BoyarMiller Breakfast Forum: The Houston Commercial Real Estate Markets - What's Ahead for 2011

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Houston Commercial Real Estate Market: What’s Ahead for 2011

Breakfast Forum

December 9, 2010

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Homebuilding & Land Development MarketsJoel MarshallTrendmaker Development CompanySenior Vice President

National Housing Starts

Houston Foreclosure History

National Survey by Frank N. Magid AssociatesMillennials defined as age 18‐28

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Industrial MarketWelcome W. Wilson, Jr.GSL Welcome GroupPresident & CEO

““A banker is a fellow who lends you his umbrella when the sun is A banker is a fellow who lends you his umbrella when the sun is

shining and wants it back the minute it begins to rain.shining and wants it back the minute it begins to rain.”” ‐‐ Mark TwainMark Twain

2009 Houston 2009 Houston

Industrial Market Industrial Market

Totals:Totals:

••482 million SF482 million SF

••3.27 million SF 3.27 million SF

under constructionunder construction

2010 Houston 2010 Houston

Industrial Market Industrial Market

Totals:Totals:

••499 million SF499 million SF

••219,000 SF under 219,000 SF under

constructionconstruction

••Map Courtesy of Map Courtesy of CoStarCoStar

15 Industrial sales transactions in 15 Industrial sales transactions in

2009, totaling $26.5 million2009, totaling $26.5 million13 Industrial sales transactions in 13 Industrial sales transactions in

2010, totaling $75.5 million2010, totaling $75.5 million

••Photo Courtesy of Photo Courtesy of CoStarCoStar

Equity!Equity!

Equity!Equity!

Equity!Equity!

Financing!Financing!



Location!Location!

Location!Location!

Location!Location!

Crude Oil Price (West Texas Intermediate) : $82.28/BBLCrude Oil Price (West Texas Intermediate) : $82.28/BBL

BAKER HUGHES BAKER HUGHES –– NORTH AMERICAN RIG COUNTNORTH AMERICAN RIG COUNT

Year 2000 to Latest Reporting Week as of 11/24/2010Year 2000 to Latest Reporting Week as of 11/24/2010

The Port of Houston reported trade of $154.4 billion in the firsThe Port of Houston reported trade of $154.4 billion in the first 9 t 9

months of 2010, up 26.8% from the same 9 month period last year.months of 2010, up 26.8% from the same 9 month period last year.

••Slide Information Courtesy of Panama Canal AuthoritySlide Information Courtesy of Panama Canal Authority

••Slide Information Courtesy of The Greater Houston PartnershipSlide Information Courtesy of The Greater Houston Partnership

LENDERS REGULATORS

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Retail MarketEwing KingEwing King Commercial Real EstatePrincipal

State of Local Economy

Houston, Texas: Population Growth

Over the past decade, Houston has welcomed 1.13 MM people ranking 3rd in the nation in population growth.

• Houston continues to have better employment than the rest of the country with the largest 5 year gain among U.S. Cities according to the U.S. Bureau of Labor Statistics.

• While the National Unemployment Average is 9.6%, Houston maintains an unemployment rate of 8.7%.

Unemployment Rate - Houston vs. U.S

Largest 5 Year Employment Gain (June 2005 - June 2010)U.S. Bureau of Labor Statistics (as Reported by the Houston Business Journal) – July 28, 2010

Houston - A Corporate Center for BusinessFortune 500 Companies Headquartered In HoustonCompany/Rank Revenues

($000,000) Company/Rank Revenues($000,000)

ConocoPhillips (6) 139515.0 CenterPoint Energy (275) 8281.0Marathon Oil (41) 49403.0 Smith International (277) 8218.6Sysco (55) 36853.3 Kinder Morgan (315) 7185.2Enterprise GP Holdings (92) 25510.9 Calpine (338) 6564.0Plains All American Pipeline (128) 18520.0 Enbridge Energy Partners (364) 5905.4Halliburton (158) 14675.0 Cameron International (399) 5223.2National Oilwell Varco (182) 12712.0 EOG Resources (434) 4787.0Continental Airlines (183) 12586.0 Spectra Energy (437) 4725.0KBR (193) 12105.0 El Paso (447) 4631.0Waste Management (196) 11791.0 Group 1 Automotive (457) 4525.7Baker Hughes (243) 9664.0 FMC Technologies (467) 4405.4Anadarko Petroleum (260) 9000.0 Frontier Oil (488) 4237.2Apache (271) 8614.8 Source: Fortune, April, 2010

With 25 Forbes Fortune 500 companies headquartered in Houston, our city ranks 3rd in the nation.

