HOUSTON SELLS OFFICE AUGUST 2015 R EAL E STATE C APITAL T RANSACTIONS

Transcription

1 HOUSTON SELLS OFFICE AUGUST 2015 R EAL E STATE C APITAL T RANSACTIONS

2 HOUSTON SELLS OFFICE AUGUST 2015 Texas Medical Center Largest Medical Complex in the World

3 H O U S T O N S E L L S HOUSTON OFFICE OWNERS have a unique opportunity to capitalize on pent-up investor demand due to the current lack of high-quality office offerings. While the decline in the price of oil since June 2014 has made owners of Houston office buildings hesitant to sell, it has not materially changed the medium and long-term economic outlook of the city. Due to a psychology among owners that office vacancy will not price correctly in the current environment, there are currently no high-quality office buildings on the Houston market. The strong projections for the Houston office market and the resiliency of the Houston economy refute this psychology. The owner willing to market a high-quality, multi-tenant office property will reap excess pricing due to increased investor focus. Investors are attracted to Houston s underlying property fundamentals, but they lack the buildings to invest in. DIVERSIFIED ECONOMIC SECTORS = RECESSION PROOF Houston, with its unique set of diverse economic sectors, has shown its resiliency in the wake of large national economic recessions (the first city nationally with positive growth) and has, and will, prove its strength after local industry-specific downturns (currently continuing to grow). DESPITE THE OIL MARKET, HOUSTON IS GROWING Houston is projected to gain 20,000 to 30,000 jobs in 2015 including job cuts related oil a 0.7% to 1.0% annual increase, according to the Greater Houston Partnership ( GHP ). OIL INDUSTRY IS BOUNCING BACK Experts expect the oil industry to rebalance with the global supply surplus reducing by 55% in 2016 and individual breakeven costs to reduce so that $60 per barrel will allow for a 25% annual return. CORE OFFICE SUBMARKETS CONTINUE GROWTH Houston s two downtowns, the CBD and the Galleria, have maintained high occupancy (Class A above 90%) and have increased rental rates over the past four quarters (Class A increased 4.3% and 1.5%, respectively). HOUSTON OFFICE NATIONAL LEADER The Houston office market is projected to out pace most gateway and top secondary markets in both rental rates and occupied square footage growth, while also absorbing more than 20 million square feet from 2015 to 2019, according to REIS. OWNER HESITATION = LACK OF SUPPLY = COMPETITION Owners are uncertain of how the market will perceive a Houston asset, leading to a 53.4% year-over-year decrease in overall square footage being traded year-to-date This scarcity compounded by solid fundamentals has produced a 39.7% increase in the price per square foot and a 110 basis point compression in average cap rate. INSTITUTIONAL INVESTORS BUYING INTO HOUSTON Houston is increasingly being viewed as a gateway market as evidenced by institutional investors contributing 51.3% of total investments since January 2014, 38.3% of which were by foreign buyers (South Korea, China, and Germany). FIRST MOVER ADVANTAGE Houston owners are at a critical point in the market the first highquality, multi-tenant office building on the market will set the tone in Houston for achievable metrics of all subsequent offerings. 3 R EAL E STATE C APITAL T RANSACTIONS

