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Bayou Business Download: A Rough Outlook for Office and Multifamily Real Estate

Published Sep 16, 2020 by A.J. Mistretta

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In this episode of Bayou Business Download we take a deep dive into Houston's commercial and residential real estate market. What sectors of the market are doing well six months into the pandemic and which ones are struggling in the current environment? 

Key topics include: 

  • The rising vacancy rate in the office market and the problem newly built inventory presents. 
  • The potential problems ahead for the industrial market. 
  • Retail's resiliency despite the negative absorption caused by shuttered stores, restaurants and other businesses. 
  • The multifamily conundrum, tens of thousands of new units in a market with little job growth on the horizon.
  • The bright spot of single-family home sales and what it says about Houstonians long-term outlook. 

Learn more about Houston's real estate market

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Economic Outlook: Houston Office, Multifamily Face Tough Road, Single-Family Housing on the Rise

Parts of the Houston economy are showing promising signs of recovery and the local outlook is strong for sectors such as single-family housing. But in other segments of the real estate market such as office and retail, the forecast is concerning as new construction pushes vacancy up.  These and other topics were part of the latest Economic Update from the Partnership’s Senior Vice President of Research Patrick Jankowski on August 25. Jankowski gave an overview of the current national and local landscape before honing in on the real estate market.  Here are a few takeaways:  One good measure of the nation’s economic recovery is continuing jobless claims. In May, more than 22 million people were filing continuing claims for benefits, meaning two or more consecutive weeks of claims. That nationwide figure has dropped to 15.8 million as of last week.  A survey of economists conducted by the Wall Street Journal shows a consensus view of Q3 GDP growth of around 18.3%, followed by lower growth of around 6% in Q4. This follows negative GDP growth in Q1 and Q2.  Houston currently has about 92% of the jobs it had in February. That’s a higher percentage of job retention than other major cities including Chicago, Los Angeles, Washington D.C. and New York. “Yes, we have had to deal with the fallout from the oil and gas sector along with the pandemic, but other sectors are helping lift us up,” Jankowski said.  Initial jobless claims here in the Houston metro were 15,667, down from a height of 76,007 in early April. However continuing claims in Houston climbed to 271,011 in July, up from 32,988 in March. Jankowski said it’s the high level of continuing claims that has him concerned.  The region lost a total of 365,200 jobs at the beginning of the pandemic and the majority (258,000) remain to be recouped.  Another economic indicator, City of Houston building permits, are down to $4 billion from $4.9 billion in 2019. Construction starts are also down about $3.7 billion this year compared with last year.  Jankowski said industry sectors including manufacturing, government, energy and transportation and warehousing continue to struggle.  Commercial and Residential Real Estate  Jankowski said real estate is a bit of a mixed bag, with some sectors of the industry doing much better than others.  With the obvious impact of the pandemic, the office market is increasingly concerning. Current vacancy rates are hovering around 20% to 22%, but with sublease availability factored in, the effective vacancy rate is more than 25%.  Jankowski said the last time the Houston office market experienced healthy absorption was 2014. Since the beginning of 2015, the area has seen negative absorption—or product coming back on the market—of about 8 million square feet.  There is close to 40 million square feet of office space currently available on the market with another 4.2 million square feet under construction as of Q2. “I don’t see a scenario for the office market where we get below a 20% vacancy rate for the next five years,” Jankowski said. “We won’t see significant office leasing for a while right now.” The industrial sector had been doing fairly well until recently. The current vacancy rate is 8.1%, up from 5.5% two years ago. Jankowski said with another 16.3 million square feet of new product currently under construction, we could reach an effective vacancy rate of 12% factoring in sublease space.  Retail has suffered significant setbacks amid the pandemic as many stores are forced to close permanently, including major big box stores. That has caused pain in retail centers where smaller stores rely on the bigger anchors to drive traffic. The vacancy rate is currently just 5.8% but there is concern over how much retail space will be thrown back onto the market by shuttered stores before the pandemic is over.  On the multifamily front, there are currently 40,000 apartment units under construction. To absorb those units, the Houston region would need to create another 240,000 jobs, which simply won’t happen quickly on the heels of the pandemic. Jankowski said the math just doesn’t add up. “Over half of Class A properties are offering incentives to get renters in,” he said. “We are going to continue to see weakness in the market.” Housing remains the brightest spot in real estate with housing starts in the area actually up 10.5% in the last six months over the same period a year ago. Existing home sales also remain quite strong, suggesting a level of long-term confidence among Houstonians.  Jankowski provides a monthly economic update available to members of the Partnership. Members can watch his full presentation available via the Member Portal. To learn more about membership, visit the membership page. Get additional data and analysis from our Research team and read Jankowski's latest Economy at a Glance focused on the impact of the energy sector on Houston. 
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Small Biz Insider: How a Black Entrepreneur Took Challenges and Created Opportunities

Ed Ryland, CCIM, MCR, is the President & CEO of ARVO Realty Advisors, a full-service commercial real estate firm based in Houston.  Ryland started his company from a box filled with ideas on of index cards. Today, his business is global, representing corporate, governmental, and small business clients in the buying, selling or leasing of office, retail, industrial land properties.  In addition to running his company with offices in Houston and New York, Ryland has established himself as a leading voice in the minority business community and mentor to many minority business executives.  He was the first African American in the Houston region to obtain the CCIM (certified commercial investment member) designation, which is often referred to as the PhD of commercial real estate within the industry.  While spending his career in a predominately white industry, Ryland has experienced the challenges that minority-owned entrepreneurs face first-hand. He's traveled the country to ask CEOs one question, “What do you think it takes to build a successful minority-owned company?” On this edition of Small Biz Insider, Ryland discusses challenges minority business-owners face and strategies for growing a successful small business.  Here are the key takeaways:  Disparities facing minority entrepreneurs: Ryland said there's a tremendous gap between revenue earned by African American and revenue earned by non-minority entrepreneurs, with Black entrepreneurs earning an average of $58,000 in annual revenue compared to $558,000 for non-minorities. He also discussed how there is a biased perception that minorities can only provide products and services in certain categories, which leads to a limited scope of opportunities, particularly within professional services that face challenges with diversity and inclusion with deeply entrenched histories that make breaking in and building relationships challenging.    Keys to building a successful small business: Ryland explained ARVO Realty Advisors has built a culture of personnel that consistently looks at ways to be creative and innovative, which gives the business an edge in providing value added services to current and future customers. “We don’t run from the problems, we run to the challenges.” In addition to having the right personnel around you, Ryland shared that critical aspects to building a successful small business are focusing on your capital and financing and building a strategic business and marketing strategy. He shared how these principles have allowed ARVO Realty Advisors to remain nimble during the pandemic, which has hit both commercial real estate and minority-owned businesses particularly hard.  The Small Biz Insider digital series highlights innovative business owners, entrepreneurs and leaders of the greater Houston area who are making a big impact in the small business community. The Small Biz Matters Business Resource Group (BRG) offers curated resources, digital programming, and a valuable platform to champion business connections and information.
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