CRE Cliffnotes (9.6.11)

Well, look at it this way….we didn’t lose any jobs in last week’s report.  I am a silver lining guy and we did have 4% growth in chain store sales and increased auto sales in spite of a hurricane shutting down most of the east coast.  I am stretching here aren’t I?

 Hope the following is a quick, helpful, and easy to read overview of some Commercial Real Estate stories from the past week:

 Remembering 9/11

ü  Link

ü  Two Sentence Overview:  This Sunday is the 10^th anniversary of the largest attack on US soil in our nation’s history in New York City, Washington DC, and Pennsylvania.  Incredible to recall all of the acts of heroism that occurred that very dark day. 

ü  One Sentence Takeaway:  This great interactive picture from the ground of the new development reminded me of the great honor and responsibility we have as real estate people to finance, develop, and operate buildings that are both symbolic and imperative to our great nation. 

Job Report:  “Disturbing”

ü  Link

ü  Two Sentence Overview:  For the first time in nearly a year we had no net increase in jobs.  Economists were looking for an increase of around 75K, but unemployment held steady at 9.1% with a bad consumer confidence report to boot. 

ü  One Sentence Takeaway:  The importance of job growth cannot be overstated for the nation in general and commercial real estate in particular – this report and all the surrounding data was disheartening. 

Zell’s take on US Real Estate

ü  Link

ü  Two Sentence Overview:  Some great takeaways from Zell as he cites that the volatility we are experiencing in the equity market is largely due to political uncertainty.  Specifically as it relates to buying opportunities in US real estate: low cost of capital and pretend and extend loans from lending institutions has led to fewer buying opportunities in the US and prices for fully occupied assets closing in on 2007 levels. 

ü  One Sentence Takeaway:  On the upside, Sam reminded us that Real Estate fundamentals are all about supply and demand – and in the US, we really have not added any significant supply since 2007. 

Time for Energy M&A?

ü  Link

ü  Two Sentence Overview:  Expect to see more and more oilfield service and equipment providers being bought.  This is something for us all to keep our eyes on with valuations becoming more feasible and seemingly more demand from the larger players.   

ü  One Sentence Takeaway:  Merger and acquisition activity is always a risk for Houston office space absorption and I would underwrite some considerable M&A activity this fall. 

Stats for the Water Cooler:

·         Texas added 688,483 people in the past year, the most of any other state in the nation (Stat)

·         August Consumer Confidence is lowest in 2 years. (Stat)

·         Oil finished the week down $1.45 to $84.05.  (Stat)

·         US Rig Count lost 7, down to 1,968 last week (up 315 from this time last year however) (Stat)

·         Houston is second only to Silicon Valley in year-over-year job growth in the nation with 2.6 % growth (Stat)

·         Retailers are finding shoppers where they live (Stat)

 Houston CRE News:

·         Litton Loan is Sold to Atlanta-based Ocwen for $263.6 million  (Link)

·         Houston adds 5,900 retail jobs (Link)

·         Community Bancorp, LLC signs lease at Williams Tower (Link)

·         Burns & McDonnell Expands at 1700 Younan West Loop (Link)

CRE Cliffnotes (6/28/11)

Much like Greece, or as I like to call the country, “the world’s 21-year old spoiled kid with a credit card problem”, I have been kicking the can down the road with the latest CRE Cliffnote update. Incidentally, in the past two months there has been a strong correlation between the number of CRE Cliffnotes and the number of Greece bailouts. There has not been the same correlation between the Greece vacation schedule (mandatory 8 weeks) and my vacation schedule.

With that, let’s get to it. I sincerely hope the following articles from the past month are of interest and value to you:

Texas is Tops
+ Link
+ Two Sentence Overview: Just a few stats: Texas has added more than 265K jobs since the recession (more than double any of the second place states). 37% of the jobs created since July of 2009 have come from Texas and the Lone Star State is one of only three states that has more jobs now than before the recession began. This deserves a third line: Texas has added 732K jobs in the past 10 years (no other state topped 100K in the same time).
+ One Sentence Takeaway: Tough to deny the correlations between the stats above and Texas having a lower net effective tax rate on businesses combined with a “Right to Work” emphasis. This only makes the secondary markets located in Texas stronger from a fundamental and capital markets standpoint.

