It’s Good to be in Houston
The Houston economy has generally outperformed the national economy and in many respects is leading the state’s economic resurgence. The largest over-the-year employment increase in 2011 occurred in Houston with 75,800 new non-farm jobs and the impact is being felt across all sectors of the commercial real estate market. In Houston we have moved through the recovery phase of the market cycle as the city has recovered more than 100% of the jobs lost during the recession. As a result office and industrial tenants are now expanding and retailers continue to eye the Houston in search of new locations.
Houston’s Office Market Ends 2011 on a Positive Note
Houston’s office market has undergone significant changes in the past twelve months benefiting from positive absorption, falling vacancy, and rising rental rates. Increased leasing activity has been key to the year-end positive net absorption of 2.6 million square feet citywide. An important driver of these market trends has been a healthy economic climate conducive to increased business activity. The Houston metropolitan area has gained about 77,000 jobs through November 2011, representing a solid 3.0% growth rate.
Overall vacancy levels decreased by 50 basis points between quarters to 15.5% from 16.0%, which was also the citywide overall vacancy rate one year ago. The average suburban vacancy rate decreased by 30 basis points to 15.3% from 15.6% the previous quarter, while the CBD vacancy rate decreased by 100 basis points to 16.6% from 17.6%.
On a year-over-year basis the citywide average rental rate increased by $0.12 per square foot to $23.20 from $23.08 per square foot. The citywide average rental rate also rose slightly between quarters to $23.20 from $22.93 per square foot.
Houston’s Office Investment sales activity decreased between quarters with only 10 properties changing hands, compared to 15 in the previous quarter. According to Real Capital Analytics, Houston office sale transactions had a total dollar volume of $732.9 million, averaging $406 per square foot with a 6.6% capitalization rate. The most significant sale was Trammell Crow JV’s sale of Hess Tower to H&R REIT for $442.5 million or $524 per square foot.
Houston’s office leasing activity reached 1.4 million SF in the fourth quarter, bringing the year-end total to 3.3 million SF. One of the most significant transactions that occurred in the fourth quarter was Shell’s renewal of 1.3 million SF in One and Two Shell Plaza in the CBD submarket.
With solid expansion in the energy sector and a strong housing market, (up 4.1% year-to-date through November), Houston’s economy is expected to continue outperforming the national economy over the next twelve to eighteen months.
2.9M SF in Houston’s Industrial Construction Pipeline – 1.8M SF is Spec Development
Houston’s industrial market fundamentals continue to strengthen with over 1.5M SF of positive net absorption in the fourth quarter, pushing year-end absorption to 4.4M SF. Houston’s industrial vacancy continues to decrease, averaging 5.2% in the fourth quarter, 40 basis points (bps) less than the previous quarter, and 100 bps below the 6.2% recorded in the same quarter last year. Houston’s overall average quoted industrial rental rate increased from $5.41 to $5.45 per SF NNN between quarters increasing by 2.3% on a year-over-year basis from $5.33 per SF NNN. 2011 leasing activity reached 13.1M SF with the help of large lease transactions.
For several years, developers have shown restraint due to the economic downturn; however, construction activity increased in 2011. Houston’s industrial market currently has 2.9M SF in the construction pipeline and delivered 1.7M SF in 2011. Much of the increased activity in the first half of the year was driven by build-to-suit projects for companies expanding in and relocating to the Houston market, however, the fourth quarter saw a significant increase in spec development representing 1.8M SF of the 2.9M under construction. As Houston’s available industrial inventory shrinks, we believe the demand for new projects will continue to increase, both build-to-suit and spec development.
Houston’s Retail Market Quarterly Absorption Boosted by Year-End Push
Houston’s retail market continued to improve in the fourth quarter of 2011 with positive net absorption and lower vacancy rates. The citywide average vacancy rate stood at 7.2%, down from 8.0% at this time last year. Although year-over-year absorption decreased, quarterly absorption increased significantly to 810,000 SF of positive net absorption from 175,000 SF in 3Q 2011. Developers increased development in 2011 delivering 625,000 SF of new retail space compared to 393,000 in 2010. There are several large projects in the planning stages to be developed in 2012 and 617,000 SF currently in the construction pipeline.
According to numbers released by the U.S. Bureau of Labor Statistics Houston added 5,900 retail jobs over the past year, a 2.3% growth rate. The area’s population is growing faster than any other U.S. city fueled by the energy and medical industries. In October, a report by The Business Journals’ On Numbers, reported Houston’s total personal income (TPI) grew by an annual rate of 5.69% between 2000 and 2010, the highest growth rate seen by the country’s 75 major metros. It is evident that many Houstonians are getting regular retail therapy and we believe this sector will continue to grow in 2012.