Upbeat Economy Softens Local Subprime Fears

Louis Cushman, vice chairman of Cushman & Wakefield Inc., and Zaya Younan, chairman and CEO of Younan Properties Inc., agreed short supply and huge demand are boosting rents for class A office space, but they offered different predictions about where the rates would end up.

Younan, this year's Up Close featured attraction, felt asking rates will continue to increase. "We'll be seeing significant rent growth in Houston because of continued positive absorption," predicted Younan, who is on a local buying spree for office product. "I'd expect it to reach the same levels they're seeing in Los Angeles and New York."

Cushman disagreed during a discussion with Michael Desiato, group publisher, editorial director and vice president of ALM/Real Estate Media Division. "Landlords have raised the rents," Cushman said. "Whether they get those rates from tenants is another matter. There's going to be a lot of sticker shock and tenants that just won't want to renew." He also predicted the lease rates are topping out and there won't be a significant increase, especially as new office space comes on line.

The leading executives also were polarized about the impact of subprime and the credit crunch on the city's real estate fundamentals. Younan pointed to the city's high job growth, demand for office space and continued high absorption plus its economic diversity as the underlying reasons for his company to be investing so heavily in Houston.

On the other hand, Cushman reminded conference-goers that Houston is far from recession-proof. He forewarned the credit crunch and subprime collapse ultimately could impact Houston. Although the region's economy is diverse, he says it still has one main driver. "We have the Texas Medical Center and the Johnson Space Center," Cushman said. "But 48% of our economy is energy-driven--as energy grows so does Houston."

Robert Duncan, chairman of Transwestern and feature of the Desiato-led "Inside the Mind" segment, agreed with Younan that rents would continue to increase yet sided with Cushman that Houston could feel the pain of subprime and the credit crunch. "Houston's economy is diversified," he told Desiato, "but because of that, we'll become more vulnerable to outside factors, like other parts of the nation are experiencing."

What wasn't in dispute was Houston's need to look at mass transit as a viable alternative to its increasingly congested roadways, a byproduct of growth. Cushman said commutes are getting harder although Houston continues to be ahead of other Texas cities.

The mass transit issue also was bounced around the panel during the town hall meeting. Paul Layne, executive vice president for Brookfield Properties, said one major growth concern is traffic. "Realistically, the only mass transit that's working right now is the one going Downtown," he said.

The traffic situation could lead to more mixed-use, urban-type developments in infill areas as strategic alternatives, according to Layne and Ed Wulfe, president and principal for Wulfe & Co. Likewise, it could bring more office development to the Galleria, said Chip Clarke, Transwestern's president of the Gulf Coast and Mountain regions.

Houston's dynamic economy also is reflected in its industrial market. There is a $1-billion expansion under way at the Houston Port Authority and both airports are expanding. "We're bullish on industrial for the area," Clarke said, adding he doesn't foresee that "new supply will outstrip demand."

The hospitality sector also is benefiting from current conditions. Brett Moody, chairman and CEO of Moody National Cos. said the area's hotel occupancy is averaging 75%.

But, different perspectives about the benefits of the vibrant economy cropped up during multifamily discussions. The dilemma is land prices. During the town hall meeting, Randall Davis, chairman of Randall Davis Cos., said rising land prices has meant that he's buying smaller tracts of land for high-rise developments. Those higher costs of land and construction are being passed along to buyers of condos or renters although it's not necessarily a bad thing. "Newer developments with higher prices could help bring the process to the next level," Davis explained.

Brian Austin, senior managing director of Trammell Crow Residential, agreed land costs are becoming prohibitive for multifamily developers, but he also had some good news for attendees of one concurrent session. "Construction costs will settle down," he predicted, noting cumulative increases will be in the 2% to 3% range rather than 25% to 30% like it's been for several years.

The multifamily experts acknowledged it's been difficult to get deals due to the subprime fallout and tightening financing regulations. Matthew Rotan, principal of Apartment Realty Advisors, and Craig LaFollette, executive vice president of CB Richard Ellis, agreed that high-leveraged buyers aren't getting too far in the present market.

Bill Luedemann, senior vice president and managing director with NorthMarq Capital Inc., added that underwriting standards are tightening while spreads are getting wider. "Lenders these days are looking at high-quality real estate and high-quality sponsors," he explained. "Deals with 'a story' won't do as well."

Stephen Helm, regional director with Imperial Capital Bank, pointed out that Texas fundamentals have somewhat better leverage than many other states. It will take time, but conditions will improve. "It probably looks as though late Q1 2008, early Q2 2008, things will return to normal," he said. "It won't be like it was pre-subprime, but it will be better."

RealShare Houston brought differing opinions to the table, but all participants agreed on one thing: it's a great time to be involved in the city's commercial real estate industry. "I don't see a market that's out of balance as there were during other times," Duncan summed up. "There are no hangovers from too much office space. We still have low interest rates, strong demographics and great capital formation."

The third annual RealShare Houston was held in the JW Marriott Hotel at 5150 Westheimer Rd. The RealShare conference series is produced by Real Estate Media, which also publishes GlobeSt.com and Real Estate Forum.