4 HOUSTON SELLS OFFICE AUGUST 2015 George R. Brown Convention Center

5 H O U S T O N E C O N O M Y THE BIGGEST STORY regarding Houston since June 2014 is not the sharp decline in the price of oil but the resiliency of the City s diversified economy in midst of a contraction in its most famous industry (Energy). While the decline in the price of oil since June 2014 has been well publicized, oil only represents one segment of Houston s Energy industry which includes natural gas, petrochemicals, and alternative energy. Few cities can boast of an expanding economy during a downturn in a core industry as Houston has demonstrated over the past thirteen months, placing Houston in the upper echelon of cities globally in terms of economic strength. DIVERSE ECONOMIC BASE - THE HOUSTON OF TODAY Growth in Houston s supporting industries has offset losses in the Energy sector through June 2015 (non-energy sectors have absorbed approximately 85.8% of the job losses in the energy sector) clearly demonstrating the strength and diversity of Houston s economy. Houston stands to gain between 20,000 and 30,000 jobs in the second half of 2015 per GHP s revised 2015 forecast. Houston s ability to grow annually by 0.7% to 1.0% given the status of the price of oil validates the investment thesis about Houston as a recession-proof city. HOUSTON EMPLOYMENT PROJECTION OIL MARKET CORRECTING STABILIZATION NEAR The global supply glut is beginning to shrink and is projected to more than half in 2016 from two million barrels per day to just 0.9 barrels per day in 2016 per the U.S. Energy Information Agency ( EIA ). Shale oil companies are adapting to low oil prices, with the breakeven price for operating in 75.0% of shale fields declining 20% in mid Analysts (IHS Inc.) already project breakeven prices to be in the high $40s as of August WTI PRICE / WORLD SURPLUS PROJECTION Employment (Thousands) 3,020 3,010 3,000 2,990 2,980 2,970 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 (30,000) (20,000) WTI Price/Barrel Jan-15 May-15 Sep-15 Jan-16 May-16 Sep Million Barrels per Day Actual Low Forecast High Forecast (Projected Job Gain) Actual Proj. Annual Avg. Surplus (mb/d) July EIA Forecast Source: Greater Houston Partnership and Federal Reserve Bank of Dallas. Source: DailyFx.com, Federal Reserve Bank of Dallas, and U.S. Energy Information Administration. 5 R EAL E STATE C APITAL T RANSACTIONS

6 HOUSTON SELLS OFFICE AUGUST 2015 ExxonMobil Baytown Refinery Second-Largest Refinery in the U.S.

7 H O U S T O N E C O N O M Y MORE THAN JUST OIL Houston s leadership position in the Energy industry reaches far beyond oil extending to alternative energy, natural gas, refining, and petrochemicals, among others. Home to ten refineries, the Houston region is a leader in refining and processes more than 2.3 million barrels of oil per day approximately 50.0% of the state s total production and 13.2% of the nation s capacity. The decline in the price of oil has positively impacted refining where oil is used as a feedstock providing a hedge for the Houston economy during a decline in the price of oil. Houston accounts for over 40% of the nation s base petrochemical capacity an energy sector based on natural gas, not oil. RAPIDLY EXPANDING HOUSING/MULTI-FAMILY MARKET average time on market (43 days), and historically high home prices (average home price increased 6.6% year-over-year to $302,942). The Houston housing market remains an extreme sellers market with only 3.2 months of inventory as of June 2015 well below the national supply of 5.1 months (6.0 months is considered balanced). Houston s multi-family market continues to expand through 2015 with Class A and Class B effective rents growing by 2.9% and 6.9%, respectively. The market was able to absorb 8,360 Class A units delivering year-to-date July 2015, experiencing a net absorption of 6,797 Class A units. Residential building permit values increased 47.3% in a year-overyear comparison ending June 2015 single-family permits rose 23.7% and multi-family permits more than tripled. The short-term uncertainty concerning the price of oil has not impacted Houston s housing market, as home buyers remain bullish on Houston s future. Houston s housing market continues its record breaking growth: June marked the highest one-month volume (nearly 9,500 home sales in June 2015, eclipsing the prior peak in June 2006), lowest Instead of capitulating following the decline in the price of oil, Houston has remained steady and is poised to experience employment growth between 0.7% and 1.0% over the second half of 2015 a testament to the diversity and resiliency of Houston s economy. Houston s ability to expand given the present circumstances is due to the diversity and ingenuity of the energy industry itself and the city s other major industries (Port of Houston and the Texas Medical Center). These diverse employment drivers have continued the impressive net in-migration of residents to the city as evidenced by record housing sales and multi-family absorption. 7 R EAL E STATE C APITAL T RANSACTIONS

