flex/R & D 1,829,897 283,634 8.4% 10.0% 15.5% 15.6% - 148,000 (51,000) (88,000)
Manufacturing 1,709,591 5,129 1.1% 0.3% 0.3% 0.3% - 12,000 - -
Warehouse/Distribution 7,973,520 685,723 7.5% 13.2% 8.6% 8.6% 46,500 299,000 123,000 393,000
Total - Southwest Far 11,513,008 974,486 6.6% 10.7% 8.5% 8.5% 46,500 459,000 72,000 305,000
Southwest Near
Flex/R & D 6,813,768 654,122 6.1% 4.6% 9.6% 9.7% - 99,000 (34,000) (109,000)
Manufacturing 3,831,749 260,559 3.3% 5.7% 6.8% 6.8% - (110,000) - 8,000
Warehouse/Distribution 28,673,820 1,175,627 4.0% 6.7% 4.1% 4.4% - 284,000 (57,000) 58,000
Total - Southwest Near 39,319,337 2,090,307 4.3% 6.2% 5.3% 5.6% - 273,000 (91,000) (43,000)
Sugar Land
Flex/R & D 3,402,845 207,574 4.0% 6.1% 6.1% 6.4% - 54,000 (20,000) 92,000
Manufacturing 2,468,995 76,539 0.7% 3.2% 3.1% 3.1% - (63,000) - -
Warehouse/Distribution 14,200,173 497,006 7.0% 8.5% 3.5% 3.5% 18,750 493,000 (256,000) (238,000)
Total - Sugar Land 20,072,013 781,118 5.6% 7.4% 3.9% 3.9% 18,750 484,000 (276,000) (146,000)
Total Houston
Flex/R & D 43,798,065 4,419,003 6.8% 7.5% 10.1% 10.3% - 32,000 (335,000) (1,119,000)
Manufacturing 82,456,731 1,650,094 1.6% 2.7% 2.0% 2.3% 72,720 3,836,000 29,000 294,000
Warehouse/Distribution 385,350,673 18,505,536 5.7% 6.9% 4.8% 4.9% 4,780,616 5,778,000 2,590,000 7,759,000
Total - Houston 511,605,469 24,574,632 5.2% 6.3% 4.8% 5.0% 4,853,336 9,646,000 2,284,000 6,934,000
SOURCE Inventory and vacancy from analysis of CoStar data, net absorption computed by Transwestern NOTE Includes buildings 15,000 SF RBA and greater; does not include buildings under construction or owned by the government
Summary of Industrial Market Indicators - All Space (continued)Houston Metro Area
THE HOUSTON METRO INDUSTRIAL MARKET
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The Houston Metro Multifamily Market
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MULTIFAMILY MARKET OVERVIEWHarvey’s Impact on the Multifamily SectorThe Houston multifamily sector had an auspicious quarter as Hurricane Harvey pummeled the city with fifty-five inches of rain. While hampering leasing activity in the short run and impacting a number of units citywide, Harvey’s long-term impacts should help push the market towards equilibrium. With respect to impacted units, 215 properties reported a total of 15,662 units damaged from the storm, according to a report by ApartmentData.com. The most heavily impacted submarkets were Greenspoint with 1,366 units (8.1% of market), Med Center/Braes Bayou with 804 units (3.4%), and the Energy Corridor with 761 units (2.3%) affected. The construction pipeline has ticked up after a slow second quarter, moving past 10,000 units again. Occupancy and absorption showed decline, but as many displaced residents find places to live both should trend upward in the period ahead.
Occupancy Occupancy Decreases Following HurricaneOverall occupancy decreased by 0.6% over the quarter, finishing at 88.3%. However, Class A properties continue to rebound with occupancy increasing by 4.2% over the period, ending at 83.8%. Class B properties recorded the highest occupancy amongst the class groups averaging 90.5%. Class C assets averaged 89.2%, followed by Class D assets at 87.3%. When subtracting units damaged by Harvey, overall occupancy increased to over 90% this quarter.
