Is Houston the Next Gateway City?

Institutional investor demand for Houston commercial real estate, coupled with job growth, a less expensive cost of housing and movement of oil and energy industries into the city is leading local players to predict that the most populousmetropolis in Texas could become the next gateway market. "Houston has always been a strong market for institutional investment, but it is now viewed as a gateway city," Kevin Roberts, the southwest president at Transwestern, said. "Today, it is considered one of the top tier investment markets in the U.S."

Las yea, the city was ranked fourth in the U.S. for foreign investment and fifth globally, according to the Association of Foreign Investors in Real Estate. "This was a huge improvement since not all that long ago, Houston was not a primary investment market for foreign capital, because most foreign investors were going toward gateway markets such as Los Angeles, San Francisco, New York, Washington, D.C., and Boston," Tom Fish, executive managing director at JLL, said. "[The city has] recently been perceived as a gateway market in the eyes of foreign investors, and [it] now has a healthy amount of foreign bidders."

Consolidation of the oil and energy industries into Houston has created internationally competitive jobs that draw foreign capital to the region, Kevin Roberts, the southwest president at Transwestern, said. He explained that Houston is predicted to be the number one supplier of oil and gas in teh United States in 2015.

Because of this, there has been a rapid increase in foreign investment from Mexico as well as an in-migration trend, according to Jan Sparks, managing director of structured finance at Transwestern. "There is significant influx of wealthy Mexican nationals into Houston, predominantly in Mexico City and Monterrey. Houston offers a stabilized, safer environment for them to raise their families and conduct their business. Commuting to numerous cities in Mexico from Houston is easy and inexpensive. They can get in and out of Mexico in the same day if they desire," she said.

The city has seen in-migration from the Northeastern, Midwestern and Western parts of the U.S., Roberts said, as people seek to take advantage of low-tax business opportunities. "Our governor has been very aggressive in trying to attract people to those businesses," Fish said. "The one thing that is interesting about the oil business is that it's not just people in hard hats drilling. It also produces an enormous amount of technology jobs, and a lot of people are coming in from places like California to fill those positions."

 

Job growth in Houston, which is seeing 80,000-100,000 new jobs created each year, is close to double the national average, Fish said. This means the office sector has seen a lot of demand, Sparks said, as it has been an efficient way to place large amounts of equity for the past two years. Houston now has more office space under construction than any city in the country, according to Fish, a vast majority of which is already leased.

 

Multifamily is also one of the leading product types in Houston this year, Roberts said, with more than 17,000 multifamily units delivered in 2014 and nearly 15,000 of those units abosorbed. "Many members of Generation Y are coming in and renting these urban, multifamily units," Roberts said. "Sixty percent of Generation Y renters think that they'll move within the next five years, so they're willing to pay up for apartment units because they are renters by choice."

 

With all of the new construction, Fish said that he believes there is enough discipline in the market to limit it to the best products that are able to get capitalized. "We have had a terrific four years of double-digit rent growth, and as long as we continue to experience the job growth that we are now, I think we'll be able to absorb the units that we have coming in," he said. "Even though construction prices are going up because of the heightened labor market, I think the future of Houston looks pretty healthy. There's always a little bit of caution about what will happen in the oil industry, but I'm very optimistic."

 

Although the market in Houston has been favored among investors for a couple of years, according to Roberts, he doesn't believe Houston has seen its peak yet. "Many use baseball analogy that we're in teh middle innings of an extra innings baseball game," Roberts said. "Fundamentals in Houston and the economy's supply and demand equilibrium are very much in check, and I do believe that this current cycle will have a very nice run. I don't think we're close to the end. I think we have several years in the future to enjoy this momentum and continue to build on it."