…But even job growth in Texas is slowing
+ Link
+ Two Sentence Overview: The US produced a lackluster 54,000 jobs in May. Even Texas is slowing, having the lowest annual growth since November 2010 in May.
+ One Sentence Takeaway: Despite the companies of The Standard & Poor's 500-stock index sitting on more than $960 billion in cash, it seems companies in the US (and even in Texas) are still hesitant to convert cash into jobs in this current climate.

“Growing Smart”
+ Link
+ Two Sentence Overview: I like any combination of the words “company”, “growth” and “hiring” but it is clear that many companies will not immediately take on more space even as they increase revenues and resume hiring. As companies grow they will be focused on strategies to maximize space utilization, both in the amount of space needed per employee and in the effectiveness of the space.
+ One Sentence Takeaway: Even as jobs return to pre-recession levels (in 2013 or 2014) we cannot assume that those same job numbers will equate to the same amount of space demand due to a heavy emphasis on maximizing space utilization.

The New Workplace
+ Link
+ Two Sentence Overview: Good article about the drivers of office space design: 1) Branding (or “recruitment”) 2) Collaboration 3) Mobile Office 4) Technology. The culminating effect of these trends is leading to less SF per employee (this article states a decline from 250 PSF to 160 PSF).
+ One Sentence Takeaway: Recruitment is THE main driver for large Energy companies in Houston (the building/design that will help companies attract and retain top talent) which could mitigate the decline in SF per employee. I am particularly interested in how the Mobile Office will affect demand for office space in the future.

The Rise of the Gulf Coast
+ Link
+ Two Sentence Overview: Move over Atlantic and Pacific coasts, The Gulf Coast is the most economically vibrant of the three US coasts. The port of Houston increased 28.1% in foreign trade this year and the scheduled $5.25 billion widening of the Panama Canal in 2014 is going to be a game changer as the breadth of cargo ships able to make it to the port of Houston will increase dramatically.
+ One Sentence Takeaway: The friendly business environment in the Gulf coast relative to the unfavorable labor and regulatory constraints in the Atlantic and West coast ports is the main driver of the Gulf’s ascendency.

Capital ahead of fundamentals
+ Link
+ Two Sentence Overview: We all know there has been tremendous liquidity waiting on the sidelines ready to pounce on deals. The gentlemen in this video makes a strong argument that pricing is ahead of the fundamentals as both private and public money (US and international) are chasing the same stabilized core assets driving prices to frothy levels.
+ One Sentence Takeaway: Pent up demand has “bid up” pricing in markets (particular in the gateway markets), which could bode well for Houston as investors are pushed towards secondary markets and Texas cities in particular because of the strong job growth.

CRE Cliffnotes (5/9/11)

So, Bin Laden was not on the CRE Cliffnotes distribution list (he did not have internet in his compound, nor do I believe he had any interest in non-cave/”hidden compound” related real estate). There are however, so many questions I have regarding his recent “retirement” and the incredible troops that carried out the mission. To name just a few:

+ Given the decision to bury Osama Bin Laden at sea, could we have at least set up to a dunk tank?
+ Where can I get a SEAL war dog, is it true that they really have “Kanye teeth”, and will my lovely wife let me have one (a SEAL dog, not the teeth)?
+ Was finding the secret Osama compound any easier than finding the “top secret” Houston Exxon Mobile Campus on Google maps?

All kidding aside, I am thankful beyond words for our heroes who carried out the mission and appreciate all our men and women overseas…and their moms.

Let the Office Recovery Begin
+ Link
+ Two Sentence Overview: Friday’s job report was positive showing 244,000 jobs added in April (With an average of 233,000 in each of the last three months). New demand combined with a general lack of new supply should help tighten office markets and help support rent growth in the Gateway and Secondary markets.
+ One Sentence Takeaway: We should all cheer that 1Q 2011 brought the first US vacancy improvement in 4 years, but bear in mind we have a long way to go on the demand side -- If we averaged 233,000 jobs a month from here on out, we would get to pre-recession job levels sometime in mid-2013.