Rental Rates Expected Demand Drives RentsAsking rental rates increased significantly over the period, ticking up by 1.7% to $999 per unit, from $982 per unit at the close of the second quarter. Extrapolated over a full year, this growth rate equates to just under 7.0%. Submarkets with the highest rental rate growth quarter over quarter were Katy/Cinco Ranch/Waterside – 5.5%, Highland Village/Upper Kirby/West U – 5.3%, and Galleria/Uptown – 4.3%. Additionally, concessions were reported in 41% of the market with the average special provided at 8.4% of total rent. Capitalizing on the sudden surge of demand generated by Harvey, rental rates should continue to increase as pressure mounts on concessions.
AbsorptionHarvey Drives Class A Absorption Absorption for the Houston multifamily market was negative in the third quarter, with absorption of negative 4,170 units. However, when removing damaged units from this calculation, absorption for the market equates to 10,926, or just under 24,000 units year-to-date. Submarkets posting the highest total net absorption levels include: Montrose/Museum/Midtown – 559 units, Highland Village/Upper Kirby/West U - 520 units and Tomball/Spring - 478 units. Despite the overall market recording negative absorption, Class A saw positive absorption of 5,317 units.
Apartment Occupancy – All ClassesHouston Metro | 2006 Through Q3 2017
Net Absorption - All ClassesHouston Metro | 2006 Through Q3 2017
Source: Apartment Data Services, Transwestern *Through Q3 2017
Source: Apartment Data Services, Transwestern *Through Q3 2017
75%
78%
81%
84%
87%
90%
93%
96%
100%Class C Class BClass A
17*1615141312111009080706
-6000
-3000
0
3000
6000
9000
12000
15000Class CClass BClass A
17*1615141312111009080706
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Supply and Development Development Pipeline Increases SlightlyFor the 12 months ending in September, over 19,501 units in 73 communities were delivered across the Houston metro. Currently, there are 10,445 units in 39 communities under construction and 16,436 units in 56 communities proposed. Submarkets with the highest level of construction activity include Montrose/Museum/Midtown – 1,771 infill units, Energy Corridor/City Centre/Briar Forest – 1,762 suburban units, and Woodlands/Conroe South – 1,117 suburban units. Construction activity has declined drastically from its peak in 2015, but is anticipated to slowly pick back up as job growth increases and demand for apartment units remains high.
Investment Market Multifamily Investors Eying Unaffected PropertiesThe multi-family investment sector received a shot in the arm from Harvey as well, with demand for unaffected properties topping the charts. Third quarter sales activity increased slightly with 31 properties sold, comprised of 8,769 units as compared to 27 buildings, comprised of 7,396 units, at the end of the second quarter. Investors are willing to pay a premium for communities that took no damage and are located in heavily impacted areas such as the Energy Corridor. Development opportunities should begin to avail themselves again as the metrics in the sector move towards equilibrium.
Multifamily Market Outlook Multifamily sector will remain weakWhat appeared to be a multi-year balancing act in the apartment sector was nipped in the bud during the third quarter of 2017 as Hurricane Harvey drenched rain down onto the metropolitan area and significantly impacted single family residential. While initially a shot in the arm to the hospitality sector, displaced residents have shifted to leasing multi-family units as they look to replace or have significant repairs to their existing homes. As such, select development opportunities will continue to present themselves and overall occupancy is expected to move across the 90% threshold, signally a market considered to be in-balance with supply.
Average Apartment Rents/SFHouston Metro | Q1 2012 Through Q3 2017
Average Apartment Rents/UnitSelect Metro Areas | Q1 2012 Through Q3 2017
While devastating to the city and its residents, one of the few tangible benefits from Hurricane Harvey is the expedited recovery of Houston's multifamily sector.
