Why is Houston Not Considered a Gateway City?
The first thing I want to get out of the way is that this post is not a rant, but merely an observation. Anyone who follows this blog, my facebook page or twitter account would understand I spend a considerable amount of time online and reading anything related to commercial real estate and in particular the office market. You might have even witnessed one of my occasional snarky comments about how commercial real estate professionals and the media that cover CRE are infamous for grabbing on to the latest buzzwords and regurgitating them to a point that you get nauseous when you hear them. The latest terms are “bifurcated-market” and “gateway-city”.
while I realize the highly intelligent readers of this blog don’t need an explanation of the concept of a “bifurcated market” some context must be provided. Typically when you hear the word “bifurcated market” spill out of someone from CRE’s mouth they are relating to the fact highest quality commercial real estate assets are significantly outperforming lesser quality assets. While some might ask isn’t this always the case? The point is currently only the highest quality properties are demonstrating notable improvement to market fundamentals while the rest of the market continues to struggle.
What the Hell is a Gateway City?
Many who comment on the commercial real estate market or forecast market performance extend the concept of a “bifurcated-market” beyond difference asset classes to describe the notable difference in market fundamentals among cities or markets in terms of exhibiting signs of a recovery or they anticipation they will. Does something like this sound familiar?
“It’s a bifurcated market and the recovery is limited to primary gateway cities such as New York City, Washington D.C., Los Angeles, Chicago, San Francisco and Boston.”
I am by no means questioning the premise of any similar statement, as I would concur that it is accurate. I also recognize the common qualities and characteristics among the most mentioned markets that result in being considered as places over the long term that will continue to attract employers and investment.
However, what the hell exactly is a Gateway City? I am being slightly sarcastic as I get it, and I also I understand someone coined the term, it caught on and true to CRE form, we latch on to the latest buzzwords because we think if the talking heads of our industry are saying it and it sounds good, we damn sure better also. I am guilty as well.
Houston has an Image Problem
So why is Houston, not mentioned more often as one of these “gateway cities”? According to BusinessDictionary.com a “Gateway City” is: an Airport or seaport that serves as the entry point to a country by being the primary arrival and departure point. Chicago and Los Angeles are without question “world class” cities that enjoy a higher profile than Houston, but there is no indication their office or employment markets are currently performing better than Houston and I am not sure why their is a sentiment they are going to, but I would love to hear it. I think my point is that CRE has fallen in love with the term “Gateway City” and Houston has an image problem.
Whether you use the term gateway city or not, in my mind I think most CRE professionals are trying to describe markets that are best positioned to attract new business, demonstrate sustainable long-term job growth and as well as attract investment in commercial real estate.
When it comes to Institutional Investors I don’ think there is any question that Houston is considered a second tier market particularly in the office market. The two most commonly mentioned negatives about Houston are:
- The economy is too dependent on one Industry (Energy) – People remember the 1980’s
- The barriers to new development are minimal and the potential for an over-supply of space is much greater than markets where new development is more constrained – I doubt you are going to see Boston Properties invest in Houston
However from an employment perspective, Houston takes a back seat to relatively few:
- Houston ranked number one out of the 100 largest U.S markets in private sector job growth over the last five years
- Houston is the Energy Capital of the World
- Houston is second only to New York City in the number of Fortune 500 Headquarters
- The Port of Houston is ranked first in the United States in foreign waterborne tonnage, first in U.S. imports, second in U.S. export tonnage, and second in the U.S. in total tonnage
- George Bush Intercontinental Airport is the 8th largest U.S airport for both total and international traffic
- Houston has one of the strongest industrial real estate markets in the country
- Houston is the Home of Johnson Space Center
- Houston is home to the world renowned Texas Medical Center
Source: Greater Houston Partnership
So, maybe this doesn’t qualify as gateway city status in most people’s mind, or we are doing a poor job of getting the word out. The reality is we are not experiencing a significant recovery yet.
So far the Houston office market has yet to exhibit any substantial signs of improvement in market fundamentals. However, the impact of the recession was much less severe on the Houston office market even compared to the so called gateway cities. Houston from the beginning of 2009 through the end of 2010 recorded 1,787,246 square feet of negative net absorption and considering the market is approximately 195 million square feet that is not all that severe. Over the same period the average asking rate for Class A space in the CBD has dropped approximately 10% and 2.5% in the suburban office market. While we have yet to see any movement in rents, positive absorption has returned and in my opinion that is a pretty strong performance during one the longest and deepest recession since the Great Depression.
Houston will never remotely rival New York City, the financial capital of the world and Washington D.C is without question the hottest market in the country. However, a change in the political winds could halt the massive expansion of federal government agencies that is driving activity, rents and values upward in the nation’s capital.
In my opinion, Houston is a “gateway-city” but I really don’t expect much to change regarding the perception of Houston among CRE professionals around the country. Houston has had a public relations challenge as long as I can remember, but maybe and if we can come up with a couple of key buzzwords and repeat them Ad nauseam we can make some progress.
Also, kudos to our US CEO, Dylan Taylor for including Houston in the conversation.