BoyarMiller Breakfast Forum: The Houston Commercial Real Estate Markets - What's Ahead for 2010

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Houston Commercial Real Estate Market: What’s Ahead for 2010

Breakfast Forum

December 4, 2009

www.boyarmiller.com

Homebuilding & Land Development MarketsJoel Marshall – Trendmaker HomesSenior Vice President

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

10/2

9/0

6

12/2

9/0

6

2/2

8/0

7

4/2

9/0

7

6/2

9/0

7

8/2

9/0

7

10/2

9/0

7

12/2

9/0

7

2/2

9/0

8

4/2

9/0

8

6/2

9/0

8

8/2

9/0

8

10/2

9/0

8

12/2

9/0

8

2/2

8/0

9

4/2

9/0

9

6/2

9/0

9

8/2

9/0

9

10/2

9/0

9

Source: Freddie Mac

National30 year Mortgage rate

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

NationalSingle Family Starts – NAHB Projections

Source: NAHB

2006 2007 2008 2009 2010SF Starts 1,465,400 1,046,000 622,000 501,000 600,000 % Change -15% -29% -41% -19% 20%Peak to 'Trough' -15% -39% -64% -71% -65%

National MSA Rank – Percentage Change September ‘09

Rank State City Job Growth1 LA New Orleans -0.3%2 VA Virginia Beach -0.6%3 TX Austin -0.7%4 TX San Antonio -1.1%5 D.C. Washington D.C. -1.2%6 OH Columbus -1.8%7 NY Rochester -2.0%8 TX Dallas/Ft. Worth -2.2%9 NY New York -2.5%10 OK Oklahoma City -2.5%11 MA Boston -2.5%12 MD Baltimore -2.8%13 NC Raleigh -2.9%14 PA Pittsburgh -2.9%15 TX Houston -3.0%16 NY Buffalo -3.0%17 PA Philadelphia -3.2%18 FL Miami -3.3%19 VA Richmond -3.3%20 AL Birmingham -3.7%

-4.2%

Top 20

United States

Rank State City Job Growth20 TN Nashville -4.2%19 CA San Francisco -4.4%18 UT Salt Lake City -4.4%17 FL Tampa -4.5%16 IL Chicago -4.6%15 CA Sacramento -4.6%14 CO Denver -4.7%13 FL Orlando -4.7%12 WA Seattle -4.8%11 CA San Jose -5.2%10 NC Charlotte -5.5%9 CA Riverside -5.6%8 OH Cleveland -5.8%7 OR Portland -5.9%6 GA Atlanta -5.9%5 NV Las Vegas -6.2%4 AZ Tucson -6.3%3 FL Ft. Meyers -7.5%2 MI Detroit -7.8%1 AZ Phoenix -8.0%

Bottom 20

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

3Q

98

3Q

99

3Q

00

3Q

01

3Q

02

3Q

03

3Q

04

3Q

05

3Q

06

3Q

07

3Q

08

3Q

09

USTexasHouston

Source: U. S. Bureau of Labor Statistics

TexasUnemployment Rates – U.S. vs. TX vs. Houston

-120.0

-95.0

-70.0

-45.0

-20.0

5.0

30.0

55.0

80.0

105.0

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2009 (P)

2010 (P)

Houston Trailing 12 Month Jobs – September ‘09

Source: Texas Workforce Commission; University Of Houston

Regional Forecast Center

12 Mos. Ending Sept.

Rank MSA Growth Rate1 Dallas-Fort Worth-Arlington, TX 146,532 2.4%2 Houston-Sugar Land-Baytown, TX 130,185 2.3%3 Phoenix-Mesa-Scottsdale, AZ 115,978 2.8%4 Los Angeles-Long Beach-Santa Ana, CA 88,196 0.7%5 New York-Northern New Jersey-Long 84,227 0.4%6 Chicago-Naperville-Joliet, IL-IN-WI 72,771 0.8%7 Austin-Round Rock, TX 60,012 3.8%8 San Franciso-Oakland-Fremont, CA 58,406 1.4%9 Washington-Arlington-Alexandria, DC- 55,835 1.1%