Key fundamental drivers that keep Houston ahead of the rest of the country include:

• The Texas Medical Center – Largest medical complex in the world.

• Port of Houston – ranks #1 in the United States in volume of foreign tonnage and is poised to increase that margin with the completion of the Panama Canal expansion in 2014.

• Oil & Natural Gas - Houston is home to more than 5,000 energy related firms and is considered the Energy Capital of the world.

• Business Friendliness – State income tax exemption and other fundamentals have made Houston the largest metro area with the highest level of entrepreneurial activity.

The Texas Medical Center

Houston Retail Markets at a Glance

Retail Breakdown

Houston’s strong, long-term outlook is expected to continue attracting retailers seeking to expand market share in one of the fastest growing metros in the U.S.

Approximately two-thirds of Houston’s retail inventory is madeof neighborhood and community centers

Houston Retail StatisticsMarket Occupancy

Retail occupancy rates are the highest they’ve been since 2005 at 92.2% led by inner loop properties.

Average Market Rents, currently at $14.38 psf, appear to have bottomed out and are gradually climbing again. Despite the recent downturn, current retail rents are still above the 8 yearhistorical average.

Market Rents

Appearing to have avoided the perils of significant overbuilding, Houston has absorbed over 5 million square feet of retail property in the past year, while completions have decreased from the peak of over 8 million square feet in 2008 to just under 2 million square feet in the last 12 months.

Positive absorption numbers are a testament to an increase in leasing activity, Houston’s attractiveness to retailers and limited development.

Absorption Completions and Net Absorption

• Holiday sales account for over 20% of Annual Retail Sales.

• With only 0.4% year over year retail sales growth in 2009, Holiday Sales are back in 2010 with Black Friday sales well exceeding expectations.

• Cyber Monday hit an all time record, exceeding over $1 Billion in sales, and increasing over 16% from last year’s sales.

Holiday Sales

Changing Market Conditions

Discount and Value Oriented retailers are the most active tenants in today’s market.

Retailers have exhibited a “Flight to Quality” mentality with the past two years providing opportunity for those typical Class B tenants to get into Class A space at relatively same rental rates.

Retail Trends

Concerted effort by retailers to increase profitability and cash flow by resetting their balance sheets and focusing within their stores on:

• Reducing the size of stores

• Increasing efficiency/reducing operating expenses

• Limiting capital expenditures on new units

• Managing inventory levels

• Remodeling and reformatting

• Emphasis on increasing internet sales

• Investments Sales – Gap exists between Class A and B projects – the market will pay a premium for Grocery anchored centers which are the most desirable “top of the food chain” retail product. Cap rates have trended downward throughout the year for these “trophy properties” while the market will pay a lot less or not bid at all on Class B product.

• Distressed properties – A sizeable bid/ask gap still remains on foreclosed properties with very little transactional volume on these assets which continues to hinder banks willingness to lend money on real estate deals.

• New Development – Difficult at best, Debt for new construction requires significant pre-leasing with a strong development yield and considerable equity.

Emerging Trends

Challenges Still Facing Us

• National uncertainty and policy making.

• Weak consumer confidence.

• Job growth.

• Financing.

• Empowerment of opportunistic tenants.

Challenges Ahead

What’s Ahead

Houston-areaMarket Leaders

1. Wal-Mart Supercenter50 stores28.5% market share

2. Kroger101 stores25.6% market share

3. H-E-B45 stores14.7% market share

4. Randalls36 stores6.5% market share

5. Fiesta Mart33 stores5.6% market share

Source: Shelby Report of the Southwest, January 2008 edition and Trade Dimensions. Counties included are Austin, Brazoria, Chambers, Fort Bend, Galveston, Harris, Liberty, Montgomery, San Jacinto and Waller.

Future Grocery Anchored Developments 2010 & Beyond

Outlook 2011

• Increase in number of tenants actively seeking locations.• Continued pressure on public retailers to grow externally through new

store expansion.• Legacy assets begin developing junior anchor boxes and

complementary inline space adjacent to existing anchored developments.

• Few if any full price retail centers from ground up. • Outlet center will be announced either in the League City/Texas City

submarket.• Class A, small retail space will be in tight supply and high demand.• Rental Rates gradually increasing in the second half of the year.• Continued obsolescence of older and poorly positioned retail centers -

candidates for adaptive reuses.• Bid/ask gap narrows for distressed properties.

