Houston Trends 2014 Slide Deck

2014 Commercial Real Estate Market Update

http://parksyouthranch.org/

Featured Speaker

If you would like a copy of tonight’s presentation,

please visit www.colliers.com/Houston/TRENDS

http://www.colliers.com/houston/trends

http://www.colliers.com/kc.conway

www.colliers.com/kc.conway

K.C. Conway, MAI, CRE

Chief Economist | USA

Colliers International

[email protected]

TRENDS 2014 “Over the River and through the Woods …”

What’s 2014 Outlook at Grandma’s House in

Houston? Texas? U.S.?

February 4, 2014

The Entrepreneurs Vs. KRONIES Action Figures!

Parts & Labor, The Bancor & “G-Force” on “K” Street

5 http://www.youtube.com/watch?feature=player_embedded&v=ZDXuPQ9ML9E

http://www.youtube.com/watch?feature=player_embedded&v=ZDXuPQ9ML9E

“A” – Value of Argentine Peso – or Turkish

Lira at end of 2014 … but monitor currency! “B” – What is real value of a Bitcoin?

($10 to $1,200 trade range in 2013)

“C” – Why a major American city with the

world’s busiest airport can’t handle 2” of snow

“D” – Why Houston wasn’t ranked #1

among Top Markets in

2014 Emerging Trends?

7

The A, B, C, D Questions KC won’t answer: “ A man has got to know his limits” - Clint Eastwood

“A” – Port of Houston will remain most

Irreplaceable - and America’s GDP port!

“B” – The BLS will incorrectly estimate

job growth 12 times again in 2014!

“C” – Colliers will be an MVP relationship &

advisor to you again in 2014!

“D” – Debt Capital will never be this good.

Don’t delay or “sit on the fence” in 2014!

8

The A, B, C, D Definitive KC Forecasts for 2014: “If you don’t know somethin’, what good are ya?”

9

What did KC forecast for 2013? A 100% score after 80% in 2012 Jan ‘13 KC said: “Beware of Q1, but be prepared for a robust 2H2013.”

GDP:

Pulls back to 1% or less in 1H2013,

but Rebounds >2% in 2H2013

(No “Cash for Clunkers” or housing tax

credit artificial stimulants).

Employment:

Focus on Labor Participation rate

(63.6%), U-6 (14.4%), & expect

another year of <200k/mo. job

growth

U-3 could drop below 7% just on

workers losing Unempl. benefits.

Interest Rates:

Get ‘eer done in 2013!

2nd U.S. Debt downgrade >50%

FED balance sheet @ 20% US GDP

Monitor commodity prices.

Housing:

The recovery is real!

NAHB IMI > 200 markets.

US Census Housing Occupancy

(50 MSAs 90% to 96%)

MF:

Overbuilding Risk is exaggerated

Too much in just a few MSAs (DC)

TX is OK: 1 unit : 9.2 jobs in 2012

Office:

ICEE office MSAs still hot.

Recovery in housing will add to

suburban absorption.

½ the 71.5msf of new office

construction is Med Office

Industrial:

Ports will remain an imPORTant story!

Port Labor Strife not done – Feb 6, 2013.

Leasing activity remains robust

Dearth of new constr & assets for sale.

So let’s look at 2014 & start with GDP: GDP 2013 Trend: Q1: 1.1% / Q2: 2.5% / Q3: 4.1% / Q4 3.2% = 2.7% for 2013

GDP 2014 Forecast: Slows back <2% in 1H due to inventory build in 2H 2013

10

GDP EKG 1950-2013

1950 peak; 1958 low; 3.25% L-Term Trend

What drove GDP in 2H2013? Build in Inventories in Q3; Consumer Spending in

Q4 (Advance view) 2013 GDP: Q1: 1.1%; Q2: 2.5%; Q3: 4.1%; Q4: 3.2% (Adv Est)

Employment …

Monitor ADP, Challenger, NFIB, ISM Vs. BLS

11

UNEMPLOYMENT – Is it really declining?

