Houston has one of the strongest economies in the nation and has lead the nation in job creation since the recession. For every job lost during the recession, two new jobs have been added.
Analysts feel 2013 could be one of the best years on record for the Houston economy. Residential and commercial real estate sales, auto sales, residential construction, commercial leasing, and airport traffic are at or nearing record levels, leading into a potentially strong 2014-15. Still, there are a few indicators to watch. The number of new oil rigs has flattened, exports have slipped, and employment growth has slowed.
With that in mind, most analysts expect continued job and economic growth for the next two years. The greater Houston area added 98,000 jobs in 2012, almost a 4% growth from the previous year. Conservative estimates forecast 72,400 jobs in 2013, yet presently employment has slowed to around 60,000+/- jobs created during the first ten months of 2013 (although these slower numbers could be caused by the government shutdown), a little slower than anticipated 70,000+/- jobs in 2014. Residential and commercial real estate sectors are poised for growth as a result.
Houston growth is similar to the experiences in the early 80’s, but with a better balanced economy with energy making a smaller percent of employment growth. Houston’s employment options and affordable cost of living have made it an attractive destination for people from all over the country.
Existing home sales have set records for twenty nine consecutive months. Home buyers sent housing inventory levels down to 3.1 months in October compared to 4.4 months one year earlier, but they also contributed to a record total dollar volume. According to the latest monthly report prepared by the Houston Association of Realtors (HBOR), home sales climbed 13.5 percent year-over-year, with contracts closing on 6,020 single-family homes. That is the lowest one-month sales volume since March.
The median price of a single-family home rose 8.9 percent to $177,500. The average price increased 7.9 percent year-over-year to $239,773. Both figures represent the highest prices for an October in Houston. Houston currently has the highest home prices it has ever had. The metro market cannot have this strong job growth and some of the strongest rent increases in the nation on multifamily rental rates and not have home prices rise in the next 12 to 24 months.
Sales activity in the early part of this decade (2001 to 2006) was influenced to a large extent by subprime financing. Homes sales today are driven by more solid underwriting fundamentals. The Houston area has created more than 300,000 jobs since Houston’s recession which ended early 2010. New residents are moving to Houston at the rate of 180 per day.
Another positive is the U.S. Census Bureau reports that median family household incomes in Houston stood at $65,854 in ’12, up 5.2 percent from ’09. That compares to a 2.4 percent increase for the nation as a whole.
How did the recession and downturn in the national housing market affect the prices of homes in the Houston area? The Houston housing market has fared much better than the national housing market. Prices in Houston started declining in July of 2007 and fell approximately 7% (based on incomplete data for 2012). By mid-year 2011, values began stabilizing. You should keep in mind that this figure is for the overall market, not for individual areas.
Since the ability to acquire most commercial construction financing remained non-existent through the first of 2011, most apartment developers were not ready for the post-recession renter surge. Now, over 9,200 rental units are under construction, yet absorption has kept pace, forcing interest from equity sources for more apartment building through 2014. West inner core, class ‘A’ apartments continue to be the most desired, leading a thirteen year high on rent rates. The continued strength of this market with strong performance in most submarkets in Houston will continue to drive equity’s interest in acquisitions in the region.
Energy sector expansion continues to be a strong catalyst for the economic growth in Houston. It has allowed over 5.1 million square feet of office space to be delivered this year, more than doubling the 1.9 million square feet of 2012, with no uptick in vacancy (which still sits at 15%). Let that sink in – over 5 million more square feet with rents continuing to increase. Class ‘A’ properties in the established business hubs – Galleria, Uptown, The Woodlands, etc. have had strong absorption, another sign of the strength of the market.
Phillips 66 split from ConocoPhillips, and will look for a new headquarters in the Houston area, most likely in the Katy energy corridor area. ExxonMobil’s staff consolidation will bring 2,000 more employees to the Woodlands campus from Virginia. These expansions, with supporting industry, have pushed the planning pipeline to over 13 million square feet of competitive office space in the future. The market continues to be tight presently, but should continue to be monitored as these many projects come on line.
Above average job creation and limited new office supply will continue to support Houston’s market recovery through 2014, although area wide vacancy could end up over pre-recession levels. That said, Houston will be one of the tightest office markets in the nation. The continued expansion of energy and technology support the increased space demands of office and industrial. With just 450,000 square feet delivered in 2012 (a fifteen year low) several large projects have been announced, and the planning pipeline continues to expand.
The impressive positive demographic trends (median incomes in Houston have risen 10% in the last year) have drawn many retailers to Houston this year. 1.3 million+/- square feet have come on line this year, with just over 1/2 of that slated for completion in 2014, possibly showing the current retail building boom slowing through 2014. In addition, the general uncertainty of the national retail market should slow this market in 2014-15. Rents should continue to modestly increase through 2014, but will bear watching. This is due to the financial issues national chains are facing, and potential current space becoming available for expansion, rather than new construction. Even though this is more of a negative outlook for this channel, there continues to be good interest from equity for investment. The market should remain stable through 2014.
Houston’s broad based economy continues to drive demand for industrial real estate, with over 7 million square feet leased last year. Occupancy has stayed at a industry leading 95%+, constrained primarily by the lack of high demand class ‘ A ‘ space. Houston appears to be one of the best positioned metros for expansion and investment. Nearly 40% of the 7 million feet under construction is reportedly preleased, again a show of the robust economy and demand of the market.
The Port of Houston is the busiest seaport in the nation in terms of ship traffic, and the second busiest port after New Orleans in terms of total tonnage. 236 million tons of cargo passing through the port directly supports 54,000 jobs, and countless other jobs downstream and in support industries. With the US surpassing Saudi Arabia and Russia as the top energy producer this year, and becoming the top oil producer overall by 2015, we expect traffic at the port to continue to increase.