Commercial Property Executive
As 2014 has come to a close, it is important to notice that Texas has been doing tremendously well and that it has managed to outpace long-established, traditional markets. Taking into account its three powerhouses, Houston, Dallas/Fort Worth and Austin, Texas is on track for becoming one of the most important real estate hubs in the U.S. Just recently, the Urban Land Institute (ULI) in collaboration with PricewaterhouseCoopers (PwC) revealed Houston as the best performing market across the U.S., with Austin and Dallas following closely by in the second and fifth position, respectively.
CBRE’s research data for Q314 portrays a similar outlook. The company’s report on Texas, which also includes the San Antonio market, shows that the state has managed to add almost 400,000 new jobs over a period of 12 months. While the unemployment rate has seen an uptick recently, having reached 5.3 percent in August, it is still significantly lower than last year’s 6.4 percent unemployment rate. Moreover, Texas outpaced most markets in the office sector with more than 28 million square feet of active projects under development. ULI and PwC’s explanation for this tremendous growth points to Texas’s capacity to create jobs on account of the state’s business-friendly environment and to the resurgence of U.S. manufacturing due to rising labor costs overseas.
“This business-friendly environment has resulted in four Texas markets in our survey creating 493,733 jobs over the last two years. Business-friendly takes into account a number of factors, but one of the most important is labor costs.” Emerging Trends in Real Estate, United States and Canada 2015
For a more in-depth analysis of the real estate market in Texas, CPE talked to Charles “Butch” West and Ernest Brown IV, CCIM Managing Directors of Kennedy Wilson’s Brokerage Group, who offered some insight.
Q: Some industry experts argue that because Dallas has a more diverse economy, the economic growth rate might be more sustainable in this city than in Houston. In a game of one-upmanship, what does Dallas offer over Houston and vice versa?
West: Dallas has two things going for it over Houston. First, Dallas is the industrial domestic distribution hub of Texas. Dallas’ location, the Dallas-Fort Worth airport and rail access makes it a more central point to bring in goods from Houston, San Antonio, and Mexico. Secondly, Dallas is a major business center. There are more large corporate headquarters in the Dallas area than anywhere else in Texas than Houston.
Brown: Houston, as Dallas, is a huge industrial market. The edge Houston has over Dallas is the Ports of Houston and Galveston, which connect Houston to the rest of the world. Once the Panama Canal is opened, these container ports will see significant increases in traffic. In short, Houston is a rail, trucking and shipping port, while Dallas is limited to rail and trucking.
Q: We’ve mentioned job growth, a business-friendly environment and the resurgence of U.S. manufacturing as possible causes for Texas’ considerable growth. What do you think are other contributing factors?
Brown: The abundance of low cost and reliable energy is the biggest driver. Companies like Voestalpine out of Austria are locating in Texas after researching multiple locations around the globe ($1.3 billion dollar investment). These companies chose Corpus Christi due to the supply of low-priced, reliable natural gas from the shale plays. One also needs to consider the large quantity of natural resources, such as wet gas, which Texas used to import, and now has ample quantities at lower costs being put to use in multiple manufacturing processes throughout the state. Just take a look at Corpus Christi and other coastal cities in Texas to see the manufacturing renaissance taking place.
West: Texas is a business-friendly state with favorable tax advantages over most of the United States. I agree with Ernest on the natural gas and our abundant petro chemical processing capabilities. With the expansion of the Panama Canal as well as the ports of Corpus Christi and Houston/Galveston being the most equipped on the entire Gulf and Atlantic Coasts to benefit from the increased shipping traffic from Asia, Europe, and South America, this will no doubt contribute to Texas’ growth. This is not only for receiving, but also for export shipping. Texas’ expansion in manufacturing is gaining by such a degree that its rail and port systems have to adapt to exporting rather than importing.
Q: From an investor’s point of view, Dallas and Houston are some of the strongest contenders in Texas. What are the benefits of investing in a market like Austin and San Antonio over those of Dallas and Houston?