8 HOUSTON SELLS OFFICE AUGUST 2015 Downtown Houston Skyline - Facing West

9 H O U S T O N O F F I C E M A R K E T HOUSTON CLASS A OFFICE continues to experience growth through 2015, experiencing a positive net absorption of approximately 2.9 million square feet and an increase in the average rental rate of 0.6% over the past four quarters. Growth has been concentrated within Houston s largest submarkets: CBD, Energy Corridor, Galleria, and The Woodlands illustrating the strength of the city s key investment markets. HOUSTON CLASS A OFFICE STATISTICS BY SUBMARKET AS OF JULY 27 TH, 2015 Submarket 1 Total Bldgs. Total SF % Total % Occ. YOY % Change Net Absorption 3Q14 - QTD15 Avg. Gross Rental Rate YOY % Change CBD 33 31,434, % 90.3% 0.1% 30,155 $ % Energy Corridor ,705, % 86.8% (8.3%) 1,158,053 $ % Galleria 32 12,533, % 90.2% (0.1%) 11,925 $ % Woodlands 35 9,624, % 95.0% 4.5% 1,830,113 $33.02 (3.6%) Westchase 31 8,336, % 83.3% (4.7%) (83,203) $37.75 (0.5%) Greenway Plaza 16 6,301, % 88.4% (4.2%) (243,619) $35.48 (1.9%) Greenspoint 24 5,440, % 65.3% (25.6%) (1,221,075) $26.92 (5.0%) Medical Center 15 4,560, % 94.7% 0.8% 22,967 $ % Houston ,142, % 87.4% (3.1%) 2,906,696 $ % 1 All submarkets use CoStar s definitions except for the Energy Corridor, which is the combination of the Katy Freeway West and Katy Freeway East. Source: CoStar RISE IN SWING SPACE Over the past four quarters, Class A office space available for sublease increased by 2,684,871 square feet, a year-over-year increase of 49.1% as energy companies increased the amount of swing space available on the market space that is temporarily not needed due to temporary decreases in workload or held for future expansion. Approximately two-thirds of the additional sublease space is located in energy heavy submarkets: Energy Corridor and Westchase. Only 9.9% of the added sublease space over the past year is located in the CBD and the Galleria the City s top two office investment submarkets. CLASS A SUBLET 1 SPACE BY SUBMARKET Year-Over-Year Change Submarket 2 Total SF SF % CBD 1,067, , % Energy Corridor 2 1,524,354 1,194, % Galleria 412,452 70, % Woodlands 126,226 8, % Westchase 894, , % Greenway Plaza 194, , % Greenspoint 562, , % Medical Center 0 (13,787) - Houston 5,467,036 2,684, % 1 Square feet presented is sublease space defined by CoStar to be occupied but available - Sublet Total Avail SF. Sublease space that is defined as vacant by CoStar is accounted for in occupancy statistics. 2 All submarkets use CoStar s definitions except for the Energy Corridor, which is the combination of the Katy Freeway West and Katy Freeway East submarkets. Source: CoStar 9 R EAL E STATE C APITAL T RANSACTIONS

10 HOUSTON SELLS OFFICE AUGUST 2015 Houston Galleria Submarket

11 H O U S T O N O F F I C E M A R K E T HOUSTON METRO AND CBD - FASTEST EXPANDING OFFICE MARKETS NATIONALLY TOP CBD OFFICE MARKET FORECASTS - 1Q 2015 Metros CBDs CAGR Net Abs. (SF) CAGR Net Abs. (SF) Office Submarket Effective Rental Rate Occupied SF Effective Rental Rate Occupied SF Gateway Markets Houston 6.1% 2.6% 20,285, % 3.1% 5,423,000 San Francisco 1 6.2% 1.7% 7,209, % 1.9% 3,990,000 Boston 5.1% 1.3% 7,255, % 0.8% 1,155,000 Washington D.C. 4.2% 1.5% 7,230, % 1.5% 2,114,000 New York City 5.0% 0.8% 13,307, % 1.6% 5,191,000 Chicago 1 4.6% 1.4% 14,718, % 0.8% 3,295,000 Los Angeles 4.0% 1.2% 10,191, % 0.5% 704,000 Top Secondary Markets Seattle 6.0% 2.3% 8,729, % 2.8% 4,842,000 Dallas 4.5% 3.1% 19,923, % 2.1% 1,993,000 Atlanta 4.2% 2.4% 14,431, % 3.0% 1,962,000 1 San Francisco is a weighted blend of the North Financial District and South Financial District submarkets. Chicago is a weighted blend of Central Loop, East Loop, South Loop, and West Loop submarkets. Source: REIS Houston remains the national leader in growth outlook for office buildings stronger than other gateway markets, despite the recent temporary drop in oil prices. REIS projects the Houston CBD will out-pace all of the comparative CBD markets in all performance metrics. REIS projects the Houston metro to experience the second largest increase in effective rental rate out of the gateway markets and top secondary markets through at least 2019 behind only San Francisco, where the occupied square footage is growing at a slower rate. The Houston metro is expected to absorb more than 20 million square feet of office space (26.7% of which will be located in the CBD) nearly 140% more than the next highest gateway market s absorption (Chicago). The closest comparison to Houston s absorption is Dallas (absorbing 19.9 million) though approximately 90% of that absorption will be in suburban markets. The market for Class A office space in Houston has remained strong while the price of oil has been depressed, with the City s largest submarkets continuing to expand. The increase in space for sublease has had a minimal impact on the City s major investment submarkets (CBD and Galleria) and is primarily swing space by energy firms. When combined with its long-term prospects, Houston s key office submarkets remain strong investment candidates in which investors will aggressively price vacancy for high-quality office buildings. 11 R EAL E STATE C APITAL T RANSACTIONS

