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HOUSTON-An outstanding local economy and booming real estate market nonetheless led to a theme of cautious optimism at RealShare Houston. Although most extolled a strong market complete with low vacancies, high absorption and upward pressure on rents, many pros were prone to compare the current boom to conditions that led to the 1980s crash.

Ed Wulfe, president and principal with Wulfe & Co., saw ups and downs during his four-decade career. When asked by Michael Desiato, group publisher and editorial director for Real Estate Media, if this is the best market he’s seen, Wulfe offered up something else.

“I think every market, every year, is the best it’s ever been,” Wulfe said during Desiato’s one-on-one interview. “If you’re having fun with what you’re doing, the market is there and the opportunity is there. I’m not seeing anything to upset that.”

During a town hall focused on the state of the market, Wulfe’s colleagues also reported they weren’t seeing any hiccups. Moderated by Will Penland, senior managing director with CB Richard Ellis, the session’s panelists said the booming energy market had led to a particularly active real estate market. That, combined with dropping yields and fluctuating cap rates on the East Coast and West Coast, is driving investors to Houston.

It’s also driving local tenants into buildings, especially in the CBD. “During the past nine months, we’ve seen class A space move from 20% vacancy to 10% vacancy,” remarked Paul Layne, executive vice president with Brookfield Properties. Consequently, large blocks of space are rapidly disappearing.

But the “O” word occurred–that of overbuilding. The panel agreed overall that the overbuilding specter needed to be watched. “I think there’s more discipline in the system this time around. Well-sponsored, quality projects should continue to do well,” said Chip Clarke, president of the southwestern region for Transwestern Commercial Services.

But how long will the boom last? One point tackled in “Pardon the Interruption–RealShare Houston Style” brought out conflicting comments, especially in reference to the cap rates that are attracting buyers. “This is a collapse waiting to happen,” said Tim Relyea, vice chairman of Cushman & Wakefield of Texas Inc. Although Relyea acknowledged he’d been predicting a burst bubble for a couple of years, he pointed out that investors outside Houston are throwing too much money into over-valued assets. “There are so many investment deals out there that just don’t make economic sense,” he said, adding the trouble will begin when returns don’t match the valuations.

His counterpoint partner, Mark Cover, executive vice president with Hines Interests, had a different take. Although he noted a bust ala 1980s could happen, he said “it’s a great time to have property for sale in Houston.” The demand for space combined with a growing energy industry should keep things going for awhile, he added.

Still, panelists in breakout sessions did compare today’s economy with that in the 1980s. And they strongly indicated another bust wouldn’t be out of the question because of the nature of the market.

“The market is prone to booms and busts. It’s cyclical,” said Mark Cashman, senior vice president for Koll Development Co. during “Firing on All Cylinders: the Outlook for Leasing, Investment & Development in the Houston Market,” moderated by Louis Rosenthal, vice president for Jones, Lang LaSalle. Fellow panelist Mark Preston, senior vice president with Moody Rambin Investments, agreed, but pointed to the vast differences between the 1970s boom, which led to the bust, and that of today. He said one striking difference is the fundamentals of population growth are steadier than they were then.

Local developers also are being more cautious. But the dwindling available space shouldn’t make developers too cautious because the current office market has crossed the line of equilibrium stabilization and is verging on scarcity. Even with ever-increasing construction costs, Preston said “we’ll need new investing in the marketplace.” High construction costs will put upward pressure on rents.

Though industrial product is seeing much of the same dynamics as office buildings, the tenancy and situation are somewhat different. In a session about the Port of Houston, panelists pointed out that there is a lull in demand for industrial space now despite current construction. Leasing activity was hot a year ago, but not so hot right now. Still, panic wasn’t the buzzword of the day. “We’ve hit a lull right now, but long term, this is a great market,” said Micheal Palmer, a CBRE senior vice president.

As with the office sector, industrial overbuilding was a concern. But again, experts noted quick lease-ups weren’t necessarily an industrial hallmark. “Sometimes space has to sit there for between 12 and 24 months before it’s leased up,” added Troy MacMane, regional director for First Industrial Realty Trust.

Other panelists believe the Port of Houston’s growth is the magnet for attracting both development and investment to the overall market. “The word around is that Houston is on everyone’s radar screen,” said Robert Clay, president with Clay Development. “That’s what the port’s done. It’s brought recognition to Houston. Everyone wants to be here.” The RealShare Conference Series is produced by Real Estate Media, publisher of GlobeSt.com and Real Estate Forum.

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