New York Area Fourth Quarter 2013 Office Market Report

Expanding Tech Firms Help Boost New York Occupancy

Progressing job growth, particularly in the robust technology sector, together with improving financial markets, will lift the number of new leases in the New York City office market. Recently, Yahoo announced it is consolidating its three sites in Manhattan into 176,000 square feet in the former New York Times space on 43rd Street. Upon inking the new long-term lease, Yahoo announced plans to continue expanding its staff in the coming years. Other expansions include YouTube, which recently announced it will open a new 25,000-square foot creative studio in Chelsea in 2014. Due to limited supply, these large corporations are paying premium rents for quality space. The rise in rents is driving many smaller firms and startups to the Garment District, where developers are repositioning old manufacturing floor plates for traditional office and tech tenants. The finance sector, the former primary driver of significant office space demand, continues to recover from job losses incurred during the recession. As the stock market gains traction and volatility decreases, financial firms are expected to bolster headcounts by 4,000 positions this year. As a result, many financial firms will backfill underutilized space and potentially expand into larger footprints.

After a frenzied investment climate during the last quarter of 2012, the market has entered a period of equilibrium. Many owners who purchased during the downturn are taking profits after a significant gain in the value of their assets, while other investors are divesting to reallocate capital into other strategies. As these assets come to market, they are targeted by high-net-worth individuals, local syndicates, and foreign investors who are competing aggressively to purchase assets located in primary office districts in the city. Value-add plays have also been a prime opportunity to achieve outsized returns for buyers positioned to assume the risk of converting old properties in the Garment District and lifting rents to the current market rate. As properties convert, investors seek to capture the influx of tech tenants who will pen seven- to 10-year leases. Properties repositioned for these tech companies are trading with first-year returns around the high-4 to low-5 percent range.

2013 Annual Office Forecast

• Employment: Robust job growth will continue through year end as 85,000 workers find jobs, lifting payrolls by 2.2 percent. Office-using employment will expand over 29,000 positions in 2013, increasing headcounts by 2.3 percent. Last year, 29,000 office workers were added in the metro.
• Construction: Developers will deliver over 6 million square feet of office space this year, expanding inventory by 1 percent. In 2012, approximately 1.3 million square feet of office space was added to inventory.
• Vacancy: By year end, vacancy will fall to 10.7 percent, an annual decrease of 70 basis points from 2012. Vacancy declined 40 basis points in the previous year.
• Rents: As conditions tighten this year, operators will lift asking rents 4.5 percent to $49.83 per square foot. In the previous 12-month period, asking rents for marketable space increased by 3.2 percent to $47.69 per square foot.

New York Metro Area Fourth Quarter 2013 Apartment Market Report

Deal Flow Jumps as New York Operations Remain Solid

The pace of job creation in the five boroughs has eased from one year ago, but the rental housing market remains healthy. Strong demand drivers will persist through the end of this year, while supply growth will also accelerate. With employment rising and other economic indicators providing encouragement to builders, the city is in the midst of a development cycle. Groups will continue to push projects through the approval process as 2013 winds down in advance of a change in the Mayor’s office in 2014. Notably, the city council is expected to vote on a massive re-zoning of the 73-block Midtown East area before the end of 2013. In the boroughs, development is booming in Queens, especially in Long Island City, a location that offers residents a relatively short subway ride to Midtown Manhattan employers. Roughly 8,000 units of housing are anticipated to come online in the borough over the next three years.

The investment market continues to flourish as significant gains were recorded in transaction velocity and dollar volume over the past year. A rise in long-term interest rates early in the third quarter had little effect on deals, and a more significant move in long-term interest rates will have to occur to trigger a broader and more profound re-pricing of assets. Until then, a keen bidding climate will persist. More than three-fourths of all transactions in the city over the past year took place in the $1 million to $20 million price tranche, a segment of the market dominated by private investors, including many local parties. Attractively priced acquisition debt and heightened competition among lenders will sustain a robust level of property purchases within this pool of investors in the months ahead. In the midst of a period of solid economic growth, the market remains supple, constantly shifting shape as new neighborhoods come to the fore. An extension of the 7 train to 10th Avenue next year, for example, will open up a new area of the city for developers and investors, while the ongoing development in Queens will also elevate the borough’s appeal.