10 Charlotte-Gastonia-Concord, NC-SC 55,368 3.4%11 Denver-Aurora, CO /1 53,233 2.2%12 Riverside-San Bernadino-Ontario, CA 49,298 1.2%13 Seattle-Tacoma-Bellevue, WA 46,588 1.4%14 San Antonio, TX 46,524 2.3%15 Raleigh-Cary, NC 44,804 4.3%

Source: Census Bureau

TOP MSA’S RANKED BY POPULATION GROWTH IN 2008

Source: Census Bureau

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

3Q00

2Q01

1Q02

4Q02

3Q03

2Q04

1Q05

4Q05

3Q06

2Q07

1Q08

4Q08

3Q09

Mon

ths

Houston MLS Months of Supply

Source: MLS

1.6%1.1%

0.7%0.1%

2.4%

-4%

-2%

0%

2%

4%

6%

Houston Fort Worth Dallas San Antonio Austin

Houston Home Appreciation – Texas Markets 2Q09

Data Source: FHFA

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

55,000

3Q99

3Q00

3Q01

3Q02

3Q03

3Q04

3Q05

3Q06

3Q07

3Q08

3Q09

Annual Closings

Annual Starts

Houston Starts and Closings Comparison

14,472 Units of Inventory Reduction

since 4Q06

0

200

400

600

800

1,000

1,200

1,400

1,600

<$100k $100k-$125k

$125k- $150k

$150k-$175k

$175k-$225k

$225k-$300k

$300k-$500k

>$500k

Houston Finished New Home Inv by Price

3Q08 to 3Q09

0

10,000

20,000

30,000

40,000

50,000

60,000

3Q98

3Q99

3Q00

3Q01

3Q02

3Q03

3Q04

3Q05

3Q06

3Q07

3Q08

3Q09

Annual Starts Annual Lot Delivery

HoustonLot Delivery vs. Absorption

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

3Q89

3Q90

3Q91

3Q92

3Q93

3Q94

3Q95

3Q96

3Q97

3Q98

3Q99

3Q00

3Q01

3Q02

3Q03

3Q04

3Q05

3Q06

3Q07

3Q08

3Q09

Quarterly Lot Delivery

Houston Quarterly Lot Delivery Rate

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

C S SE NE FN NW WNW WSW SW

Market Area

Star

ts &

VD

L

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

VD

L MoS

Starts VDL VDL MoS

HoustonVacant Developed Lot – Market Area Comparison

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

0 to 5 6 to 24 25 to 49 50 to 74 75 to 99 100+

Annual Starts

Star

ts &

VD

L

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

VD

L MoS

Ann Starts VDL VDL MoS

HoustonVDL Supply by Annual Starts Rate

Subs with 25+ Annual Starts

Total: 9,367 Annual Starts

Total: 12,009 VDL @ 15.4 MoS

0%

5%

10%

15%

20%

25%

3Q05

3Q06

3Q07

3Q08

3Q09

MPC Share of New Home Closings

HoustonMaster Planned Community – Market Share

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

Atla

nta

Sara

sota

Sout

h Fl

orid

a

Rio

Gra

nde

Valle

y

Chi

cago

Nap

les

Nor

ther

n C

olor

ado

St G

eorg

e

Ren

o, N

V

Orla

ndo

Jack

sonv

ille

Albu

quer

que/

San

ta F

e

Min

neap

olis

Pho

enix

Tria

d

Bois

e

Den

ver

Tam

pa

Las

Vega

s

Cha

rlotte

Col

orad

o Sp

gs

Sal

t Lak

e C

ity

Cen

t Cal

Ral

eigh

-Dur

ham

Tucs

on

San

Die

go

Indi

anap

olis

Sac

ram

ento

Dal

las/

Ft W

orth

Inla

nd E

mpi

re

Nas

hvill

e

NoV

a-C

Nor

ther

n V

irgin

ia

Hou

ston

San

Fran

cisc

o

Aus

tin

San

Ant

onio

So C

al C

oast

MD

- C

Mar

ylan

d

National ComparisonVacant Developed Lot Supply

Houston

Still Obstacles Remain• Low Consumer Confidence• No Sign of Job Growth• Financial Failures..Regional &