Houston Props
+ Link
+ Two Sentence Overview: Houston has been getting a lot of great publicity lately – and for good reason. Houston is in the top 3 in the US for fortune 500 HQ’s (beating my old home of LA), Fast Company’s City of the year, in top 5 for gross metropolitan product in the US, was the LIFO (last in first out) to the recession party, and finally its state just won the best state for business for the seventh year straight (which may have something to do with a Governor who will send letters to California to get businesses to migrate).
+ One Sentence Takeaway: I may be a little biased, but isn’t it time we officially call Houston a Gateway Market?

Chevron is thinking of paying what?
+ Link
+ Two Sentence Overview: While not confirmed, the WSJ reported that Chevron is considering buying the former Enron HQ for a hefty sum of $380 million. This $309 PSF figure would set a new benchmark in Houston after Brookfield’s bought Heritage Plaza at the end of 2010 for approximately $280 PSF.
+ One Sentence Takeaway: “Trash or Trophies” baby … and the trades that have occurred in late 2010 and early 2011 all point to the pent up demand for the well leased Class A buildings causing some low cap rates and high price tags for the trophy properties in top markets.

Foreign Dough
+ Link
+ Two Sentence Overview: Foreign investment in US Real Estate doubled in 2010 (13.37 billion in ’10 from $5.6 billion in ’09) and this is only the beginning. Investors outside the US (to include sovereign wealth funds) have their eye on US CRE primarily because of its fundamentals with a minimal amount of new supply and rental rates that are trending upwards.
+ One Sentence Takeaway: Initially these foreign buyers were looking at the Gateway Markets, but this foreign cash should begin to find its way into secondary and tertiary markets by year’s end.

Upsurge in Property Sales
+ Link
+ Two Sentence Overview: As indicated in the articles above, office property sales have come on strong in the 1Q of 1011 with investors who are beginning to look for more value. Velocity of sales for assets with minor leasing exposure is beginning to pick up.
+ One Sentence Takeaway: While demand for the Class A properties in gateway markets remains high, maybe this is the beginning of the end to the “barbell effect” as more distress comes on the market, the discount for distress starts to gradually narrow, and the demand for more value add properties picks up.

Thanks for reading. Hope all the moms had a very happy mother’s day and hope you have a great week.

Port of Houston Update

Yesterday for lunch I had the opportunity to go on a boat tour of the Port of Houston hosted by the port authortiy. It was great to meet and hear the port authority's CEO Alec Dreyer as he told the great story of Houston's port. Having been on a few tours of the port of Long Beach/LA. I was impressed with Houston’s port and its trajectory going forward.

2010 Port of Houston Stats:
+ 1st in the U.S. in foreign tonnage for 15 consecutive year
+ 1st in imports for 20 consecutive years and
+ 2nd in U.S. in total tonnage for 20 consecutive years
+ 7,852 ships called
+ 220.0 million tons handeled
+ 1,812,268 TEUs (20-ft. equivalent units)

With a great trend of increased activity in all areas, committed new development, and the widening of the Panama Canal in 2014, the Port of Houston will continue to increase its role as a main driver of economic activity in Houston. More appropriately for readers of this blog, I walked away with a good impression on its increased positive impact on Houston real estate fundamentals in the years to come.

Chevron to purchase 1400 Smith from Brookfield Office Properties

Chevron Tower set to trade

As the recent Wall Street Journal report indicates, commercial office property values are flying high in Houston with 1400 Smith (otherwise known as Four Allen Center) set to be the next record trade for the Bayou city. The Journal reports that Brookfield Office Properties is nearing a close of a deal that would sell the building to its tenant Chevron for approximately $380 million. I had to double check my math, but that equates to a $309 PSF on the 1,228,877 SF former Enron headquarter building. This figure would shatter the recent high water mark of $279.65 PSF Brookfield recently paid for Heritage Plaza. In that deal which closed in December of 2010, Brookfield bought a 83% occupied trophy asset from Goddard Investment Group for about a 6 cap.