Source: Apartment Data Services, Transwestern
Source: Apartment Data Services, Transwestern
$0.5
$1.0
$1.5
$2.0Class CClass BClass A
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Q217
Q117
Q416
Q316
Q216
Q116
Q415
Q315
Q215
Q115
Q414
Q314
Q214
Q114
Q413
Q313
Q213
Q113
Q412
Q312
Q212
Q112
$600
$800
$1000
$1200
$1400
$1600Class CClass BClass A
Q317
Q217
Q117
Q416
Q316
Q216
Q116
Q415
Q315
Q215
Q115
Q414
Q314
Q214
Q114
Q413
Q313
Q213
Q113
Q412
Q312
Q212
Q112
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Submarket# Apartment
Units Q3 2017
# Apartment Units 2016
Occupancy 2016
Occupancy Q3 2017
Avg SF/Unit
2016
Avg SF/Unit Q3
2017
Avg Price/Unit
2016
Avg Price/Unit Q3
2017
Avg Price/SF
2016
Avg Price/SF
Q3 2017
Absorption 2016
Absorption Q3 2017
Construction Q3 2017
Montrose/Museum/Midtown 12,501 11,901 80.4% 86.7% 931 926 $1,631 $1,685 $1.75 $1.82 -36 559 1,771
Highland Village/Upper Kirby/West U 16,619 16,206 85.2% 89.2% 959 970 $1,639 $1,700 $1.71 $1.75 102 520 -
Med Center/Braes Bayou 23,361 21,813 88.7% 85.7% 878 880 $1,211 $1,265 $1.38 $1.44 -89 119 652
Heights/Washington Ave 10,625 11,030 81.4% 89.0% 889 895 $1,517 $1,541 $1.71 $1.72 112 -146 435
Downtown 5,951 4,819 58.4% 62.3% 967 967 $1,905 $1,960 $1.97 $2.03 120 266 -
I-10 East/Woodforest/Channelview 11,353 11,353 90.3% 82.5% 832 833 $807 $829 $0.97 $1.00 -72 -857 546
I-69 North 3,605 3,503 92.6% 93.6% 848 851 $747 $760 $0.88 $0.89 10 -2 350
Northline 6,294 6,290 92.5% 91.8% 840 840 $721 $754 $0.86 $0.90 -10 -98 154
Greenspoint/Northborough/Aldine 17,120 16,686 85.5% 80.5% 797 796 $692 $699 $0.87 $0.88 -209 -1,081 -
FM 1960 East/IAH Airport 8,778 8,681 93.9% 93.8% 898 897 $831 $858 $0.93 $0.96 63 -42 -
Lake Houston/Kingwood 12,356 12,031 88.4% 86.2% 938 939 $4,046 $1,071 $1.12 $1.14 -51 -288 300
Northeast Houston/Crosby 3,278 3,278 94.1% 83.3% 886 884 $736 $778 $0.83 $0.88 49 -312 -
Brookhollow/Northwest Crossing 19,712 19,593 91.1% 90.0% 826 826 $804 $823 $0.97 $1.00 -3 -206 -
Memorial/Spring Branch 21,642 21,527 91.5% 92.5% 916 916 $898 $922 $0.98 $1.01 -46 205 133
Inwood/Hwy 249 5,828 6,030 94.3% 94.5% 883 882 $732 $750 $0.83 $0.85 4 -31 -
Willowbrook/Champions/Ella 39,001 39,013 90.3% 89.3% 885 885 $877 $886 $0.99 $1.00 -332 -368 -
Jersey Village/Cypress 15,131 14,961 92.5% 91.4% 908 908 $941 $958 $1.04 $1.06 -126 -227 -
Bear Creek/Copperfield/Fairfield 16,240 15,799 90.2% 88.1% 900 902 $981 $1,008 $1.07 $1.12 -140 -8 -
Katy/Cinco Ranch/Waterside 24,753 23,800 85.5% 86.2% 958 955 $1,098 $1,176 $1.15 $1.23 207 -222 207
Tomball/Spring 12,566 11,468 75.7% 82.5% 926 929 $1,049 $1,113 $1.13 $1.20 229 478 788
Woodlands/South Conroe 18,983 18,815 84.3% 90.1% 943 942 $1,079 $1,103 $1.14 $1.17 225 20 1,117
Conroe North/ Montgomery 8,649 8,022 84.7% 84.6% 894 896 $893 $898 $1.00 $1.00 -57 255 -
Hwy 288/Pearland West 11,599 11,612 84.3% 86.6% 966 966 $1,104 $1,112 $1.14 $1.15 36 -61 400
U of H/I-45 South 17,257 17,259 91.9% 88.4% 797 797 $707 $711 $0.89 $0.89 79 -316 240
Beltway 8/I-45 South 13,204 13,004 91.6% 89.6% 857 861 $838 $861 $0.98 $1.00 -185 -149 -
Pasadena/Deer Park/La Porte 23,205 22,838 90.3% 89.6% 847 849 $794 $821 $0.94 $0.97 -163 -395 135
Friendswood/Pearland East 5,458 5,458 94.2% 93.3% 857 857 $960 $987 $1.12 $1.15 -34 -10 108
Clear Lake/Webster/League City 24,032 23,690 90.6% 90.8% 885 885 $1,021 $1,040 $1.15 $1.18 -190 -90 558