BANKS & The FED …

Are we done with Bank Failures? What will be different?

12

BANK FAILURES – Will 2014 be different than 2013?

What is different in 2014?

FDIC gets a premium for deposits & failures not tied to housing.

BANKS & The FED …

Banks back to lending? Beware the Bank Stress Tests

13

35% vs. 21%

decline in CRE

value in Yr-End

2013 CCAR/Bank

Stress tests.

“March Madness”

ahead for banks

TX Banks

Comerica & BBVA

appear to be

slowing

CRE loan growth.

Watch Citi.

Banks & the FED: Volatility in 2014!

A new FOMC! QE taper; Currency Crises; GDP; Jobs???

14

The FED

meets 8

times/yr.

Structure of the FOMC The Federal Open Market

Committee (FOMC) consists of

twelve members--the seven

members of the Board of

Governors of the Federal Reserve

System; the president of the

Federal Reserve Bank of New

York; and four of the remaining

eleven Reserve Bank presidents,

who serve one-year terms on a

rotating basis

NE Vs. MW Yellen

is now

FED

Chair!

Dallas FED being a voting member of

FOMC in 2014 is a significant!

INTEREST RATES

Let’s hope this correlation holds up for 2013

15

Jan 1

1982

14.59% Jan 1

2013

3.01%

Expect

Volatility & a

10-Yr range of

2%-4%

STATE TAX RATES

NE, DC region & CA worst, but TX not among 10-Best?

16

Why isn’t TX

among 10-Best

&

How does FL

make it among

10-Best

with such high

auto ad

valorem, hotel

occupancy, etc.

taxes? Need to add SC

with high point

of sale on R.E.

CMBS … $340 Billion to ReFi Metrics Improve as 2nd Wave comes ashore 2014-17

17

CMBS ReFi Wave 2.0 Bigger than Refi Wave 1.0 / Cap Rate & Interest Rate Compression?

#1 #3 #2

#1

#2

#3

Source: TREPP

Watch List Loans

Delinquest Loans

Housing …

Monitor ADP, Challenger, NFIB, ISM Vs. BLS &

NAHB HMI (Builder Sentiment Index

18

Housing – Best year since 2007, but can it continue?

(AP) — U.S. home construction ended 2013 with the best showing since the housing bubble

burst. Builders broke ground last month at a seasonally annual rate of 999,000, the fastest in

five years. For the year, builders started 923,000 homes and apartments, up 18.3 percent from

2012. It was the strongest since 2007, when 1.36 million homes were started.

The avg. rate on a 30-year mtg fell to 4.41% - down from a peak of 4.6% in August.

Each home built creates 3 jobs for a year and generates $90,000 in tax revenue, according

to data from the homebuilders association.

http://www.nahb.org/reference_list.aspx?sectionID=2223

http://www.nahb.org/reference_list.aspx?sectionID=2223

Housing … Multifamily

NAHB HMI (Builder Sentiment Index)

19

Not

Overbdg

MF

Why?

>8:1 ratio

Housing … Multifamily

Houston can absorb the new supply! Sales are strong!

20

Manufacturing …

ISM Strong (5%); Warehouse Absorption Strong… Houston?

21

Manufacturing / Intermodal / IANA / Warehouse Absorption

Industrial Absorp. – Port, Air Cargo, Intermodal

Houston has lacked new supply to rank high!

RailTime: 2013 a record for Intermodal

ISM Vs. GDP

More granular – backlog orders, etc.)

FTZs – Foreign Trade Zones … Next annual report to Congress due out Aug 2014!

22 http://enforcement.trade.gov/ftzpage/index.html

MEXICO

wage rate a

big story?

http://enforcement.trade.gov/ftzpage/index.html

Ports & Panama Canal…

West coast port strike threat June 2014!

23

www.colliers.com/us/port-2H

http://www.colliers.com/us/port-2H



The 7 Class 1 Railroads… Mexico wage rate &

KCS a big-deal to TX & mfg. story!