Brookfield purchased Four Allen Center for $120 million in 2006 -- a building that will always be associated with the now infamous "crooked E" trademark signage at the front of the building. Many Houston market pros remember the see through empty floors of the building that became synonymous with the market downturn following the Enron collapse.

In a time where we are either seeing "trophies or trash" trade here in Houston it is very interesting to see the trend on prices of the recent Class A trades:

• 
  
  Unilev’s acquisition of Galleria Towers from Walton Street went for $176 million ($162/SF).


• 
  
  KBS REIT II purchase of the 388,142 SF Two West Lake Park from Younan Properties sold for $81 million ($209/SF).


• 
  
  The Opus Group bought Ten West Corporate Center II, a 250,260 SF building, for $45 million ($180/SF).


• 
  
  Wells Core REIT bought the 143,961 SF Westway One from Behringer Harvard for $31 million ($215/SF).
  

At a recent HFF capital markets event I attended I gathered that this trend is here to stay for the short term as captial is seeking a home and Houston has become very attractive to investors with many of the major gateway markets like New York and DC getting priced out. One thing is for certain, for Brookfield, the "E" now stands for "Earnings" as the savvy owner has decided to sell 1400 Smith at an ideal time in the market cycle.

Leasing Strategies

There is no question we have been through a tough couple years in leasing office space. With fewer tours, proposals, and ultimately deals, leasing professionals have to make sure they see every opportunity and make sure each one counts. Leasing strategies in today's market require a hunter mentality and an attitude that says "I will go above and beyond for the asset I steward". The following are some strategies you can implement that will hopefully separate your building from your competition:

Price your space accurately: Use Morning Start 10K Wizard: www.10kwizard.com

This is a great tool. Simply put, 10K wizard post leases that recently closed in the market place. The online resource enables a leasing professional to get the most recent real comps on rate, free rent, TI, moving allowance, reserve parking, etc.. A leasing professional can then strip away what he/she has learned from leases done in the past six months to analyze trends, price space appropriately, and make smarter deals. The one catch is in order for a lease to be posted, one side has to be public (either public company or public REIT).

Have a "best in show" Tour

The tour is the first opportunity to leave a great impression in the mind of the potential customer and his or her representative. A leasing professional cannot take these opportunities lightly and must ensure that each tour is "best in show". One recommendation to consistently have the best possible tour experience is to create pre-set budgeted “tour categories”. In honor of Tri season here is an example of different categories that could be used:

• 
  
  Sprint Tour: 2-3K SF requirement. $25 budget. Starbucks waiting for prospect and representative, with $5 gift card to local Starbucks (to highlight local amenity). Set and scripted "pre-planned questions” for tenant and tenant representative. Good Homework done on customer and his/her business. Standard welcome sign.


• 
  
  Half Tour: 3K-7K SF requirement. $50 budget. Starbucks and food waiting for prospect and representative (from local restaurant), with $10 gift card to local Chipotle (to highlight amenity). Deep knowledge of customer. Introduction to similar customers in building.


• 
  
  Full/Iron Man Tour: 7K requirement or greater: $150- $300 budget. Senior member of building ownership present (Asset manager). Make sure best reserved parking spot is open. Welcome sign for specific customer. $100 Gift certificate for two to local restaurant. Plan for a current tenant to stop by during the tour to give raving reviews of the building.

The specific budget and game plan for each tour is a discussion to have with your ownership team. In the end, the goal with each tour is to create an emotional attachment to the building and specific space. You want your potential customer to walk away saying “it sure felt good to tour that space” and “gosh, they really want me in that space". We all have to understand that our prospects are going to look at multiple buildings on a given tour day and so it is a necessity to do the little things that make your space and service stand apart. Make sure you and your space are remembered. Finally, and most importantly, remember the tour is about the tenant! The potential customer cares more about how the space will support their business objectives, their employee relationships/hiring, and ultimately profits than anything else so the leasing representative will be wise to make sure those questions are always answered in the positive.

