Real Estate Forum - February 2008

“Rental rates are the highest we’ve ever seen in the Dallas/Ft. Worth area,” notes Jim Lob, senior vice president of UGL Equis in Dallas. “I expect rental rates to remain at this level throughout 2008, however I don’t expect we’ll see additional increases. There is currently more than six million sf of new office space under construction, so this will keep rates stable.”

A spate of construction projects was completed last year. According to Marcus & Millichap, 2. 8 million sf of office space was delivered. This year, several speculative projects will come on line, adding 4. 1 million sf of new space to the supply.

Also likely to see a boom in new construction is the industrial sector. Some 16. 6 million sf of absorption brought vacancy over the year to 8.9% from 9.7%, says CBRE, but with 18. 1 million sf currently under construction, there is some concern for the sector this year.

“The bustling logistics industry will maintain momentum across the leasing market in the year ahead,” predicts Dave Richards, SVP and managing director at Grubb & Ellis. “The scale will tip in the tenant’s favor, as a tremendous amount of new product will provide users with opportunity.”

New jobs will boost demand for apartments, Marcus & Millichap notes. Construction activity is expected to pick up, with 8,000 new units slated to come to the market this year, compared with 5,260 apartments last year. Steady absorption should leave the multifamily vacancy rate unchanged at 8.5%, while asking rents should climb 3% to $780 per month.—Jennifer McCandless

Houston

THE CONTINUING SUCCESS STORY OF THIS city has been its booming industrial properties. High-energy prices, low interest rates, a weak dollar and a growing economy have brought Houston’s industrial market into an expansion

phase, says Grubb & Ellis. The sector posted another phenomenal year in 2007 with over 8. 1 million sf of positive net absorption, with warehouse/distribution properties recording the largest annual gain. The overall industrial vacancy fell to 6%, a level unseen since 1998.

This remarkable demand is due in large part to increased activity at the Port of Houston and the booming energy industry, which according to Grubb has led oil-field service companies to expand in or relocate to the area. “As the Port of Houston’s expansion attracts more container traffic away from the West Coast ports, industrial property will remain attractive to expanding tenants and investors looking to capitalize on future growth,” says Randy Moore, executive vice president and regional managing director of Grubb & Ellis.

Construction also reached a new high at 9. 5 million sf in some 91 buildings at year’s end. This far surpassed the 1998 record of 7. 1 million sf, reports CB Richard Ellis. Much of this activity has been driven by the Port of Houston’s recent expansion via the Bayport Container Terminal, which will enlarge capacity to 2. 3 million TEUs, an increase of over 200%, says Grubb. In the year ahead, the firm anticipates vacancy to level off as new space deliveries keep up the pace and even outrun tenant demand.

A robust energy sector coupled with strong employment growth—some 60,000 jobs were added in 2007—has also helped drive Houston’s office market forward. Net absorption, according to Transwestern, came in at 1. 4 million sf in the fourth quarter, representing the ninth consecutive quarter of positive take-up. The firm registered 4. 8 million sf of absorption for the year, while Grubb & Ellis recorded 5. 7 million sf in total. However, CBRE measured 505,743 sf of negative absorption for the final quarter, largely due to one million sf put back onto the market by Hewlett-Packard.

Nevertheless, for the third straight year Houston saw solid demand that reduced the citywide vacancy from 16.4% at the beginning of 2005 to 11% by the close of last year, says CBRE. Transwestern recorded the overall

vacancy rate in Metro Houston at 10.9%, down from 11.7% the prior year.

With class A vacancy dipping below the 10% mark in the CBD for the first time since 2002 and the majority of the suburban office submarkets following suit, tenants witnessed a surge in asking rents in 2007, notes Grubb. Landlords were able to achieve class A rents in excess of $35 per sf in the CBD and more than $25 per sf in the suburbs.

In the year ahead, Houston will see substantial additions to its inventory with 3. 6 million sf projected to deliver in 2008. With slower economic growth predicted, absorption is expected to decrease at the same time the construction pipeline continues to expand, says Grubb. Conversely, CBRE maintains that new development is still relatively restrained. That, coupled with class A vacancies under 7% throughout the city, says the firm, should bring another year of falling availabilities and moderate rental increases.

On the retail front, strong population and job growth is pushing expansion. But new supply will place upward pressure on vacancy in the year ahead, relates Marcus & Millichap, which anticipates retail sales to grow by more than 4% this year. An upsurge in high-end housing catering to professionals within the Inner Loop and West Downtown is increasing population density and resulting in a wave of new retail properties.—Danielle Douglas

Phoenix

IN THE GREATER PHOENIX AREA, THE office and industrial markets appear to be on divergent paths. The office sector, although still healthy, is showing signs of softness as it begins to feel the aftershocks from the housing market crash. Meanwhile, there does not appear to be enough industrial space to satisfy demand from incoming businesses.