24

The 7- Class I RRs (Note CN (red) & KCS (brown)

“All that happens on the ports, doesn’t

stay on the ports” – Rail, Intermodal!

http://www.epaducah.com/media/139405/us_rail_map_new.jpg

Ports & Industrial R.E …

The 2014 influences heading into 1st Post PMX Decade.

25

P-Canal 50%

cost overrun

dispute

Labor Strife: Chile

now (fresh fruit and

copper); West-

coast June 2014

Who will be able to

refuel Duel-Fuel?

SE (Jax) & Gulf ports

have advantage

And one other …

NY faces new competition

from Mid-Atl & Great Lakes

ports, like Cleveland

26

Close with ONEI & AFIRE TX MSAs dominate top-5 / Houston ranked #5 at Yr-End 2013

r

YE 2014

Rank Metro Overall score

5-year

job gr.

1-year

job gr.

Unempl.

Rate

Weekly

earnings

5-year

earnings

growth

1-year HPA /

Home $ Appr

1 Austin 84.186 11.80% 3.80% 5.20% $929 14.50% 9.00%

2 Dallas-Fort Worth 84.161 6.00% 3.60% 6.00% $943 17.90% 6.80%

3 Provo, Utah 82.503 6.70% 4.30% 4.90% $803 47.00% 10.70%

4 San Jose 80.498 3.40% 3.30% 6.80% $1,456 16.60% 16.90%

5 Houston 79.632 9.00% 3.30% 6.10% $973 15.80% 6.00%

6 Oklahoma City 76.092 3.60% 2.70% 4.70% $786 22.30% 2.60%

7 Honolulu 75.224 1.00% 1.50% 3.80% $824 14.60% 6.80%

8 Denver 74.359 2.20% 2.70% 6.50% $1,008 14.90% 10.30%

9 Ogden, Utah 74.31 3.20% 4.00% 4.90% $720 13.70% 6.20%

10 Minneapolis-St. Paul 73.393 2.30% 2.30% 4.70% $942 13.50% 8.10%

11 Boston 70.943 2.90% 2.50% 6.20% $1,102 13.70% 3.40%

12 Grand Rapids, Mich. 68.914 6.80% 3.70% 6.40% $765 2.70% 6.20%

13 Tampa-St. Petersburg 67.106 2.20% 4.40% 7.00% $789 4.60% 8.40%

14 Salt Lake City 66.933 3.20% 3.50% 4.50% $915 6.60% 9.90%

15 Indianapolis 65.769 2.60% 1.50% 6.90% $888 16.70% 2.20%

16 Charleston, S.C. 65.051 2.40% 1.30% 6.90% $778 34.30% 6.10%

17 Nashville 64.359 8.50% 3.70% 6.80% $793 4.60% 4.10%

18 San Francisco-Oakland 64.012 0.90% 1.50% 6.50% $1,142 5.90% 17.10%

19 Orlando 63.245 0.80% 2.60% 6.60% $805 3.80% 10.60%

20 Seattle 63.22 0.10% 2.90% 6.10% $1,170 12.20% 9.90%

21 Pittsburgh 62.75 3.40% 2.00% 7.20% $851 24.30% 3.40%

22 Madison, Wis. 62.452 1.80% 1.50% 4.50% $1,002 22.20% 2.60%

23 Des Moines, Iowa 61.735 2.20% 1.90% 4.70% $926 13.30% 2.10%

24 Bakersfield, Calif. 59.037 5.70% 1.50% 10.90% $899 2.00% 15.20%

25 Washington 59.011 1.50% 1.10% 5.40% $1,177 13.10% 4.80%

52 San Antonio 49.581 4.00% 0.60% 6.00% $751 -8.50% 2.70%

72 El Paso, Texas 41.289 2.30% 1.00% 8.70% $568 12.40% 1.60%

AFIRE – Close on a hot note!

What’s Hot – Assoc. of Foreign Investors in R.E.

27

AFIRE – U.S. tops globally & Ind’l R.E. tops (first time in a decade)

Port cities

move up in

rankings!