Response: Respond with Speed and Quality

Our response to a tenant rep's question, proposal, counter proposal, needs to be awesome. Responses need to be as fast as possible with the highest quality as possible. Using the same categories as before, a pre-set budgeted “proposal categories” can help achieve quality with speed:

• 
  
  Sprint Proposal: 2-3K SF requirement. $0 budget. Normal proposal procedure with fast, friendly, and effective communication.


• 
  
  Half Proposal: 3K-7K SF requirement: $15 budget. Proposal with really nice cover letter and cover page. PDF sent and a bound copy sent to Tenant Rep (going the extra mile).


• 
  
  Full Proposal: 7K requirement to 10K: : $25 budget. Folder made with all questions answered before they are asked.


• 
  
  Iron Man Proposal: Big Deals or Huge renewals. $550 budget. I-pad with an electronic version of proposal uploaded sent to the tenant broker.

Again, this is a strategy discussion to have with all ownership team members, but the most important thing is that we respond with speed and quality.

Use Google Ad-words

With our Governor proactively courting businesses outside the state this is all the more important. Anyone who searches “Class A office Space” should get a link to your building. For very cheap a leasing professional can buy ad-words on Google so the building or portfolio is at the top of the search engine when people Google. This can be done for more general search queries like: “Houston office, best office, best property management”, or for more specific queries like: “Greenway Plaza office space”.

Conclusion - Adding Value

Leasing office space is an art as much as it is a science. These tactics will hopefully create more opportunities , but it will take a savvy leasing professional to know when to walk away from a deal. A difference in $.50 - $1.00 in back-end rates can equate to thousands of dollars in value for a landlord. There is a great balance between securing occupancy and securing the most valuable and safe leases -- and a leasing professional should never sacrifice one for the other. At the end of the day, having more deal velocity and potential deals created from the strategies above will only add to negotiating leverage and to the end result of having buildings with higher occupancy and the highest possible value of leases. Happy hunting!

CRE Cliffnotes 3/30/11

It has been a little over a month since I sent out a CRE Cliffnotes. All I can say is a response I said a lot when I was in the Air Force: “No excuse sir/ma’am!”. Quick overview of what this is: I know this group, and this is one of many emails that will flood your inbox today. The hope is that this is quick, easy to read, and value added way to get some CRE news for you. With that, let’s get to it:

Optimistic PWC Survey

+ Link

+ Two Sentence Overview: According to the MIT center for Real Estate, CRE prices increased 19 % in 2010 (2nd biggest on record). Also, cap rates declined in 27 of 31 office markets in 2010.
+ One Sentence Takeaway: Strong competition (large amounts of capital chasing too few deals) and low interest rates have increased prices dramatically -- we all await the pending impact of rising interest rates.

Pessimistic Jobs Article

+ Link

+ Two Sentence Overview: Newsweek article that details that many of the jobs people are taking as the economy rebounds offer lower pay, fewer hours, and worse benefits than some of the 8.75 million positions that disappeared because of the Great Recession. The article indicates that the economy has suffered a decrease in its ability to create pre-recession high-paying jobs. + One Sentence Takeaway: The good news for Houstonians is the Bureau of Labor Statistics reported Harris County as the second largest county for employment level growth in the country(21.2 thousand jobs from 9/09-9/10) – but hard to tell from the report if these jobs are “under employing” people from previously held pre-recession jobs.

Honey, I shrunk my workspace

+ Link

+ Two Sentence Overview: Work stations and cubicles are getting smaller. The most recent IFMA report shows individual workstations have decreased by 15 SF over the past 16 years.

+ One Sentence Takeaway: While cost is the ultimate driver of this decrease, I believe the underlying trend of companies redistributing space to meet the needs of a more social and collaborative workforce is here to stay.

Price of Oil and Houston Office Rents

• Link


• Two Sentence Overview: With fear (see article below) about Libya and pro-democracy uprisings elsewhere in the Middle East Oil hit $104.79 a barrel yesterday. This is a great graph that correlates the price per barrel of crude and the “Class A” rent rate of the Houston Office Market.


