Texas Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in Texas.
Issue link: https://texasrealestatebusiness.epubxp.com/i/591312
www.REBusinessOnline.com Texas Real Estate Business • November 2015 • 45 Baker Katz; Jim Murphy, general man- ager of Westchase District; Eric Lestin, senior vice president of CBRE; Ste- phen Cooney, real estate transactions lawyer, Gray Reed; Mary Axelrad, Gray Reed; Jon Spears, vice president of development at TNRG; and Louis Jullien, projects director of Westchase District. What follows is an edited transcript. TREB: What is the climate for retail in the Houston market? Kenneth Katz: I think we're in this interesting world where there are a lot of eyes on Texas, and specifcally on Houston, and what's happening on the ground with respect to jobs and population growth. The reality is that what we're hearing from retailers just doesn't seem to jive with the percep- tion that we're getting in Houston. When retailers are looking at their sales, their comp store increases and all of the metrics that they use to judge the strength of a store base of a market, they're seeing something that they're very pleased with. There seems to be this inconsistency between what we're seeing and what we're hearing from our tenants and our retail clients and what we perceive others are thinking about Houston. Top to bottom, things here are very strong. David Luther: We're national; we're based in California. Investment sales brokers, often times, are bringing in or importing capital. A lot of that capital is from California. You mentioned the term perception; there is a perception of risk here in Houston. When I look at the capital migration reports for re- tail deals that we have done over the last twelve months, and compare that to the year before, in the last twelve months, 75 percent of the buyers that we pitted to our retail deals were Tex- as guys. They were very aggressive; they were the ones outcompeting ev- ery other investor. The year before, upwards of 60 percent of the buyers that we were putting into our retail deals were from out of area, primar- ily from California. It's not that the Californians or the out of area guys aren't interested in Houston, or Tex- as, they're on the sidelines. I oversee our Fort Worth ofces as well, when I look at the transactions we're doing in Dallas-Fort Worth, it's hot up there. There's a lot of out of area capital that is going into Austin and DFW that has chosen, perhaps, not to pursue some of the deals in Houston. That has af- forded an opportunity for those Texas investors that believe in our economy and know the diversifcation that ex- ists in the economy, as you guys have all heard with the port expansion, with the medical district, and so the Texas guys are positive at this point because the deals are less competi- tive. But there is a perception of risk, and as investment sales brokers, we have to educate our out of area inves- tors on why this is a good time to buy. I would say that, out of all the asset classes that we sell, and we're doing multifamily, ofce and industrial, re- tail has the strongest fundamentals and there is tremendous demand for this asset class right now. Lance Gilliam: I agree that there is a disconnect between perception and reality. The retail asset class seems to stay strong. The other asset classes, which our frm engages in, are strug- gling. Ofce and multifamily both have perception issues that are prob- ably more based in reality, but there continues to be a greater demand for retail than there is supply. It has kept rents high and occupancy rates very high. Gerald Crump: We're seeing dou- ble-digit rent growth, both on new leases and renewals. Our occupancy for portfolios is about 97 percent, so the lack of new supply has really helped us to continue to drive rents. I think we're in a landlord's market. TREB: What has prevented new supply here? Crump: In our portfolio, we're in the core areas of the city. Eighty per- cent of our income is from the inner loop and West Houston Corridor; it is a high income, high education base with strong density. We're not doing a whole lot in the suburban markets the grocers are most active. Michael Axelrad: We've beneftted from that as well at Brixmor. We ben- eft from the lack of supply, and again, that we are in dense infll locations. It's very hard for someone to come in and develop on top of us. I think a lot of that is driven by the fact that, for a long time, at least the last couple of years, you had apartment developers competing at rates that really drove the retailers out — suitable or compet- itive sites were taken by multifamily. It really strengthened our niche. Eric Lestin: I think that what every- one said is what I'm fnding as well, particularly with tenant rep. We do have landlord reps as well, but there's 212 million square feet of retail in Houston, and about 3.5 to 4 percent vacancy. Anybody can recognize what that means. I have several restaurant clients that are looking at deals in At- lanta, Miami, Dallas and Austin right now, where that's just not the case. The rates are signifcantly less, except in the prime locations. In Houston, there's only 1.3 to 1.4 million square feet under construction of the 212 mil- lion for exactly the reasons stated. We're fnding an enormous discon- nect between telling this client that his rate here versus the rate in Dallas or in Atlanta, and it's hard for them to digest that. TREB: Mark, as a national owner, how do you see the Houston market? Mark Vondrak: I see it as being very strong. I was going to comment about the renewals, and being able to have strong rate increases. There is such a strong demand for space that tenants who are coming up for renewal fnd that they will have to pay the higher rent because we already have a back- fll tenant. TREB: Are you going out a couple of years in advance to some of your clients with leases that are getting ready to expire? Vondrak: Absolutely. We've been contacting tenants whose leases are expiring that don't have options at least 12 months in advance. TREB: How do you forecast de- mand with regard to tenants who are expanding in your portfolio else- where who might want to come into Houston? Are you trying to get them here frst? Vondrak: Absolutely. We're in front of the tenants probably at least twice a year, and then we visit their corporate ofces to do full portfolio reviews and let them know which spaces will be coming available. If there is interest, then we start moving from there. TREB: I know that you have a big initiative underway at Brixmor to backfll some junior box spaces… Axelrad: Certainly. We're using our national platform to take advantage of tenants who want to expand into Texas. I think there's a real disconnect between what you see in the media and the press about $40 a barrel of oil versus the demand we're seeing from tenants. I see tenants saying, 'I've got to get in there,' because you want real HOUSTON from page 1 INFILL, EXURBAN PROJECTS LEAD HOUSTON RETAIL From left to right, Stephen Cooney, Gray Reed; Jim Gibson, Stan Johnson Co.; Lane Gilliam, Waterman Steele Real Estate Advisors; and Jason Gaines, Hunington Property Inc. There is such a strong demand for space that tenants who are coming up for renewal fnd that they will have to pay the higher rent because we already have a back-fll tenant. — Mark Vondrak, director of leasing, InvenTrust Properties