12 HOUSTON SELLS OFFICE AUGUST Main Sold Union Investment (Germany ) in March 2015 for$520 per Square Foot. BG Group Place Sold to a South Korean Pension Plan in May 2013 for $493 per Square Foot

13 H O U S T O N C A P I T A L M A R K E T THE HOUSTON OFFICE MARKET remains a seller s market, as trophy assets continue to attract institutional-quality capital at record pricing. However, 2015 has experienced a lull in transactions as the dynamics currently affecting the price of oil have changed the psychology of Houston office owners. While single-tenant office buildings with long-term, investment-grade tenants have sold in Houston in 2015, multi-tenant buildings have not been offered due to a fear that investors will not appropriately price vacancy. Given the afore-mentioned projected market fundamentals, this is a fear that is not supported by data or relevant to Houston s premier Class A office buildings. HOUSTON OFFICE TRANSACTIONS GREATER THAN $10 MILLION 2014 JULY 2015 # of Trans Total SF Total Volume % of Total Avg SF Occ Price PSF Cap 2015 Year-to-Date Core 9 2,001,514 $745,268, % 222, % $93,158,592 $ % Core-Plus 1 795,115 $200,000, % 795, % $200,000,000 $ % Value-Add 1 220,000 $46,250, % 220, % $46,250,000 $ % Opportunistic 1 231,000 $10,200, % 231, % $10,200,000 $44 - Total ,247,629 $1,001,718, % 270, % $91,065,340 $ % 2014 Core 17 5,796,824 $1,537,498, % 340, % $90,441,073 $ % Core-Plus 13 2,262,928 $396,690, % 174, % $33,057,536 $ % Value-Add 17 3,563,376 $498,325, % 209, % $35,594,643 $ % Opportunistic 11 2,142,604 $498,325, % 194, % $16,980,143 $ % Other 1 120, , Total ,886,704 $2,551,374, % 235, % $51,027,494 $ % Source: Real Capital Analytics and CoStar INSTITUTIONAL PUBLIC PRIVATE HOUSTON INVESTMENT CBD GALLERIA ENERGY CORRIDOR WOODLANDS OTHER SUBURBAN 2014 HOUSTON THE PRIME INVESTMENT MARKET In 2014, Houston continued its reign as a top investment market with unrivaled economic growth rates and expanding office fundamentals creating an investment environment equivalent to the traditional gateway markets as opposed to a top secondary market (as it was previously considered). Houston was ranked sixth best city in the world for real estate investment by the Association of Foreign Investors in Real Estate (AFIRE) in 2014, based on its 2015 survey. Houston was ranked first in the U.S. in 2014 and 2015 as the most favorable market to watch for investment in real estate prospects according to the ULI s Emerging Trends Report. Average cap rates for transactions greater than $5.0 million compressed 13 basis points from 2013 to THE 2015 OWNER INDUCED SLOW DOWN Available offerings have slowed in 2015, as many owners have a waitand-see mentality, but investors are still highly interested in entering the Houston market as evidenced in the elevated 2015 pricing metrics. As of July 2015, only 3.2 million square feet of office buildings have traded (approximately $1.0 billion in value), a 53.4% decrease in the overall square footage for the same period in Houston real estate owners are hesitant of the market s ability to accurately price rental rates and absorption in a low-oil price market and have themselves created a void of offerings on the market. This scarcity has only produced more competitive pricing metrics with a 39.7% increase in the price per square foot and a 110 basis point compression in the average cap rate in 2015 when compared to the same time period in R EAL E STATE C APITAL T RANSACTIONS