• One Sentence Takeaway: There is no surprise to anyone on this email that higher energy prices drives profits and (hopefully) hiring in the energy industry which positively impacts Houston Office absorption – although if you talk to our friends in the energy industry, they seem to prefer the still remarkably profitable, but much less negative attention garnering: $70-$80 a barrel range.

Oil – The Price of Fear

• Link


• Two Sentence Overview: The main reason our friends in the energy industry do not like prices too high is few things can short circuit a global economic recovery like rise in oil prices (when oil price goes up, consumers spend less). With Libya (the world’s 13th largest oil exporter) cutting the supply short by 1.4 million barrels a day and demand up as rich world recovers and demand in India and China surges, $100 prices are here to stay in the short term.


• One Sentence Takeaway: Saudi Arabia is the key: the OPEC leader causes the most risk if there is any uprising there, but is one of the main hopes for price stability with its rather large spare capacity of oil.

Sub Market Report - Energy Corridor

1401 Enclave had two of the largest lease signings in 4Q 2010 with SK&C and Callon Petroleum

Overview:

Absorption: In 2010 the submarket netted over 700,000 SF of positive absorption with positive activity so far in Q1 2011.

Flight to Quality: Tenants who previously occupied Class B space have used favorable market conditions to upgrade into Class A assets.

Rent rates: Class A and Class B quoted rent rates have been trending lower, but fundamentals are enabling concessions to thin with a flatting of rates expected to follow.

Vacancy: Class A and Class B vacancy rates are decreasing , with no new construction coming online in 2011.

The Energy Corridor was the strongest submarket in Houston in 2010 and finished the year strong with a very positive Q4 2010. The submarket had over 700,000 SF of positive absorption in 2010 with a trajectory that seems to be continuing into 2011. A good percentage of the absorption is occurring in the Class A buildings with tenants in Class B buildings taking advantage of the market and upgrading into better assets. While this "Flight to Quality" is consistent throughout the broader market, it appears to especially be playing out in the Energy Corridor.

The big news of 4Q 2010 of course was when KBR signed a 78,000 SF 11-year lease at Eldridge Oaks. This November announcement (which was in process for most of 2010) was followed with the information that KBR will more than likely be taking down additional space in the building (potentially up to 200,000 SF).

KBR was a welcome sight for Eldridge Oaks

WorleyPraons also leased 60,000 SF at Energy Center II and Alta Mesa took 40,000 SF at Energy Crossing. Both tenants relocated from Class B buildings to newer Class A assets. In addition, the companies SK&E Co. and Callon each made full floor deals at 1401 Enclave in the fourth quarter of 2010. We expect to see more of the "flight to quality" as we progress into 2011. Energy companies are paying to be in top tier buildings -- which should be a positive indicator for Class A landlords in 2011.

The Energy Corridor sales market has seen positive activity as well. In the early part of 2011, The Opus Group sold Ten West Corporate Center II to an affiliate of ING Clarion Partners. The property is 100% leased to Mustang Engineering. For the more risk adverse buyer C-III has put 1200 Enclave on the market. The former home of Cabot Oil & Gas has good upside but is sitting at 25% occupancy (pricing is rumored to be in the $115 to $120 PSF range). On the other end of the risk spectrum is Younan Properties, Two Westlake. The 100% leased building (ConocoPhillips and BP) is rumored trade around $220 PSF.

Forecast:

For Energy Corridor Landlords, progressively strengthening fundamentals make the submarket a great place to be located -- especially for Class A owners. However when the newer and more vacant developments begin to compete there will more than likely be a downward pressure on rents. The other mitigating risk is the lingering effect of the drilling ban. While the moratorium has been lifted, there have been no new permits approved since the ban was removed. This is the greatest threat for Energy Corridor tenants and subsequently landlords. However due to unrest it the middle east oil prices are at does bode well for the industry as a whole. Regardless, the Energy Corridor should continue to strengthen and Class A owners should see the benefits. It is important for Class A landlords to be ahead of the curve to know when to pull back on concessions.