Thank You

K.C. Conway, MAI, CRE

Chief Economist | USA

Colliers International

[email protected]

www.colliers.com/us/kcconway

http://www.colliers.com/us/kcconway

29

Commercial Real Estate Market Update

February 4, 2014

HOUSTON’S BRAG BOOK 2013-2014 Headlines

• Houston, “The Best City In America” (BUSINESS INSIDER)

• The Highest Demand for Engineering Jobs in 2013 (MONSTER.COM)

• Best Cities for your Career in 2013 (PAYSCALE.COM)

• Houston Makes Top Five Lists For U.S., Global Real Estate Investment (AFIRE)

• Fastest Real GDP Growth Among Large MSA’S (THE BUREAU OF ECONOMIC ANALYSIS)

• Top Cities for Global Trade (GLOBAL TRADE)

• Largest Export Market in U.S. (U.S. DEPARTMENT OF COMMERCE, INTERNATIONAL TRADE ADMINISTRATION)

Industry Forecast of U.S. Tight-Oil Production

Organization for Economic Co-operation &

Development

OECD – 34 Developed Countries – Blue - 1.25 Billion People (18%)

Non – OECD - 5.85 Billion People

China – 1.34

India – 1.24

Africa - 1.0

Latin Am – 0.6

Russia – 0.14

Oil Consumption - 2010

19%

14%

19%

48%

U.S

EU

Other Developed

China, India,Undeveloped

U.S – 12 Barrels per Person per Year (300MM People)

China – 2 Barrels per Person (1,344MM People)

If people in China use 3 Barrels per person we need to cut our

consumption by 4 Barrels per person to stay even on demand.

Alternative Energy and more efficient consumption required

Projected Demand – Going UP

0

100

200

300

400

500

600

1990 2000 2010 2020 2030 2040

OECD

Non OECD

Quadrillion Btu

Non OECD –

56% Increase

Projected

Energy Sector Projected Employment

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

2013 2025

Source: IHS

• Competition for employees

will be fierce.

• Houston will be the largest

beneficiary of this boom.

HOUSTON OFFICE – 179.8M SF

HOUSTON OFFICE MARKET INDICATORS

YE 2012 YE 2013

CITYWIDE NET ABSORPTION (SF) 4.2M 2.9M

CITYWIDE AVERAGE VACANCY 14.5% 14.0%

CITYWIDE AVERAGE RENTAL RATE $24.25 $25.16

CLASS A RENTAL RATE

CBD $37.02 $38.16

SUBURBAN $28.20 $30.18

CLASS A VACANCY

CBD 9.8% 10.2%

SUBURBAN 11.4% 10.8%

At the close of Q4,

10.7M SF of new

office development

was under

construction, more

than any other U.S.

metro.


10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

$16.00

$18.00

$20.00

$22.00

$24.00

$26.00

$28.00

Houston Average Rent Houston Average Vacancy


Average Cap Rate (Yield) Average Price ($) Per SF

Sales by Total $ (mil)

0

1,000

2,000

3,000

4,000

5,000

6,000

Q4 '09 Q4 '10 Q4 '11 Q4 '12 Q4 '13

Rolling 12-mo. Total Quarterly Vol.

0

50

100

150

200

250

Q4 '09 Q4 '10 Q4 '11 Q4 '12 Q4 '13

Houston United States

4%

5%

6%

7%

8%

9%

10%

11%

12%

Q4 '09 Q4 '10 Q4 '11 Q4 '12 Q4 '13


http://www.rcanalytics.com/

HOUSTON INDUSTRIAL – 483.6M SF

HOUSTON INDUSTRIAL MARKET INDICATORS

YE 2012 YE 2013


CITYWIDE AVERAGE VACANCY (%) 5.2% 5.2%

CITYWIDE AVERAGE RENTAL RATE ($) $5.77 $5.90

NEW SUPPLY DELIVERED (SF) 4.0M 8.0M

4Q UNDER CONSTRUCTION (SF) 2.5M 4.4M

8.0M SF of

new inventory

delivered in

2013, 4.6M SF

was spec

construction!