Baytown 9,678 9,678 91.8% 88.6% 852 852 $861 $851 $1.01 $1.00 4 -227 384
Dickinson/Galveston 11,330 11,100 93.0% 91.3% 838 840 $837 $861 $1.00 $1.03 -108 88 -
Alvin/Angleton/Lake Jackson 10,525 10,027 86.6% 84.8% 825 825 $853 $887 $1.03 $1.08 -104 36 -
Galleria/Uptown 24,306 23,369 87.1% 86.1% 890 896 $1,216 $1,270 $1.37 $1.42 -150 179 281
Woodlake/Westheimer 12,233 12,235 85.6% 88.0% 888 889 $994 $1,031 $1.12 $1.16 113 39 -
Energy Corridor/CityCentre/Briar Forest 31,175 31,848 85.5% 87.4% 950 944 $1,097 $1,132 $1.16 $1.20 201 -1,120 1,762
Westchase 14,922 14,653 90.0% 88.7% 838 840 $934 $951 $1.12 $1.13 -23 115 -
Alief 26,897 26,895 91.7% 91.4% 873 872 $833 $837 $0.95 $0.96 -291 -20 -
Sharpstown/Westwood 25,538 25,538 92.4% 90.9% 790 790 $679 $689 $0.86 $0.87 -55 -44 -
Westpark/Bissonnet 16,900 16,900 94.5% 92.9% 810 810 $726 $735 $0.90 $0.91 30 -72 -
Braeswood/Fondren SW 21,786 21,907 90.2% 87.8% 839 838 $748 $761 $0.89 $0.91 -87 -625 -
Almeda/South Main 4,646 4,422 89.7% 86.7% 846 838 $832 $829 $0.98 $0.99 -96 -183 124
Sugar Land/Stafford/Sienna 12,896 12,217 92.1% 88.9% 956 958 $1,150 $1,189 $1.20 $1.24 -26 162 -
Richmond/Rosenberg 4,766 4,766 91.7% 92.3% 875 875 $938 $955 $1.07 $1.09 -58 -11 -
Total - Houston 636,699 626,035 88.8% 88.3% 881 882 $969 $999 $1.10 $1.13 -1,157 -4,170 10,445
Houston Multifamily Market Indicators
Source: Apartment Data Services, Transwestern
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The Houston Metro Retail Market
Photo © Russell Hancock
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RETAIL MARKET OVERVIEWHarvey Impacts Gross Sales Temporarily Retail remains one of the strongest commercial real estate sectors in Houston as overall vacancy ended the quarter at 5.8%, up marginally from 5.5% at mid-year. Demand created by population growth, the ongoing transformation of brick and mortar retail and the escalating demand for mixed-use/lifestyle properties will keep demand in the market strong for the near term. Additionally, retail's ability to experientially and financially impact a commercial real estate development, makes it a central focal point in the revitalization of second generation office properties.
Third quarter activity in the sector was hampered by Hurricane Harvey, as foot-traffic was slowed for portions of August and September, lowering sales volumes. Gross retail sales for 2017 total $117.1 billion, annualized, down 5.2% from retail sales recorded in 2016. Although sales slowed in the third quarter, they are anticipated to increase over the balance of the year as residents and businesses alike rebuild from the devastation of the storm. While overall asking rents have fallen, this is primarily due to quality space alternatives withholding rates and artificially pulling down asking rates. Same-store rents have increased, with urban core retail at the peak of the market. Vacancy rates remain extremely tight for core retail holdings despite vacancy increases in the overall market. The construction pipeline remains robust for mixed-use/lifestyle and grocery-anchored projects throughout the metro. Suburban markets are thriving areas for expansion as new household growth taps into regions with a lack of retailing options. Overall, the market remains very strong and is anticipated to continue this trend for the foreseeable future.