West: Austin is a market that is booming, but still small enough to get a handle on your investment. Austin has a very strong urban core, primarily because of the State Capital and the main campus of the University of Texas. The city has a very highly educated work force and is a very desirable place to work and live. Dallas and Houston both are so large. With Austin and San Antonio only two hours away from both Dallas and Houston, these markets have the advantage of being able to capitalize on both Houston and Dallas’ commerce, offering a higher quality of life.
Brown: San Antonio is a very stable city and generally avoids the big swings that Houston, Dallas or Austin can experience. The city has diversified its economy so not to be too reliant on one segment, such as oil and gas in Houston or technology companies in Austin. Growth in San Antonio is taking place in all sectors with the medical field being among the strongest of those. At over 2 million people, close proximity to the Eagle Ford play and a central Texas location, San Antonio is well poised for the future.
Q: What sector made the most significant impact in 2014, and what sector has been overlooked by investors across the state?
Brown: The industrial sector was one of the most active sectors of the economy as existing space filled quickly with oil and gas operators continuing expansion throughout the state. This resulted in very high occupancy rates, which in turn has led to a large amount of industrial development. This has been true in the office warehouse, bulk and manufacturing arenas.
The revival of the industrial manufacturing sector is likely one of the most overlooked aspects of our economy in 2014. While most people saw growth in the industrial market, they were not aware of the manufacturing concerns that were slowly taking hold. In part this is because it took place slowly over time as more raw product (gas, oil and in particular wet gas) was drawn out of the ground and manufacturers realized the benefit and value of a locally obtained, reliable and less expensive source of raw materials for use in multiple manufacturing processes. This is also more focused along the Texas coast, where it is “out of sight and hence out of mind” for many professionals not venturing into those areas.
West: This is a very interesting question and one that is difficult to answer. As brokers we are always looking for the next best opportunity for our investors. First again, I agree with Ernest on Corpus Christi and South Texas, but the Waco (home of Baylor University) and the Temple/Belton areas are also some of the most overlooked by investors across the state. However, where we see the most opportunity is in the suburbs along the I-35 Corridor between Austin and San Antonio. We regularly meet with the economic development groups from the corridor cities. The biggest need is for industrial/service and flex properties built on a spec basis. What is slowing growth in this area is the lack of spec space for business to move in. There is a lot of money out there and a willingness to develop on a build-to-suit, but the time lag for permitting and construction is causing users to seek secondary locations or bypassing these suburban locations. These cities are willing to fast track development projects and will aid in getting them leased.
Q: What are the major trends for each city that have come out of 2014?
West: Dallas and Houston are monsters in growth. Houston is growing because of the petro chemical arena and the port. Dallas is now spread into multiple counties and continues to dominate in corporate expansions. My main focus for the moment is Austin. It continues to expand its hotel and multi-family inventory to the point of creating a mobility issue. This is why I commented on the financial opportunities smaller cities have along the I-35 Corridor. We see large-scale developments coming up in the surrounding communities. People want to be part of the Austin culture, but will increasingly live and work on the outskirts.
Brown: For San Antonio, one of the most interesting trends is the focus of inner city housing around The Pearl and South Town. There seems to be a real shift in desires to live closer to downtown and the lifestyle association thereto. For Houston, it has been the amazing growth in the office market as oil and gas companies have experienced significant growth.
Q: Considering all we have seen this past year in Houston, Dallas/Fort Worth, Austin and San Antonio, what are your expectations for 2015?
West: We see no slowdown in the expansive growth within the major metropolitan area of Texas. Texas has such a favorable business and living climate that keeps us at the forefront of business relocations. On top of this is Texas’ proximity to Mexico. This is one area that we have not touched on yet, but the symbiotic relationship between Texas and Mexico for oil and gas, and rail distribution coming in through El Paso, Laredo and the Rio Grande Valley will be huge for 2015.
Brown: 2015 should be a good overall year. The impact of lower oil prices will dampen, but not stop, development in the shale plays. The benefit of lower gas prices, lower unemployment (positive job growth) combined with central time zone and a southern climate will continue to be positive impacts to the overall economy of Texas.
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