Transwestern's Annual Trendlines Presentation, River Oaks Country Club

BY RAY HANKAMER

Featured Speaker: Patrick Jankowski, Sr. V.P. & Chief Economist for The Greater Houston Partnership

Takeaway: Overall Houston has recovered from the pandemic and our economy is poised for vigorous growth going forward.

• We have recovered all the jobs lost in the pandemic, and employment is at an all-time high

• Recovery has taken place in all commercial real estate (CRE) sectors except office, and that has stabilized; worst may be over for office

• Oil & gas exploration and hiring are lagging a bit while companies strengthen their balance sheets and give some return to their investor/shareholders; 65% of these companies plan to increase capital spending

• If there is a recession in Houston it will be short

• The port is one of our strongest economic drivers

• Construction permits are up as is our population since 2020-we are among the top five U.S. cities in population growth

• Industrial remains strong although the nature of the market is changing since the ‘covid boom’- Houston’s warehouses must supply the fifth largest Metro population in the country plus serving San Antonio, Austin, and other nearby mid-sized cities and towns

• Multi-family peaked 4-5 years ago but remains strong as high interest rates curtail single family home buying; 21,000 Class A units are under construction

• Retail is doing very well, serving the 7.2 million regional consumers (and growing); as usual, retail ‘follows rooftops’ as it moves to the distant suburbs

• Short term economic view: partly cloudy with patches of blue; long term: bright sunshine

Transwestern “House View”- Collective observations from the CRE professionals on the Transwestern team

• Some headwinds for all asset classes

• Interest rates are near the top now, and there is a positive outlook among investors for Houston area CRE

• There is continued institutional equity and debt interest in all Houston area asset classes; most assets here are in ‘pretty good shape’

• We are at ‘full employment’ in Houston and the port is setting records

• Houston CRE will outperform other cities, and we are well-positioned for the upturn

• One drawback is the lack of city and county economic incentives to incoming companies

• Industrial- 43 million SF absorption with 36 million under construction; we will be short of space, while having high demand; continued rent growth and shortage of space by 2024

• Retail- will benefit by continued population growth; mom and pop shops are being squeezed out by national retailers coming in, who can pay higher rents; we will have a supply constraint in this sector until 2025

• Multi-family-Houston was the second most active market in the country in 2022; there is softening in Classes B & C due to negative absorption; there is a slowdown in volume of investment transactions in this segment

• Healthcare-very strong; there are 32 million SF of health-oriented space in Houston market; demand strengthening for life science space, and this sector may be on the verge of ‘an explosion’; venture capital is coming into this sector; 190,000 SF of spec lab space will be absorbed in 2023

• Office-old buildings are ‘a dead man walking’; offices with loan maturities coming up in the next 24 months are in trouble; covid exposed obsolescence of older buildings, and there is a flight to quality: tenants will pay more for just the right environment; West Houston, The Woodlands, Uptown Houston, and the inner loop are the most sought-after locations; “back to the office” is in full swing here, although some ‘cube people’ don’t need to be in an office-they can work from home; idea flow makes things happen in a company and that requires physical presence of employees; expect chronic vacancy in old buildings

Chat between TW CEO Larry Heard & Revered businessman/consultant Greg Brenneman-Excerpts from the fast-moving chat and fast-moving slides

• Brenneman’s new book Right Away And All At Once was recommended

• Brenneman’s career included Harvard Business School, Bain Consultants, and working as turn-around consultant for such companies as Continental Airlines

• The need for careful and positive personal relationships was exemplified by the paraphrased quote from Mitt Romney: “In every interaction, you either gain or lose share”

• Warren Buffet was quoted: “Be fearful when others are greedy; be greedy when others are fearful”

• It was pointed out that previous energy transitions (i.e. wood to coal and coal to gas and oil) took very long times, and we must expect our transition to renewables to not happen ‘overnight’

• “Houston has the chance to lead the world in energy transformation”-we are set to lead the world in energy, in the various forms it will be taking

• It was emphasized how Houston is a leader in healthcare worldwide, and our medical center is second to none in the world; “the Texas Medical Center has it all pulled together”, including the excellence of Texas Childrens Hospital and the fact that Baylor College of Medicine supplies 50% of all the doctors in the TMC

• Houston is known for its diversity AND for its generosity, as private donors give back huge amounts of personal wealth

• “Let’s don’t forget that productivity is more important that statistical ‘job growth”