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

$5.00

$5.20

$5.40

$5.60

$5.80

$6.00

$6.20

$6.40

Houston Average Rent Houston Average Vacancy



$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

Q4 '09 Q4 '10 Q4 '11 Q4 '12 Q4 '13



$0

$10

$20

$30

$40

$50

$60

$70

$80

Q4 '09 Q4 '10 Q4 '11 Q4 '12 Q4 '13


2%3%4%5%6%7%8%9%

10%11%12%

Q4 '09 Q4 '10 Q4 '11 Q4 '12 Q4 '13



HOUSTON RETAIL MARKET INDICATORS

YE 2012 YE 2013



CITYWIDE AVERAGE RENTAL RATE ($) Statistically Irrelevant

NEW SUPPLY DELIVERED (SF) 1.1K 880K

4Q UNDER CONSTRUCTION (SF) 1.1M 947K

HOUSTON RETAIL – 264.7M SF

Houston’s Strong

Economy Helps

Push Retail

Vacancy Rate to

Historic Low




0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Q4 '09 Q4 '10 Q4 '11 Q4 '12 Q4 '13



0

50

100

150

200

Q4 '09 Q4 '10 Q4 '11 Q4 '12 Q4 '13


4%

5%

6%

7%

8%

9%

10%

11%

12%

Q4 '09 Q4 '10 Q4 '11 Q4 '12 Q4 '13



HOUSTON MULTI-FAMILY – 574.5K Units

HOUSTON MULTI-FAMILY MARKET INDICATORS

YE 2012 YE 2013

UNITS ABSORBED 14,664 16,516


CITYWIDE AVERAGE RENTAL RATE ($) $806 $857

UNITS DELIVERED 6,818 14,455

4Q UNDER CONSTRUCTION 2,831 20,479

The average

monthly rent amount

increased 6.0% in

2013 and is

expected to

increase 6.0% in

2014.

HOUSTON MULTI-FAMILY - 574.5K Units

HOUSTON MULTI-FAMILY – 574.5K Units

Average Cap Rate (Yield) Average Price ($) Per Unit


0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Q4 '09 Q4 '10 Q4 '11 Q4 '12 Q4 '13


0

20,000

40,000

60,000

80,000

100,000

120,000

Q4 '09 Q4 '10 Q4 '11 Q4 '12 Q4 '13


4%

5%

6%

7%

8%

9%

10%

11%

12%

Q4 '09 Q4 '10 Q4 '11 Q4 '12 Q4 '13



HOUSTON HOTEL MARKET INDICATORS

YE 2012 YE 2013

TOTAL UNITS 74,630 75,837


CITYWIDE AVERAGE DAILY RATE ($) $94 $101

UNITS DELIVERED 427 553

HOUSTON HOTEL – 75.8K Units


4%

5%

6%

7%

8%

9%

10%

11%

12%

Q4 '09 Q4 '10 Q4 '11 Q4 '12 Q4 '13



Average Price ($) Per Unit

$0

$50,000

$100,000

$150,000

$200,000

$250,000

Q4 '10 Q4 '10 Q4 '11 Q4 '12 Q4 '13


Average Cap Rate (Yield)


0

100

200

300

400

500

600

700

800

900

1,000

Q4 '10 Q4 '10 Q4 '11 Q4 '12 Q4 '13



2014 CONSTRUCTION COMMENTS

• Consultants continue to aggressively pursue hiring with firms

reporting “best year ever”, again.

• General Contractors are hustling to keep up with demand.

Finding experienced personnel has magnified.

• We are still seeing the subcontractor community struggling to

keep up with bidding and construction workload.

• Construction costs have shown moderate increases, in spite of

notices of material volatility.

• Manufacturers are still not keeping significant inventory on

hand. Material lead times continue to drive schedules.

Thank You Hope you have a great 2014