14 HOUSTON SELLS OFFICE AUGUST 2015 Rendering of Energy Center Three (Right) and Four (Left) Energy Center Three was completed June 2015

15 H O U S T O N C A P I T A L M A R K E T This compression is further exemplified by 1000 Main trading for $520 per square foot in March 2015 the second highest price ever paid for a Houston office building (behind Hess Tower at $524 per square foot in December 2011). Nine of the 12 transactions in 2015 (74.4% of total volume) have been Core office buildings, eight of which are single tenant buildings which are perceived to transcend short-term economic fluctuations. Accounting for 58.4% of the Core transaction volume (and 43.5% of the total) in 2015, 1000 Main sold to Union Investment, a German investment bank, who is (characteristic of many investors) interested in Houston due to the extreme price appreciation potential in gateway markets. SCARCITY OF HOUSTON OFFICE TRADES There has been a significant lack of offerings of office buildings in the Houston in There are currently a limited number of office buildings being marketed in the Houston MSA most are smaller offerings located on the periphery of the city. There are only three office buildings larger than 200,000 square feet actively on the market: the Academy Sports + Outdoors headquarters, One and Two Corporate Plaza, and Energy Center 3. The Academy Sports + Outdoors headquarters is a 217,782 square foot sale-lease back transaction currently pending with an offer of $60 million ($276 per square foot) at a 5.8% capitalization rate. One and Two Corporate Plaza is a two-property portfolio with a total of 277,914 square feet located in the NASA/Clear Lake suburban submarket (20 miles southeast of the CBD) and is being marketed at $45 million ($162 per square foot). Energy Center 3 is a 549,000-square-foot, single tenant office building located in the Energy Corridor, with an expected price point of $492 per square foot the highest per-foot price outside of the CBD (due to lack of other prominent offerings) and at a 5.5% capitalization rate. The lack of quality offerings in one of the hottest investment markets in the country provides an opportunity for significant market focus on a high-quality asset. 15 R EAL E STATE C APITAL T RANSACTIONS

16 HOUSTON SELLS OFFICE AUGUST 2015 Discovery Green $125 million World-Class Amenity to Downtown Houston

17 H O U S T O N C A P I T A L M A R K E T HOUSTON A GATEWAY MARKET Houston is increasingly being viewed as gateway market as evidenced by the consistent acquisitions of office buildings by institutional investors, accounting for more than 40% of total investments annually. Investors are still favorable towards the Houston market as it offers an opportunity to invest in a gateway market at a lower price point Institutional investors are the leading source of capital since January 2014, with approximately 1.8 billion in investments (51.3% of all investor types). 38.3% of institutional investments since 2014 have been acquired by foreign buyers. Houston s two downtowns the CBD and the Galleria attract the majority of institutional investors, accounting for 80% of institutional investment since January 2014 and 52% of all investment types. Continued institutional investor interest is evidenced by record pricing in other asset types Broadstone Post Oak (class A+ multifamily) attracted an international investor, and traded in May 2015 at an impressive $260,000 per unit (average Houston multifamily transaction in the past four quarters was $93,768 per unit) YTD HOUSTON OFFICE TRANSACTIONS (>$10M) JULY 30, Institutional Houston Investor Composition 48% 53% 4% 5% 47% 33% Institutional Public Equity Fund Private User/Other Public Equity Fund Private User/Other Houston Investment Type by Submarket 69% $39M $148M 15% 6% 56% 44% $237M 56% 24% 12% 26% 19% 7% 27% $1.3B 9% $1.8B CBD Galleria Energy Corridor Westchase Greenspoint Other Suburban Source: Real Capital Analytics The continued growth of Houston and the nation-leading growth projections of its office market highlight the fact that the momentary downturn in the price of oil will not materially impact pricing for high-quality, Class A office buildings. To the contrary, the dominant market psychology shaping the current Houston office market creates an opportunity for a current owner to benefit from increased investor focus, thus setting the tone for pricing of the Houston office market. 17 R EAL E STATE C APITAL T RANSACTIONS

18 R EAL E STATE C APITAL T RANSACTIONS Main Street, Suite 3625 Houston, Texas 77002