More attention to the human factor in building use and design. A blurring of functions between some market segments. Yet more demand for connectivity, walkability and integrated systems. Amenities proliferation and rampant e-commerce. Throw in the wild card of wiggy oil prices and you have some of what’s predicted for Houston’s 2019 real estate market, based on a series of year-end real estate outlook presentations, industry panels and an informal poll of participants. There’s momentum, they said. And there are challenges.
At Urban Land Institute’s (ULI) leadership presentation on emerging trends, for example, keynote speaker Byron Carlock, who leads PwC’s U.S. real estate practice, shared findings from the 40th edition of their joint annual forecast report. Among the national factors he highlighted that resonated locally: an abundance of capital, demographic shifts, retail transformation (toward experiential offerings), urbanization, rejiggered space utilization and the continued impact of e-commerce.
Meanwhile, amenities have “gone wild,” Carlock observed. The proliferation of services and facilities for tenant use has now jumped from residential projects to multi-tenant office developments as ways to stand out from the competition.
And then there’s AI and automation. “We watched ‘The Jetsons’ growing up and now we get to live it,” Carlock told the 300-strong ULI event audience.
Though market conditions appear healthy across most of the 30 major market cities studied, the industry’s evolution “has led us to a plateau” of activity, he said. (About 1 percent of report survey respondents believe 2019 will be ho hum.)
Given today’s smoother underlying economics nationally, he said, “The next downturn is not going to be our industry’s fault.”
In Texas, immigration issues combined with a workforce getting older (the average is now age 42) is on the industry’s radar, he said, both affecting the labor force which affects construction. Oil prices had rebounded but fell to under $50 per barrel in December.
On the housing end, the millennial generation’s bell curve has hit household formation. Some are moving into the ‘burbs, taking their collective desire for community connectivity and mobility with them. So, the suburbs aren’t dead, Carlock said, but this group of buyers is redefining what that location’s lifestyle means.
In housing construction, specifically at the high-end, developer Will Stolz of Stolz Partners, said Houston’s luxury condo product is getting better and the market for them is growing organically as people visit their friends who already made that leap and realize, “I could live there.”
Despite several properties under construction, the supply is “tight in 2019 and tighter in 2020,” Stolz said. “It takes a long time to get one off the ground.”
A custom luxury home builder, Scott Frankel, co-president of Frankel Building Group (FBG), said concepts like sustainability, connectivity and the integration of systems within a home “are no longer requests, negotiable or new. They’re basic expectations.”
From a design standpoint, client interest is now about “bigger spaces, not bigger homes,” meaning a return to thoughtful and deliberate design, he said.
Also, clients are entering the design-build process more educated about what they want, need and expect, he said. That has made custom projects as deliberate, precise and efficient as the clients themselves.
Following Hurricane Harvey, home elevation has become a more pointed discussion and concern for Houston clients, Frankel said. The company, however, was a proponent of pier-and-beam foundations even before new city regulations kicked in this fall requiring higher homes in flood plains.
In an interesting twist, family-owned FBG was its own client in the design-build process as it planned and debuted a collaborative studio of home-building resources and adjacent showroom to streamline and simplify the custom design-build experience.
ULI panelist Jonathan Brinsden, CEO of Midway Companies, said Houston’s office market is “healthy, but looking over its shoulder.”
The industry in general is transforming from space utilization to service, he said. “Fundamentally, we’re now in the hospitality business,” meaning learning about customer/tenant preferences and then optimizing their experience. And retailers are becoming data analytics ventures.
Paul H. Layne, central region president of Howard Hughes Corp. and another of ULI’s event panelists, said, “Houston still has a great run ahead.” Internal growth prevails rather than large company relocation, he said.
Also in 2018, the coworking concept really took off, in both existing buildings and in new developments exploring just how small to go, Layne said.
Some of the best returns are in redevelopment and re-animating properties, he said, particularly in well-located sites with uses that remain relevant.
Increasing density in office floor plans – as in shrinking the footprint per employee – has reached the threshold of about 125 square feet per person, about half that of five years ago, he noted.
At JLL’s market review in December, Bubba Harkins, senior vice president, office agency leasing, said 2018 has been “A Tale of Two Halves.” In the first two quarters of 2018, larger tenants were re-entering the market. In the second two quarters, the city’s smaller sub-markets were more active than downtown’s CBD and the Uptown Houston area, located four miles west of it.
In the third quarter, the city’s overall office vacancy rate ticked down slightly for the first time in 14 quarters, reaching 24.2 percent, a company market snapshot found.
The Houston economy has more drivers since the 2014 bottoming of energy prices, and companies are making a meaningful commitment by locking in now, Harkins said. “We’ve bounced off the bottom and are starting some ascent.” Subleasing is still high, but “there’s some burn-off coming” because there have been fewer announcements of large blocks of space hitting the market.
A flight to quality continues, he said, with remodeling of Class A office properties expected to continue as a mechanism for retaining and attracting tenants. Their expectations continue to escalate from basic need.
What’s coming in response? The human experience, Harkins said. Commercial properties are adding a lifestyle focus, with interest in connectivity, walkability and re-integration with the streetscape. Even in car-centric Houston.
This escalation in amenities and services remains strong as office (and residential) properties strive to differentiate themselves, Harkins said. The “standard of new” keeps advancing. So much so that office properties within the next two years might feel like high-end hotels, offering a concierge approach.
Tenant migration remains within the same sub-markets, he said. One emerging trend is interest in being near the urban center rather than in it. And there appears to be a more neighborhood focus to what’s in the pipeline. Mixed-use developments populating various sub-markets are examples of this.
Bottom line: Be unique, Harkins said.
New players in office ownership – and a fair amount of 2018 investor interest in Houston came from them – appear to be getting a toehold in the state or veering from more expensive gateway markets, observed Michael Zietsman, JLL’s international director and lead for Texas and Colorado investment sales, capital markets. “Investors want modern assets,” he said, defined as built within the past 10 years, in environments with mixes uses and having high-walkability amenities.
The industrial segment, meanwhile, continues to exhibit “robust demand” across the city, including areas not previously active, said JLL’s David Buescher, vice president, industrial services. Consumer behavior is now a demand driver, which is a new wrinkle for the Houston market, which typically supports oil services, manufacturing and purpose-built projects.
Given demand for last-mile distribution sites, he said there’s a blurring and a crossover between warehouse space and retailers as the latter realize they are fulfillment centers and rejigger their stock rooms to more efficiently accommodate that function.
When polled on retail, Jason Gaines, NAI Partners, senior vice president retail division, said that although retail continues to respond to the challenges of e-commerce nationally, Houston’s sustained annual population growth of 100,000, job growth and discretionary spending has meant a consistent market.
“There has not been a noticeable setback in occupancy, average rental growth, or overall purchase/lease demand during the decade,” he said, unlike many other metropolitan U.S. cities that have “struggled to maintain and absorb retail centers.”
As Houston becomes more densely developed, its retail development is going vertical, he noted. And while macro-economic factors are affecting and sometimes eliminating national retailers, “a wave” of new retailers has hit the market with plans to expand throughout Texas.
Gaines pegs retail development as “conservative and calculated” as it is addressing not only e-commerce but replacement cost escalation attributed to materials and labor.
Headwinds? E-commerce, as is the case nationally. In Gaines’ view, however, if Houston or Texas retail catches a cold, “the Midwest and northeast cities will come down with the flu.”