Smaller Banks• Question of Fundamental Consumer

Change• Commercial Real Estate Loans• Appraisals!

www.boyarmiller.com

Industrial MarketWelcome Wilson, Jr. – GSL Welcome, LLC President and CEO

2010 Industrial Forecast2010 Industrial Forecast

Welcome Wilson, Jr.Welcome Wilson, Jr.

Whispering words of Whispering words of ““recoveryrecovery””......

Houston Industrial Market Totals:Houston Industrial Market Totals:

••482 million SF482 million SF

••3.27 million SF under construction3.27 million SF under construction

Houston Quoted Rental RatesHouston Quoted Rental Rates

Average Quoted Rental Rates Average Quoted Rental Rates ‐‐

Houston vs. USHouston vs. US

••Available amount of Available amount of

sublease space in the sublease space in the

Houston market is Houston market is

1,046,000, down from 1,046,000, down from

1.2 million SF during the 1.2 million SF during the

22ndnd quarterquarter

••This only represents 3% This only represents 3%

of total industrial space of total industrial space

available for leaseavailable for lease

Location!Location!

Location!Location!

Location!Location! Financing!Financing!

Financing!Financing!

Financing!Financing!

••HCMBS issuance in 2007 was $230 billionHCMBS issuance in 2007 was $230 billion

••In 2008 it dropped to $12 billionIn 2008 it dropped to $12 billion

••In 2009 it is at zeroIn 2009 it is at zero

••Evaporation of financing has caused a Evaporation of financing has caused a

decrease in transactions and valuesdecrease in transactions and values

••Values have been difficult to determine Values have been difficult to determine

due to lack of transaction volumedue to lack of transaction volume

Over $500 billion of conduit debt is set to Over $500 billion of conduit debt is set to

expire in 2010, that number increases expire in 2010, that number increases

each year through 2012each year through 2012

Houston Industrial MarketHouston Industrial Market’’s 3 Major s 3 Major

Drivers:Drivers:

••The National EconomyThe National Economy

••Trade with Foreign CountriesTrade with Foreign Countries

••The Energy SectorThe Energy Sector

Domestic Rig Count Domestic Rig Count ‐‐ November 25, 2009November 25, 2009

Worldwide Oil DemandWorldwide Oil Demand

The Texas population will add 13 million The Texas population will add 13 million

people by the year 2030.people by the year 2030.

If Texas were itIf Texas were it’’s own country...s own country...

If Texas were itIf Texas were it’’s own country we would be s own country we would be

1212thth in the world among countries based upon in the world among countries based upon

GDP.GDP.

33rdrd Quarter 2009Quarter 2009 HoustonHouston Dallas/Ft. WorthDallas/Ft. Worth

Total Industrial SF:Total Industrial SF: 482,440,258482,440,258 746,888,878746,888,878

% Vacant:% Vacant: 6.9%6.9% 12.1%12.1%

Vacant SF:Vacant SF: 33,247,21433,247,214 90,140,53490,140,534

Houston:Houston:

Dallas/Dallas/

Ft. Worth:Ft. Worth:

www.boyarmiller.com

Office MarketRudy Hubbard – TranswesternManaging Director, Investment Services Group

BoyarMillerDecember 4, 2009


What happened?

Banks and other high-powered Wall Street firms made a lot of bad loans for houses, and commercial real estate.

They also made a lot of bad loans for businesses, credit cards, and M&A.

They lost more money than their equity.

The losses are so big that the government can’t allow banks to take them all at once.


They can’t auction the bad assets because it would reveal the true extent of the losses.

So they have “injected capital” allowing the banks to amortize their losses over years.

What happened?