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Office MarketBrandi McDonaldTranswesternManaging Director & Senior Vice President Tenant Advisory Services

Houston Office Market Report

Houston Office Market is in relatively strong position

The bottom of the market is behind us

The next peek is outside visual range

Absorption is positive for the first time in 4 quarters

Outlook: Steady improvement into 2011

Texas job growth “=“commercial space demand in Houston

National Office Market





Source: The Texas Workforce Commission, www.texasworkforce.org

National UnemploymentOctober 2010

Houston 8.0%

Texas 8.1%

U.S. 9.6%

Texas Job GrowthOctober 2009 – 2010

Total NonAg. Employment 172,800 1.7% 6,200 0.3%

Profess. & Business Svcs 50,600 4.1% ‐3,600 ‐1.0%

Education & Health Svcs 38,800 2.9% 8,800 2.9%

Mining & Logging 30,800 15.7% 3,700 4.2%

Manufacturing 26,400 3.2% 2,600 1.2%

Leisure & Hospitality 23,800 2.4% 3,600 1.6%

Construction 12,900 2.3% ‐4,700 ‐2.7%

Other Services 5,700 1.6% 900 1.0%

Financial Activities 4,500 0.7% ‐1,600 ‐1.2%

Trade, Trans. & Utilities ‐3,000 ‐0.1% ‐700 ‐0.1%

Government ‐4,500 ‐0.2% ‐1,200 ‐0.3%

Information ‐13,200 ‐6.6% ‐1,600 ‐4.7%

Source: The Texas Workforce Commission, www.texasworkforce.org

# Houston Jobs

# TexasJobs

242M SF, 12th Largest Office Market in U.S.

Houston Office MarketCurrent Conditions

Vacancy 13.3%, down from 13.6% in Q2 2010

Absorption 97,000SF YTD

Lease Rates Rents stabilizing with concessions driving effective rates down

New Construction

2.5M SF under construction, down from 4.4M SF one year ago

Job Growth Private sector employment grew by 10,800 in May and has grown by 31,000 since January

Source: Delta Associates, Q3 2010

Houston Office MarketVacancy/Absorption

Source: Delta Associates Q3 2010

Houston Office MarketAbsorption

2007: 4,754,000

2008: 4,613,000

2009: (586,000)

YTD: 97,000

Houston Office MarketLease Rates

Houston Office MarketNew Development

62.0%

Houston Office Market

Size (MSF)

CBD 50.3

West Loop 35.1

Energy Corr.29.1

Westchase15.5

Northwest15.3

Greenspoint13.4

Greenway12.1

Vacancy %

CBD11.4%

West Loop11.1%

Energy Corr.12.6%

Westchase14.1%

Northwest19.6%

Greenspoint14.2%

Greenway13.6%

Vacancy (MSF)

CBD5.2

West Loop3.6

Energy Corr.3.4

Westchase2.1

Northwest3.0

Greenspoint1.7

Greenway1.5

Rate (Class A)

CBD$36.72

West Loop$29.00

Energy Corr.$26.75

Westchase$30.00

NW Far$27.20

Greenspoint$20.40

Greenway$28.00

Source: Delta Q3 2010

Houston Office MarketSubmarket Comparison

Rate Forecast

2001

2004 - 2005

2009

2010

$32.00 psf

$24.00 psf

$38.00 psf

$36.00 psf

Tech Bubble

Enron9-11

Oil Hits$145/barrel

SubprimeMortgage Crisis

14 bldgs with over 50K SF Contiguous AvailableSource: Costar, a select set of buildings 12/6/10

Trends/ForecastCBD Class A

29 Bldgs, 28M SF

1.8M SF UC

7% Vacancy

-602K SF Absorp. YTD

Three Allen Ctr.333 Clay StreetDevon Energy186K SFSublease Thru 1/2020

Two Allen Ctr.1200 Smith StreetDevon Energy281K SFAvailable 4/2011

Continental Ctr. I1600 Smith StreetContinental Airlines414K SFExpires 12/2014Chevron250K SFExpires 3/2011

