January 22, 2020
Topics at the upcoming Connect Houston conference will include predictions for commercial real estate and the area economy. Patrick Duffy, President of the Houston office of Colliers International, shared some pre-conference CRE and economic insights with Connect Media.
Q. What are some of the standout real estate trends you noticed in 2019?
A. The industrial commercial real estate is the new retail trend accelerated – last mile delivery and distribution for Amazon and the big box retailers. Clear heights for industrial continue to go up, with more cubic space per square foot. The tight labor market has pushed companies to move to more quality and amenity-rich office projects, preferably mixed use with walkable restaurant and hotel venues. The concept of creating a “place” to work rather than just a “space” to work is now the preference of the development community and the more profitable users.
Big box retail has continued its slow erosion as retailers mix on-line with bricks-and-mortar, and need less square footage to satisfy their customer. The department-store concept is getting weaker every year, as many of their products can easily be purchased more conveniently on line with limited risk – for example, shoes and accessories.
Q. What seems to be the CRE product “flavor” when it comes to investors/owners/occupiers?
A. Investors are hungry for industrial product – same reason as above – generally low-vacancy, high-demand product with limited downside. Not much product available, so the yield curve is being compressed on newer product. Older, somewhat functionally-obsolete product is selling to speculators who see the purchase as a cash-flowing land play, with the anticipation of redevelopment or repurpose at some point in the future.
Multifamily is still the sweet spot for many investors. Cap rates are very low for quality product. In many markets, the C and B asset classes are attracting entrepreneurs who upgrade the Cs to Bs, and bring the Bs to B-pluses to tap into the lack of affordable workforce housing. You don’t build a Class B, and there is a demand for units in the more affordable rent range.
In Houston, the office investment market is difficult because of high vacancy, and the action is somewhat limited to newer projects that are institutional Class A++ assets. The value add, high-vacancy, pre-2000 construction is very quiet.
Q. What impact will oil and gas have on real estate in 2020?
A. The oil and gas sector in Houston is in contraction – especially among upstream and midstream companies. The expectation is that they will (net) shed jobs this year as they probably did in 2019 – the final numbers are not in yet. The average salaries for upstream and midstream oil and gas companies are in excess of $120,000, on average. The average salaries for every other industry in Houston are about $60,000. We are expecting a net gain of jobs in 2020, but will trade those $100,000-plus jobs for sub-$60,000 jobs. This means the supply of people capable of affording top end restaurants, apartments, condos, single family homes, cars and boats is shrinking.
Much of the manufacturing in Houston is energy-related, and there will be a pullback in that sector, as well. Energy has long been a big driver for growth in Houston; for the next five to seven years, the expectation is that it will be neutral, at best. The good news is that healthcare and other sectors that are the normal drivers in most other markets are strong here, and energy is a smaller piece of the overall pie.
Connect Houston will take place Feb. 4 in Houston. For more information, or to register, click here.
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