0%

5%

10%

15%

20%

25%

30%

83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 3Q09

Where is the Houston office market now?

Houston’s vacancy rate, at 13.2% (12.1% for direct space), is below the national average of 14% and has held up better than some of the harder-hit markets, like Phoenix, Dallas and Atlanta.

Source: CoStar, Delta Associates; October 2009.

Office Vacancy RateHouston Metro Area

1983 through 3rd Quarter 2009


Where is the Houston office market now?Average Office RentsHouston Metro Area

1982 through 3rd Quarter 2009

Source: Delta Associates’ analysis of CoStar data; October 2009.


-4

-2

0

2

4

6

8

10

12

14

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09*

Net

Abs

orpt

ion

(Mill

ions

of S

F)

-100

-50

0

50

100

150

200

250

300

350

Cha

nge

in E

mpl

oym

ent (

000'

s)

Source: BLS, Delta Associates; October 2009.* Absorption through 3rd quarter;

12-month job growth ending September 2009.

Where is the Houston office market now?Office Absorption and Employment

Houston Metro Area1980 through 3rd Quarter 2009


Where is the Houston office market now?Houston Job Growth

Since 1980

Houston’s average job growth since 1980 has been approximately 36,000 per year.



Houston’s average net absorption since 1980 has been approximately 3.5 million square feet per

year.

Houston Historical AbsorptionSince 1980



$0

$1

$1

$2

$2

$3

2003 2004 2005 2006 2007 2008 2009*

Bill

ions

of $

Office investment sales (for which pricing information could be obtained) in metro Houston total $109 million through 3rd quarter 2009.

By comparison, sales totaled $981 million in the first nine months of 2008.

Weak market fundamentals and lack of liquidity in the credit markets have suppressed sales activity in all metro markets.

Houston Investment Sales Volume2003 – 3rd Quarter 2009


What does this mean for Houston’s future?

$1.4 trillion in loans maturing in the next three years

This is the equivalent of . . .

140 billion $10 million deals

1 trillion seconds is over 30,000 years



Prices fall as cap rates revert to 2002 levels

Occupancy falls as job layoffs continue

Rents fall as owners covet tenants

New construction continues to add new supply

Foreclosures increase as refinancing is precluded

A Timeline for CRE Recovery2009



Prices continue to fall as price discovery continues

Occupancy falls as firms downsize staff

Layoffs end, but downsizing continues for cost savings

Rents fall to compete for smaller tenant base

New projects started in 2007-08 are completed

No new construction projects undertaken




Slow job growth begins to soak up space

No new supply delivered to the market

Rent levels stabilize at lower rates

2006 vintage loans fail to refinance

Foreclosure rates decline as credit market heals

Class A space starts to fill at expense of lesser properties




More rapid job growth increases absorption rate

No new supply delivered to the market

Rents start to rise as space starts to fill

More foreclosures from properties bought 1H07

Property values start to increase, anticipating positive absorption and very limited new supply




More rapid job growth soaks up more space

Occupancy rate increases significantly

No new buildings delivered to the market

Prices continue to increase due to rising fundamentals and falling cap rates



www.transwestern.net

The performance advantage in real estate

www.boyarmiller.com

Retail MarketLance Gilliam – Moody Rambin InterestsManaging Director

• consumer income to fuel and generate retail sales

• retail sales to pay rent

• rent to fund debt service or rent to be capitalized to create value for a sale

• consumers, retailers and capital markets have to have confidence in that income

Fitch Ratings reported that retail sales from Black Friday weekend were, at best, marginal.

The National Retail Federation reported that more people shopped but spent less money.

“Mounting job losses, declines in wages & salaries and falling home prices prompted consumers to cut discretionary spending.“Source: Wells Fargo Securities’ Economics Group

Reports from the recent Urban Land Institute Fall Meeting in San Francisco were that “not one expert was willing to predict what things will look like in 3 years other than they think it will be better.” And, further, that a “…recovery will be slow. Unemployment will not drop back to more normal levels until 2014.”