Vacancy Mixed-Use Sector Vacancy Extremely Tight Overall retail vacancy ended the third quarter at 5.6% up from 5.3% at mid-year. Core retail holdings such as mixed-use, grocery-anchored and power centers, all outperformed the broad market as pain is generally felt in non-core holdings. Mixed-use/Lifestyle centers recorded the lowest vacancy at 3.3%, down from 4.2% at the end of the second quarter. Grocery -anchored retail ended the third quarter at 3.6% vacancy, a modest 0.1% increase over mid-year. Power centers recorded the highest vacancy at 4.3%, up slightly from 4.1% over the quarter. Despite the minor increases, vacancy rates remain favorable citywide and look to remain at historical lows for the foreseeable future.
Rental Rates Asking rents steady Rental rates for the third quarter remained steady coming in at $15.94 per SF NNN, down 0.2% over the quarter, but up 3.0% over the year. Mixed-use properties finished the quarter at $39.55 per SF NNN, up 1.1% from mid-year, and 2.5% year-over-year. Inner Loop Mixed-Use/Lifestyle asking rates continue to increase, although not as briskly as in 2016. Power Centers are currently averaging $16.12 per SF NNN, while
Multi-Tenant Retail Market ScaleHouston Metro | Q3 2017
Multi-Tenant Retail Space Under ConstructionSelect Metro Areas | Q3 2017
Retail Job GrowthHouston Metro | 2005 Through September 2017
Source: CoStar, Transwestern
Source: Bureau of Labor Statistics, Transwestern, *12-month job growth through September 2017
Source: CoStar, Transwestern
Non-Core
Grocery Anchored
Power Center
Mixed-Use/Lifestyle
306Million SF
Total
Em
plo
yees
in T
hous
and
s
-4
-2
0
2
4
6
8
10
17*1615141312111009080706
0
1
2
3
4
5
6
SF BayDenPhxLA Basin WasBosChiAtlNYS FlaHouDFW
U/C Nationally = 26.3 Million SF
Mill
ions
of S
F
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Grocery Anchored centers are averaging $14.37 per SF NNN. That said, asking rates are artificially suppressed as higher quality locations tend to withhold asking rates. Rental rates should continue to remain stable through the balance of 2017 and into 2018 as new developments are delivered to the market.
Investment MarketInvestment activity ticks up in Q3 Investors are keeping their eyes on Houston as the third quarter delivered robust property sales. Retail investment sales activity totaled $412.9 million at the end of the third quarter, a 19.0% increase over the second period. Pricing for the sales averaged $324 per SF this quarter, as compared to $276 per SF at the close of the second quarter. Investment activity was highlighted by the sale of the LaCenterra Ranch, a 360,000 SF Mixed-Use/Lifestyle property in the Katy/Cinco Ranch submarket. PGIM Real Estate acquired the property from Amstar JV Vista Goup for $143.4 million, a 5.5% cap rate. Moving forward, retail property sales should remain strong through the balance of 2017 and into early 2018.
Retail Market Outlook Retail sector looks to continue up-cycleThe retail sector remains one of the strongest in the Houston metro, as sustained household growth continues to create opportunities in both urban and suburban locations. Additionally, the market is currently bolstered by the ongoing transformation of retail to more mixed-use/lifestyle developments that are walkable and create synergy among retailers. Houston's food scene has also matured into one of the top national markets, creating a compelling case for further expansion as chef's look to refine their names and culinary skills in a high-impact market.
Looking to the fourth quarter, increases in sales tied to holiday spending and hurricane recovery should help to bolster activity through the end of 2017 and position the sector well to start the new year. Demand for expansion into the Houston market will remain elevated as the low barriers to entry and a strong consumer base make it a compelling sell. Vacancy will continue to remain in the 5-6% range with core holdings between 3-5%. As the energy sector gets its footing in early 2018, discretionary spending should benefit, leading to further growth in the retail sector. This is particularly beneficial within the urban core where space is limited and rental rates remain high. The retail sector will continue to perform well through the end of 207 as it evolves with changing consumer dynamics.
