Colliers Houston TRENDS 2023

BY RAY HANKAMER

Colliers’ annual TRENDS event took place at Houston Country Club, with presentations by Colliers’ President Patrick Duffy and a keynote address by UH Bauer School Director of the Institute for Regional Forecasting Robert Gilmer. Over four hundred real estate professionals attended the confab, which included a grand networking event before and after the presentations, complete with open bar and lavish hors d’oeuvres buffets.

Patrick Duffy-Takeaway

Overall the Houston real estate market continues on a roll in most sectors, although somewhat subdued at present by higher interest rates.

• The population of Houston’s MSA grew by 1.7% and should continue to grow by 1.5% annually for the next five years

• Based on UHaul drop-offs, Texas is the #1 state for relocations

• The Houston Ship channel is expanding to accommodate new container business coming from crowded West Coast ports, and there are more than 200 private terminals in our port; Houston leads the US in actual tonnage due to the large amount of bulk petroleum and chemical shipments

• The oil & gas sector continues to make Houston the energy capital of the world, although many other economic drivers are in place now in our local economy

• The Houston airport system impacts our economy by over $36 billion annually

• Our medical center is the largest in the world

• Single family housing started 2022 with a bang but lost momentum when interest rates rose; this has also affected new home starts as developers find new projects don’t always pencil out; this should lead to higher demand for multi-family until interest rate hikes for single family homes end

• California and Illinois experienced the greatest out-migration while Texas captured the most in-migration of any state; Dallas / Ft. Worth and Austin are capturing many of the new residents, as is Houston

• Retail is ‘on fire’ with historically low vacancies (5%); restaurants are the exciting new tenants in many centers; over 2 million SF of retail under construction with 47% pre-leased; Class A in-line rates can vary from $25-$85 SF

• Multi-family experienced a slight drop in occupancy in 2022 to 90.6%; there are almost 21,000 new units under construction; there is negative absorption in Class B & C as many tenants move up to A

• The office sector continues to be challenged as companies and employees work to adjust the at-home, at-office balance; vacancies are up ten basis points year over year and many companies have sub-lease space available; overall vacancy in office sector is 23%; some old buildings should probably be demolished; almost 2 million SF new office product under construction

• The industrial sector is very strong, driven largely by the port; vacancy is at 5.6% with almost 29 million SF absorption in 2022; we have 33.6 million SF under construction, with 16% pre-leased; conservative developers are seeking more build-to-suit as more tenants want to own; spec building in this sector is down; in 2022 70% of absorption was in deals 100,000 SF and larger

• Healthcare, another one of Houston’s economic engines, experienced 867,000 SF absorption in 2022, up slightly from 2021; average asking rental rates are up 2.5% over 2021

• All Houston CRE sectors are in expansion phase except for Office, which remains in recession phase

Robert Gilmer-Takeaway

The aftermath of the pandemic left somewhat of an economic ‘mess’, which the Fed is trying to clean up, after ‘mistimed’ economic stimulus. Oil & fracking are now a smaller economic impact on Houston’s economy, and without it Houston should have a near zero overall job growth in 2023. Most Texas cities have had a complete post-Covid payroll recovery after the initial shock created deep job losses. Federal stimulus funds, while helping people in need, also created imbalances and inflationary pressures in the economy.

• Predictions of Houston job growth in 2023 vary from none to 117,000, with almost no help from oil and gas, although this industry is enjoying relatively high prices around $80 bbl; Houston lost 44,000 O&G jobs after oil peaked in 2019, and only 39% are back

• Oil & gas companies are directing profits not so much toward new exploration but towards ‘cleaning up’ their balance sheets and towards paying out returns to investors

• OPEC created big gyrations in oil prices in past years, which led to Texas oil producer bankruptcies, and this has led to a slowdown in new investment in this sector; producers can make money at prices above $65 bbl; rig counts have fluctuated between roughly 2000 and 700, where they now stand

• The Fed is attempting to slow the economy and inflation without creating a recession, which is a careful tightrope to walk

• Oil prices have been back since mid-2021 but the industry has only seen limited increase in rigs, oil jobs, and production; the industry is cautious after having been whipsawed by OPEC policies

• The Fed is seeking a return to an average 2% inflation rate over the long term; the Fed has the economic tools if they have the political will, and the Fed was ‘embarrassed’ by letting inflation soar in 2021; there will be some job loss nationwide as interest rates rise

• Industrial production is down over past 6-8 months; merchant wholesalers down; retail sales down 0.5% after peaking last October; real personal consumption down 0.2%

• Inflation is falling nationwide and different forecasters have different predictions on timing, but overall the US economy is heading in the right direction, and Houston and Texas along with it; excluding oil & food, inflation ran at 4.3% rate through December

• Houston existing home sales show shrinking sales, rising inventory, flat prices; inflation and rising mortgage rates are responsible for the sharp slowdown

• Auto sales have shown an almost level rate (with some up and down fluctuation), while prices have risen sharply over past year

• Houston sales tax collections remain robust and have steadily risen over past two years; fiscal support and cheap money drove record retail sales since 2020 but they are finally leveling off as fiscal restraints start to bite and stimulus wanes; Houston consumer savings rates are below pre-pandemic levels and continue their gentle slide