Pennzoil North700 MilamShell554K SFExpires 12/2013

Trends/ForecastCBD Class A

One Allen Ctr.500 Dallas StreetHess388K SFAvailable 9/2011

Two Houston Ctr.909 FanninShell Trading249K SFAvailable Q3 2013

BG Group Place811 Main Street690K SF Available

690K SF 554K SF 249K SF 388K SF 281K SF 186K SF 664K SF

3M SF = 11% Class A Market

2000-2001

2004 - 2005

2009

2010

$22.00 psf$19.00 psf

$30.00 psf

$29.00 psf

Tech Bubble Enron9-11

Oil Hits$145/barrel



36 Bldgs, 14.6M SF

302K SF Proposed SKANSKA

10% Vacancy

170K SF Absorp. YTD

Trends/ForecastWest Loop Class A

3009 Post OakSKANSKA New Dev.302K SF GB 1Q 2011

Southern Union Tower5444 WestheimerBG/Southern Union220K SF Expires 5/31/2012

Trends/ForecastWest Loop Class A

Bechtel3000 Post Oak439K SF Expires 6/2011

Apache2000 Post Oak Blvd.340K SF Expires 12/2013


2001-2002

2004 - 2005

2008 - 2009

2010

$22.00 psf$20.00 psf

$28.25 psf

$26.75psf

Tech Bubble

Enron9-11

Oil Hits$145/barrel


33 Bldgs, 8.1M SF

1.6M SF UC

30% Vacancy

30K SF Absorp. YTD

Trends/ForecastEnergy Corridor Class A

Three Eldridge Place737 Eldridge305K SF

Trends/ForecastEnergy Corridor Class A

Reserve at Park Ten15721 Park Row136K SF

Eldridge Oaks1080 Eldridge272K SF Avail.


1998 - 1999

2004 - 2005

2009

2010

$24.00 psf

$20.00 psf

$27.75 psf

$30.00 psf

Tech BubbleEnron

9-11

Oil Hits$145/barrel


Trends/ForecastWestchase Class A

26 Bldgs, 7.2M SF

14% Vacancy

291K SF Absorp.

Westchase Park3700 W Sam Houston144K SF

Oak Park Center IV6005 Rogerdale158K SF

Trends/ForecastWestchase Class A

10 bldgs with over 50K SF Contiguous Available

Source: Costar, a select set of buildings 12/4/10

2000 -2001

2002

20092010

$22.74 psf $21.00 psf

$27.20 psf

Tech Bubble

Oil Hits$145/barrel


Trends/ForecastNorthwest Far Class A

24 Bldgs, 4.6M SF

39% Vacancy

785K SF Absorp.

Beltway Lakes II5875 N Sam Houston162K SF

Trends/ForecastNorthwest Far Class A

Westway Park II4424 W Sam Houston82K SF

Two Westway11025 Equity72K SF

1 bldg with over 50K SF Contiguous AvailableSource: Costar, a select set of buildings 12/4/10

Trends/ForecastGreenspoint Class A

19 Bldgs, 4.7M SF

7% Vacancy

61K SF Absorp. YTD

2001-2002

2003 - 2004

2010$21.50 psf

$18.75 psf

$20.40 psf

Tech Bubble

Enron

9-11

2006

$18.70 psf

2008 - 2009$20.50 psf


2000-2001

2005

2009

2010

$21.75 psf$19.50 psf

$30.50 psf $28.00 psf

Tech Bubble Enron9-11

Oil Hits$145/barrel


Trends/ForecastGreenway Class A

15 Bldgs, 6.0M SF

14% Vacancy

24K SF Absorp. YTD

Capital Markets

$1.2T Debt tsunami is farther offshore and weakening

Distressed loan levels stabilized in Q3

New delinquencies decreasing and more banks putting

assets on market*

Special services are resolving troubled loans faster this year

(2009 ave 21mos/2010 ave 18)**

CMBS market is slowly returning

Source: *Costar Advisor 10/27/10** Globe Street 10/27/10

Capital Markets

Houston is still the ‘place to be’ (not overbuilt + job growth) Foreign investors continuing to enter market

Sellers:

Buyers:

Tenants:

Cash is King – 55-65% LTV More buildings expected to go on the market in Q1 2011

Special servicers not motivated to spend capital Know your lease

Capital MarketsNotable Sales

Date Building SF $/SF % Cap Buyer

Jun-10 17000 Katy Fwy 174K SF

$174 9.5% Black Forest Ventures

Jun-10 Energy Center I 332K SF

$283 7.2% Wells Real Estate Funds

Jul-10 3 Sugar Creek Blvd

153K SF

$186 TBD American National Insurance

Sep-10 Energy Crossing I 239K SF

$119 TBD Lincoln Property Company

Oct-10 3900 Essex 235K SF

$144 8.0% Beacon Investment Properties

UC Lakes on Post Oak 440K SF

$145 8.0% Five Mile Capital

UC Heritage Plaza 1.1M SF $285 6.2% Brookfield

Source: Real Capital Analytics; Transwestern; CoStar Comps

Corporate Space Strategies for Tenants

Renewing:

Downsizing:

Expanding:

Subleasing:

Relocating:

Don’t judge a building by its market

The watch list is a must see

Go Long

Restructure Lease

Go Long

Go Ugly EarlySet Aside 3 Days for Tours

Questions & Answers