2013 Annual Apartment Forecast

• Employment: Employment in the five boroughs will expand 1.8 percent in 2013 through the creation of 70,000 jobs, primarily in education and health services, and leisure and hospitality. In 2012, 78,200 positions were created in the city.
• Construction: In 2013, developers will bring online approximately 7,000 rentals in the five boroughs, an increase from more than 5,000 units last year. The building cycle will continue, as more than 15,000 units of multifamily housing are on track to receive permits this year.
• Vacancy: The vacancy rate in the New York metro will rise 10 basis points to 2.6 percent in 2013; a decrease of 10 basis points was recorded last year.
• Rents: Average rents will advance 2.5 percent in 2013 to $3,455 per month. A gain of 11.5 percent was registered during 2012.

http://www.marcusmillichap.com/Services/Research/#1

Chinese Investors Seeing Bargains Rescue Distressed Commercial Real Estate In The U.S.

Summary: Chinese investors are investing in distressed commercial properties in cities like Detroit.  Dongdu International paid $13.6 million for two Detroit office buildings, with plans to convert one into apartments.  (The replacement price of these two buildings is $80 to $100 million each.)  New York's Cassa Hotel was bailed out of bankruptcy by a Chinese firm.  Chinese property deals in the U.S. grew to $1.7 billion this year from $1.1 billion in 2011.  These buildings, by Shanghai comparisons, are incredibly cheap.


New York --(International Business Times)--

Chinese investors have found a new place to park their cash: increasingly they snapping up distressed commercial properties in American cities like Detroit, where despite the risk steeply discounted prices are appealing to investors used to China's highly inflated real estate prices.

Wealthy Chinese have been buying residential properties for years in popular destinations like California and New York but now they are also bailing out office buildings, hotels and other commercial properties overleveraged from the boom years in the U.S., the Wall Street Journal reported this week.

Earlier this month Chinese firm Dongdu International (DDI) paid $13.6 million for two well-known Detroit buildings with plans to convert one into an apartment complex, while the other building will be remain an office. Other Chinese purchases include New York’s Cassa Hotel whose previous owners sought bankruptcy protection, and a vacant office park in Silicon Valley.

The new Chinese administration has encouraged companies to diversify their holdings and spend foreign capital reserves, which prompted an overall rise in Chinese U.S. property investment this year. Chinese property deals in the U.S stand at $1.7 billion so far in 2013, up from the $1.1 billion 2011, according to research firm Real Capital Analytics Inc..

While some Chinese companies like Dalian Wanda Group, owned by China’s richest man Wang Jianlin’s , have bought high-profile landmark buildings others are more attracted distressed properties needing further investment and management. Other foreign investors generally shun projects requiring such secondary investment.

These properties are often in default and suffering high vacancy rates or facing other turnaround challenges. Experts say these deals suggest the Chinese are both more willing to take risks than other real estate investors and patient enough to hold properties until values rebound.

Four of the 15 largest Chinese property investments in the U.S in the past year have “resolved a troubled situation,” Real Capital said. In just the past few months, the Chinese have made 23 direct bids for properties on sale through Auction.com LLC, many of which would be distressed, said the company’s Executive Vice President Rick Sharga said.

Steeply discounted prices account for much of the recently-purchased properties' appeal according to the Wall Street Journal. Each of the two Detroit buildings, for example, would have cost between $80 million and $100 million to replace, said Ryan Snoek, a consultant for Luke Investments, the seller of the Detroit properties.

"People from China look at the price at which you can buy these buildings and think that's the cost of one apartment in Shanghai," said Goodwin Gaw, founder of the Hong Kong-based Gaw Capital Partners.

http://www.ibtimes.com/chinese-investors-seeing-bargains-rescue-distressed-commercial-real-estate-us-1445528