Vacancy Rate TrendsHouston Metro | 2005 Through Q3 2017
Core Retail holdings such as Mixed-Use/Lifestyle, Power Centers and Grocery-Anchored show no signs of slowing in the near term.
Average Rental RateHouston Metro | 2005 Through Q3 2017
Gross Retail SalesHouston Metro | 2005 Through Q1 2017
Source: Texas Comptroller’s Office, Transwestern *Through Q1 2017, annualized
Source: CoStar, Transwestern *Through Q3 2017
Source: CoStar, Transwestern *Through Q3 2017
Tota
l Gro
ss R
etai
l Sal
es
(in B
illio
ns o
f Do
llars
)
$60
$90
$120
$150Retail Sales
17*161514131211100908070605 $2.0
$2.5
$3.0
$3.5Gas Prices
17*161514131211100908070605
Vac
ancy
Rat
e
2%
4%
6%
8%
10%Non-CoreOverall RetailGrocery AnchoredPower CenterMixed-Use/Lifestyle
17 Q317 Q217 Q116 Q416 Q316 Q216 Q115 Q415 Q315 Q215 Q1
Vac
ancy
Rat
e
$10
$15
$20
$25
$30
$35
$40Overall RetailGrocery AnchoredPower CenterMixed-Use/Lifestyle
17 Q317 Q217 Q116 Q416 Q316 Q216 Q115 Q415 Q315 Q215 Q1
Nick Hernandez - Managing Director, Retail
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The Houston Metro Healthcare Market
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HEALTHCARE MARKET OVERVIEWHealthcare market drenched by Harvey The third quarter saw Hurricane Harvey rain down on the Texas coast and place a significant burden on many medical practices across the Houston healthcare sector. According to the Texas Medical Association, just under 140 practices suffered serious damages or were destroyed. Market wide 44 hospitals, nursing homes and assisted-living facilities required evacuations due to the storm. Considering the damages that remain to a number of practices throughout the market, it could take well into the new year before all operations are back to normal. That said, fundamentals for the sector remain strong with population growth in both urban and suburban locations driving demand for the providers in near proximity. Sales activity for the period remained strong, fueled by portfolio transactions. In September, Medical Properties Trust purchased two Houston area hospitals for $244.5 million, including the 458,569 SF George W. Strake Building for $199.6 million and the 102,946 SF St. Joseph Women’s Outpatient Center for $44.9 million. Dallas based MedProperties Holdings also acquired three properties; the 56,992 SF OakBend Doctors Center – Grand Parkway, the 49,585 SF OakBend Doctors Center – Southwest, and the 32,100 SF Kingwood Professional Plaza for a total of approximately $55.0 million. A notable delivery this quarter is the 170,000 SF Memorial Hermann MOB in the Woodlands, a facility that will support the needs of continued suburban household growth.
Job GrowthJob growth still kicking The healthcare sector is still one of the primary drivers of growth in the city, although job creation was lower this quarter. Year-over-year job numbers for the Houston healthcare sector have declined from 12,700 created through June 2017 to 6,800 created through September 2017. Though a decline from the previous quarter, this still represents a 2.1% increase year-over-year. Job growth was low with only 300 jobs for the quarter, but will likely pick up throughout the remainder of the year as strong household growth pushes demand for healthcare.