CRE Cliffnotes (2/12/11)

After I watched Mubarak step down this week (He is the Egyptian dictator version of Brett Favre (he’s out/he’s in/he’s out)), I turned my attention elsewhere and began reading the Winston Churchill biography, The Last Lion, and came across this quote from Churchill: “I like a man who grins when he fights.”

I do too Sir Winston.

As we go about our prospective challenges and opportunities in the upcoming week, it made me want suggest we do it with a smile. Here are some stories from this past week:

The Uneven Comeback
• Link
• Two Sentence Overview: A rather ominous WSJ article, describing bifurcation of return in values of CRE (Class A buildings in quality markets seeing values that have increased 30% from 2009 lows with some trophy assets even approaching 2007 bubble prices). The flip side is that Class B assets in secondary/tertiary markets are suffering driving CMBS delinquencies up to 9.34% from 1% in 2007 and keeping office vacancies at near high levels (18% nationwide).
• One Sentence Takeaway: Low interest rates and “pretend and extend” have caused this rise in Class A property values, but Sam Zell is right – increased interest rates (which is inevitable) is going to change the game in a big way.

Whose Market is it anyway?
• Link
• Two Sentence Overview: Since 2008, there is no doubt tenants have had the leverage in negotiations with the ability to drive rates down and concessions up. As this JLL report indicates, the “tenants market” may be in its final hour (percentage of tenant favorable markets are projected to fall from 94% to 31% by 2012).
• One Sentence Takeaway: With very little construction in the past few years and decreasing supply of large blocks of space, we believe the Landlords will have a growing ability to decrease concessions and hold (even increase) rates for the larger contiguous blocks.

Top 10 CRE challenges in 2011
• Link
• Two Sentence Overview: So many great points to highlight in just two sentences, but here are a few: we lost 8.4 million jobs during the 2008-2009 recession and only gained back 1.1 million in 2010 (we are growing but we have a long way to go to get to pre recession unemployment). QE2 and extension of Bush tax cuts provided a short term boost but higher government spending/mounting national debt/concern of higher taxes/declining dollar/rising inflation and the inevitable increasing interest rates are HUGE concerns going forward.
• One Sentence Takeaway: With “pretend and extend” and low interest rates, this recovery is quite a different scenario from the market clearing made possible by the Resolution Trust Corp. in the early 1990’s.

Hiring: All talk and no Walk
• Link
• Two Sentence Overview: Even though hiring expectations are at near four-year highs, those good intentions are not translating into new jobs. Companies are opting to sit on record levels of cash, buy back stock, and continue to keep margins high by doing more with less.
• One Sentence Takeaway: This article doesn’t mention the uncertainty of health care costs that weigh on employers as well – hopefully some of these sentiments will translate into the type of job growth we need for a robust recovery.

Whose Market is it anyway?

We have great relationships with the tenant rep community here in Houston. One of the many great things about our job is the opportunity to be in constant dialogue with proven deal makers we respect. A conversation that seems to come up quite often these days centers around whether the market is beginning to turn in favor of Landlords. There is no doubt we have been in a protracted "tenant's market" with very generous concessions and falling rent rates in most Houston submarkets. However, we believe we see the tide beginning to turn in favor of office owners. It is all about supply and demand and given the supply and demand trajectories, we predict owners will begin to have more leverage in deals -- especially with the larger contiguous blocks of space. To give more color on the supply and demand dynamics, take a look at the limited supply of blocks over 100K SF by Houston sub market:

The trend for larger transactions is also a positive one. There were 16 transactions in excess of 100,000 SF in 2010 (Compared to 9 in 2009) with several large tenants currently believed to be in the market evaluating space options. All this is good news for landlords with large contiguous blocks. These owners should begin to take advantage of a transition of leverage in lease negotiations. We see the transition occurring in three stages:

The important factor for Landlords is to be ahead of the curve on this transition so they do not leave any value on the table from the yearly NOI to the exit value of the asset. Many smart tenants reps will begin to see the end is near and will try to lock in long term deals while the market is in a trough. Savvy owners will recognize this and begin to get a sense of the true leverage they have. As the progression begins, maximizing value is the name of the game for office owners.

