HOUSTON—Like many others, Paradigm Tax Group is predicting a leveling out of the commercial real estate market in the coming year. James Sutton, Texas market leader with Paradigm, recently discussed 2018 commercial real estate trends and the implications of the leveling-out process in this exclusive.

GlobeSt.com: What are the commercial real estate trends you are seeing in Houston for 2018?

Sutton: Decrease in overall vacancy for industrial properties, as well as a decrease in overall vacancy, increase in rent growth and zero concessions for multifamily properties. In addition, there will be a reduction in office sublease space as a result of the storm (Harvey). This is a short-term correction as a result of the office sector's issues stemming from the energy market decline.

GlobeSt.com: How much is the aftermath of Harvey having on that outlook?

Sutton: Harvey mostly impacted residential properties but millions of square feet of office space, most of it in the Katy Freeway and Galleria submarkets, were damaged in the storm. Occupancy losses as a result of the storm have dramatically affected vacancy. The Katy Freeway West submarket now has a vacancy factor of more than 30%. Short term, new multifamily properties experiencing trouble leasing up as a result of a glut of new products on the market at the time that the energy sector took a hit have seen increases in occupancy and rent growth.

This is due mostly to residents affected by flooding seeking housing. Also, there has been an uptick in industrial demand as a result of the storm. Retailers of home goods and building supplies have sought to expand their footprints to meet the demand for materials.

GlobeSt.com: Everyone is talking about how we are in the ninth year of the recovery and whether year 10 is unlikely. What are you forecasting?

Sutton: I'd agree, in that a commercial real estate correction is imminent. There are far too many negatively impactful issues to believe otherwise, i.e., potential tax law changes, rising interest/cap rates and a softening of commercial real estate sales. Also, factor in uncertainty with the retail sector. Amazon has thrown a curveball to most major retailers and has forced them to rethink their brick and mortar operations in an effort to remain competitive. To play devil's advocate, many well-respected commercial real estate publications have said since 2015 that we are in the ninth inning.

GlobeSt.com: If the forecast is for leveling off, what are the implications for the Houston metro?

Sutton: If there is a correction to the real estate market, the Houston metro area should see property tax-related value adjustments. Unfortunately, for property tax purposes, properties are valued as of January 1 of the tax year in question. If we were to see a market correction beginning in early 2018, the ramifications of that related to property taxes may not be felt until tax year 2019. Appraisal districts typically are more gun shy when it comes to reducing value in a down market than increasing values in an up market.

GlobeSt.com: What else is of relevance for the Houston market going into the New Year?

Sutton: Strong, energy and tech-related companies are still a major draw to the Houston metro. The impact of Harvey on commercial real estate was not nearly as devastating as the impact the storm had on residential properties. Industrial and multifamily properties will most likely see increases in property tax values in 2018.

GlobeSt.com: What are the commercial real estate trends you are seeing in Houston for 2018?

GlobeSt.com: How much is the aftermath of Harvey having on that outlook?

GlobeSt.com: Everyone is talking about how we are in the ninth year of the recovery and whether year 10 is unlikely. What are you forecasting?

GlobeSt.com: If the forecast is for leveling off, what are the implications for the Houston metro?

GlobeSt.com: What else is of relevance for the Houston market going into the New Year?

Instant Insights /

CRE Has Been in Ninth Inning for Two Years

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