Robert Bach, Grubb & Ellis’ Senior Vice President & Chief Economist, included some hope in his recent Good Friday e-mail, “The recession is over, but 2010 is not going to feel like a classic recovery. There are too many headwinds, notably lagging job creation, lingering weakness in consumer spending and tight lending conditions.”

Drew Kanaly with Kanaly Trust shared the following with your peers attending Boyar Miller’s breakfast last September:”Consumer spending has a long way to fall. Household balance sheet repair (more savings paying down debt) (is) likely to drive economic fundamentals over (the) next several years.”

Dr. Barton Smith included the following in the University of Houston’s Institute for Regional Forecasting Houston Economic Symposium on November 5, 2009, “The Worst is Behind Us -- The Wait Lies Ahead.” With that framing statement, he also noted and forecast:

“job growth will begin in 2010 but not fast enough to keep the year’s average from falling. Nonetheless, most sectors will show year over year job growth by fall.”

“consumers continue to struggle, bargain shop only”

“retail sales would fall by 2.9% in 2009 and increase by a nominal 0.63% in 2010.”

From Wednesday’s Houston Chronicle, “Retailing analysts at Thomson Reuters expect stores to post a 2.3 percent sales increase for November, in contrast to a 7.8 percent decline a year ago.”

“…the retail landscape will see material changes as retailers and property owners use the current environment to right size their portfolios and focus on repositioning underperforming locations. This process is healthy in the long run and will form a solid base for retail expansion as the economy rebounds … (We) work with our clients on both sides of the equation to take actions that will stabilize one another’s real estate through and beyond those challenging times.”

What that means is; whatever deal you thought you had with the tenant, you don’t or at least the tenant doesn’t think you do.

Requests for rent reduction and lease modifications are based on a company-wide initiative to “pay less.”Today, retailers are no longer focused on growth, they are focused on profit.

Good for the retailers’ stockholders. Bad for landlords.

Even if the capital markets would fund it, we still shouldn’t build it. We need to take a step back.

Any new construction and tenancies would likely cannibalize existing retail and restaurant sales and, as a result, further weaken existing tenants’ ability to meet their current lease obligations.

Further, the downward pressure on rent extends beyond existing leases and is very evident in conversations about new stores --- few of which are being constructed.

The direction to most dealmakers is “pay less” Those numbers don’t work for new construction.

When that equilibrium returns, I do not know.

But … retail is a competitive industry. The strong survive. The weak do not. Successful retailers and restaurateurs who are well capitalized will take advantage of their competitors’ weaknesses.

Many retailers have remarkable liquidity. Fitch Ratingsnoted in a special report: The Retail Register released inSeptember 2009 that “...liquidity is strong for the dis-counters as a result of solid cash flow generation. Lowercapital expenditures are expected to help generate addi-tional cash of $1 billion each for Walmart and Target.“

Limited new construction: retailers’, especially grocers, entries into urban

markets where elevated land prices have recentlyposed a barrier to entry.

retailers’ relocations to improve their locationwithin a trade area or update the store to a currentprototype.

smaller owner-operated retailers and restaurants and other service users.

Look beyond reports of reports that reflect vacancy rates for “retail” or “shopping centers,” in general. They overstate the problem.

Vacancies in well-located, well-designedand responsibly owned and operated willbe filled. Their will be pain but the painwill pass.

There are buildings that have significantvacancies that are “shopping centers” inname only. They no longer are or, insome cases, never were viable retailshopping environments. They are“something else.”

“Something elses” represent opportunity. These projects are prime candidates for“adaptive re-use.”

UNCERTAINTY KILLS DEALS.

There is a W I D E gap between

UNTIL THOSE TWO PHILOSOPHIES RECONCILE,COMPLETING DEALS WILL BE DIFFICULT.

what buyersand tenants

are willing to pay for properties

and

what sellers and landlords are willing to take for them

Questions & Answers

Business

BoyarMiller Breakfast Forum: The Houston Commercial Real Estate Markets - What's Ahead for 2010