CRE Cliffnotes (1.29.11)

Prologis/AMB in World Domination talks

• Link
• Two Sentence Overview: In a merger that some say could be as powerful as the more much more famous “Brad-Jolina” union, AMB and Prologis are in talks to combine the two companies which would result in the new entity controlling over 600 million SF of industrial product. While the combined assets of the two giants would make up 5.2% of the entire industrial market (creating awesome pricing power), it doesn’t appear the possible merger is going to be stalled by any antitrust suits.
• One Sentence Takeaway: As this great Reuter’s article points out, this is not really a “merger of equals” as Prologis comes into these talks from a position of weakness due to its massive debt load (due to its buying frenzy in the 2000’s PLD has a larger portfolio but much weaker balance sheet than AMB).

CRE Prices on the Rise?

• Link
• Two Sentence Overview: The US economy added approximately 1.1 million jobs in 2010 (the most since 2006), which (according to this article) has helped provided justification for higher CRE prices - especially the office sector. Reference is made to what has to be our favorite overused term of 2010: “bifurcated market”, as Class A++ properties are the ones leading these price indices up (Greenstreet’s is up more than 30% since the 2009 low).
• One Sentence Takeaway: The Class A assets pricing story is playing out in Houston with Heritage Plaza recently trading at a 6 cap ($279.65 PSF – talk about frothy) – while there is small demand thus far for non trophy assets.


Economy: Texas shines, but Houston…

• Link
• Two Sentence Overview: The Real Estate Center at Texas A&M released its 2011 monthly report that showed the lone star state’s economy again outperformed the broader US economy. The Texas economy gained 231,700 jobs from December 2009 to December 2010 (annual growth rate of 2.3 %).
• One Sentence Takeaway: While this is great for Texans (the US grew 0.8% over the same period), it wasn’t particularly great report for Houston as its 0.5% growth is last among the Texas metros (and less than the overall US growth).

2010: Top Houston Office Stories

• Link
• Two Sentence Overview: Just in case you were in the mood for a short review, I thought it would be helpful to share a blog we recently posted that quickly recaps some of the highlights from the Houston Office Market in 2010. From KBR staying put in the CBD in the beginning of the year to INVESCO renewing at 11 Greenway Plaza and the stories in between, I hope this is a beneficial and succinct overview for you.
• One Sentence Takeaway: We are looking forward and cautiously optimistic about what the Houston top stories will be in 2011.

BIG FOUR UPDATE: Q1 2011

Each quarter I will be giving a brief update of what former Greater Houston Partnership Chairman Patrick Oxford calls, four of Houston's "Crown Jewels": The Port of Houston, the Texas Medical Center, Houston's Energy Sector, and The Johnson Space Center. These four jewels are intergral drivers of the local Houston economy and truly set Houston aprt from the rest of the US.

Port of Houston
+ Panama Canal widening in 2014 will have a substantial and positive impact on the port and corresponding Houston business.
+ 1st in the US in foreign tonnage for 14 consecutive years

+ 1st in imports for 19 consecutive years.

+ 2nd in US in total tonnage for 19 consecutive

Johnson Space Center
+ New NASA budget ending the constellation program threatening 7,000 Houston jobs.
+ GHP efforts worked out a compromise that has mitigated these losses.

Texas Medical Center
+ Largest consolidation of medical buildings in the world (140+ buildings). 93,500 employees and $14 billion annual impact.
+ Future growth: $7.1 billion in approved building and infrastructure investments through 2012.
+ Impact of healthcare bill is yet to be determined but will undoubtedly influence this center.

Houston Energy
+ Oil Prices are up to $90.79 (as of 1/19/11), with indicators pointing towards higher prices.
+ There have been no new deep water permits granted since the BP Oil spill despite the moratorium being lifted.
+ M&A activity on the rise.