Market IndicatorsMarket fundamentals are positive Healthcare market fundamentals continue to fare well as the recent development cycle has been in reaction to Houston's population growth over the past 4-6 years. Even with a robust development pipeline, vacancy remains tight and demand for space
Direct VacancyHouston Metro
Deliveries vs AbsorptionHouston Metro
9.0%
10.5%
12.0%
13.5%
15.0%
Overall Direct VacancyClass A Direct Vacancy
Q3 2017
Q2 2017
Q1 2017
Q4 2016
Q3 2016
Q2 2016
Q1 2016
Q4 2015
Q3 2015
Q2 2015
Q1 2015
-300000
-175000
-50000
75000
200000
325000
450000
575000
700000
Overall DeliveriesClass A DeliveriesOverall Net AbsClass A Net Abs
Q3 2017
Q2 2017
Q1 2017
Q4 2016
Q3 2016
Q2 2016
Q1 2016
Q4 2015
Q3 2015
Q2 2015
Q1 2015
Healthcare Job GrowthHouston Metro
Annual
Job Gro
wth
0
2800
5600
8400
11200
14000
17*1615141312111009080706
10-Year Annual Average = 8,490 jobs
Source: CoStar, Transwestern Research
Source: CoStar, Transwestern Research
Source: CoStar, Transwestern Research
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continues to thrive. Increased demand and falling vacancy rates have helped to further
escalate rental rates over the course of the year.
Supply and Development Construction pipeline remains active The development pipeline remains highly active with just over 4.8 million SF of hospital and MOB construction underway across the Houston metro. As the industry continues to evolve, developers are paying closer attention to markets with the highest levels of household growth, and looking for sites closer to major retail clusters . We are currently seeing the most transactional activity occurring in the north,west and southwest submarkets of Houston.
Healthcare Market Outlook Continued growth but at a more conservative paceWhile uncertainty still clouds the future of American healthcare, the underlying fundamentals such as strong population growth, well distributed age groups on both sides of the bell curve, and a population that is living longer, position the healthcare sector firmly in the growth sector. Additionally, rising industry costs should result in continued consolidation of practices where physicians are better able to absorb technological, administrative and real estate costs, while providing care to patients in effective payer mix areas. This will lead to larger average lease transaction size in the industry and more quality transactions from a credit perspective. Potential changes to the ACA could create short-term hesitancy in decision making; however, the inability of the current regime to repeal and replace may render that point moot. Moving forward, consolidations and mergers will continue to shape the market, while expansion of services out to the consumer will drive demand for construction.
While healthcare organizations are dealing with the rising costs of the industry, concerns around changes to the ACA, and localized impacts from Hurricane Harvey; the underlying fundamentals for the sector remain strong and foretell continued growth.
Largest Healthcare SystemsHouston Metro Area | 2016
HEALTHCARE SYSTEM BEDS LOCAL HOSPITALS
Memorial Hermann 3,613 12
HCA Gulf Coast Division 2,721 12
Houston Methodist 2,545 7
CHI St. Luke's Health 1,557 7
Tenet Healthcare Corp. 1,113 4
Harris Health System 963 3
Kindred Healthcare Inc. 950 11
St. Joseph Medical Center 792 2
Texas Children's Hospital 683 3
UT MD Anderson Cancer Center 654 1
Total 15,591 62
Source: Bureau of Labor Statistics, Transwestern *12-month job growth through September 2017
Medical Office Building Stats
MOB COUNTTOTAL
MOB SF
All MOBs 556 36,015,540
Construction 10 542,340
Off Campus 423 17,348,870
On Campus 133 18,666,670
Sold Past 12 Mos 19 2,184,466
Source: Revista, Transewstern Research
