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Houston’s Monthly Metrics: November 2015

The following article originally appeared in the November newsletter to clients of Kiley Advisors, LLC for the purpose of providing the latest leading indicators and industry issues to those clients.  Reprinted with permission.

As the year comes closer to an end, and the downturn becomes more prevalent, a more common projection of 2017/2018 for recovery continues to emerge. However, Houston will not be lifeless over the next few years, but rather a slower, normal pace, that may give contractors the breathing room they needed after 2014’s frenetic pace.

City of Houston permits show residential permitting down nearly 10% from a year ago, which tracks with Metrostudy’s projection of 2015 starts being down 10% from 2014 at year end. Even with a 10% decline, Houston’s single family market is easily still the leader in US, and has the tightest supply of lots of the major Texas metros, making it very difficult for Houston to oversupply lots going forward. The Grand Parkway, particularly south of the Westpark Tollway, has remained the strongest area, with Northeast Houston also showing strength in part due to the downstream activity and the Generation Park development. Looking ahead, onerous new closing regulations, lot shortages, higher labor costs, financing difficulties and home affordability are all challenges that point toward a decline into 2015 and 2016 before a recovery is expected.

CBRE Q3 Office report shows vacancy now at 13.2% as sublease space has increased to 7.1 msf. Asking rents continue to hold but concessions are on the rise. 10.7 msf of construction is underway over 32 projects, with 52.4% pre-leased and 13 spec developments (compared to 17+ msf a year ago). CBRE estimates 12 msf to be delivered in 2015 with another 8 msf to be delivered in 2016, and noted that a sublet bubble will hit the market in 2018 and 2019, the office market’s pivotal year, when the majority of these subleases expire. CBRE also stated that a recent study suggests the Texas Triangle will add 8 New York City’s, in population, by 2040, bringing over 65 million people, who will need to work, live and play. CBRE also reported that the BBVA building closed this week a rumored 5 cap rate and over $550 per sf with Spanish investors who are confident in the Houston market long term.

CBRE’s Q3 Light Industrial report shows activity slowing but stable as construction has slowed to 9.3 msf, nearly half is the new headquarters for Daikin, and a vacancy rate of 4.7%. With the Purchasing Manager’s Index below 50 for the ninth consecutive month, and employment growth waning, developers are becoming more cautious in this segment.

Adam Purdue, with the University of Houston, recently noted that roughly $45 - $50 billion in total industrial investment is underway in the Houston metro area, of which $17B is expected to complete in 2017 (peak), $12B in 2018 and a continuing decline in completions in 2019 and 2020, perhaps providing workers back into the commercial arena as the rest of Houston’s economy begins to accelerate again.

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