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Atlanta 3340 Peachtree Road NE Suite 1000 Atlanta, Georgia 30326 PHONE: 404.842.6600 FAX: 404.842.6601
Austin 901 S. MoPac Expressway Building 4, Suite 250 Austin, Texas 78746 PHONE: 512.328.5600 FAX: 512.328.9309
Baltimore 7160 Columbia Gateway Drive Suite 210 Columbia, Maryland 21046 PHONE: 443.285.0770 FAX: 443.285.0660
Bethesda 6700 Rockledge Drive Suite 500-A Bethesda, Maryland 20817 PHONE: 301.571.0900 FAX: 301.571.0903
Boston 99 High St. 30th Floor Boston, Massachusetts 02110 PHONE: 617.439.6000 FAX: 617.439.9707
Chicago 200 W. Madison St. Suite 1200 Chicago, Illinois 60606 PHONE: 312.881.7000 FAX: 312.881.7085
Dallas 5001 Spring Valley Road Suite 400W Dallas, Texas 75244 PHONE: 972.774.2500 FAX: 972.991.4247
Denver 4643 S. Ulster St. Suite 300 Denver, Colorado 80237 PHONE: 303.639.3000 FAX: 303.407.1453
Detroit 3000 Town Center Suite 2500 Southfield, Michigan 48075 PHONE: 248.350.2222
Fort Lauderdale 110 Tower 110 SE 6th St. Fort Lauderdale, Florida 33301 PHONE: 305.808.7310 FAX: 305.357.3837
Fort Worth 777 Main St. Suite 1100 Fort Worth, Texas 76102 PHONE: 817.877.4433 FAX: 817.870.2826
Houston (Corporate) 1900 West Loop South Suite 1300 Houston, Texas 77027 PHONE: 713.270.7700 FAX: 713.270.6285
Los Angeles 601 S. Figueroa St. Suite 2750 Los Angeles, California 90017 PHONE: 213.624.5700 FAX: 213.624.9203
Miami 100 SE 2nd St. Suite 3100 Miami, Florida 33131 PHONE: 305.808.7310 FAX: 305.808.7309
Milwaukee 234 W. Florida St. Suite 310 Milwaukee, Wisconsin 53204 PHONE: 414.937.5030 FAX: 414.224.7780
Minneapolis 706 Second Ave. S. Suite 100 Minneapolis, Minnesota 55402 PHONE: 612.343.4200 FAX: 612.343.4201
New Jersey 300 Kimball Drive First Floor Parsippany, New Jersey 07054 PHONE: 973.947.9200 FAX: 973.947.9199
New Orleans 127 West Ruelle Drive Suite 1300 Mandeville, Louisiana 70471 PHONE: 504.782.0100
New York 600 Lexington Ave. 10th Floor New York, New York 10022 PHONE: 212.537.7700 FAX: 212.537.0380
Northern Virginia 7900 Tysons One Place Suite 600 McLean, Virginia 22102 PHONE: 703.821.0040 FAX: 703.734.2837
Oakland 38 Webster St. 2nd Floor Oakland, California 94607 PHONE: 510.625.1500
Oklahoma City 235 N. MacArthur Suite 500 Oklahoma City, Oklahoma 73127 PHONE: 405.789.0900 FAX: 405.789.0905
Orange County 2211 Michelson Drive Suite 650 Irvine, California 92612 PHONE: 949.751.5700 FAX: 949.751.5701
Orlando 3063 Mercy Drive Suite G Orlando, Florida 32808 PHONE: 407.293.6090 FAX: 407.893.7099
Phoenix 2415 E. Camelback Road Suite 900 Phoenix, Arizona 85016 PHONE: 602.956.5000 FAX: 602.956.5333
Rosemont 5600 N. River Road Suite 150 Rosemont, Illinois 60018 PHONE: 847.588.5700 FAX: 847.588.0034
San Antonio 8200 IH-10 W. Suite 800 San Antonio, Texas 78230 PHONE: 210.341.1344 FAX: 210.377.2797
San Diego 6815 Flanders Drive Suite 100 San Diego, California 92121 PHONE: 858.452.8668 FAX: 858.452.2585
San Francisco 101 Second St. Suite 300 San Francisco, California 94105 PHONE: 415.489.1820 FAX: 415.489.1840
San Jose/Silicon Valley 2025 Gateway Place Suite 328 San Jose, California 95110 PHONE: 408.843.4100 FAX: 415-489-1899
Seattle 10800 NE Eighth St. Suite 150 Bellevue, Washington 98004 PHONE: 206.737.4300 FAX: 206.737.4301
St. Louis 1001 Highlands Plaza Drive W. Suite 150 St. Louis, Missouri 63110 PHONE: 314.621.1414 FAX: 314.802.0802
Walnut Creek 500 Ygnacio Valley Road Suite 100 Walnut Creek, California 94596 PHONE: 925.357.2000 FAX: 925.357.2001
Washington, D.C. 1717 K Street, NW Suite 1000 Washington, D.C. 20006 PHONE: 202.775.7000 FAX: 202.775.7009
TRANSWESTERN HOUSTON1900 West Loop South | Suite 1300 | Houston, TX 77027P: 713.270.7700 | F: 713.270.6285 | www.transwestern.com/Houston
Follow us on twitter@TranswesternHOU
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