Founder's Feature
Third Quarter 2008
State of the Central Texas Real Estate Market
The Central Texas real estate market is performing very well in the face of an especially uncertain economic, housing and capital market across the nation. With such issues facing the US, Central Texas is performing contrary to these concerns, as an environment of relative security for overall investment, and more specifically, real estate investment. Job growth, an active lender and investor market and commercial and residential value stabilization are all positive aspects of the Central Texas economy. In spite of the recent slowdown across product types, HPI Real Estate Services and Investments, Inc. foresees, that, through the right investment partner with a proven track record of execution, Central Texas is a relative safe haven for both capital preservation and real estate appreciation for owners, investors, and lenders.
Central Texas Economy
Austin
With 4.2% job growth, according to economy.com, Austin ranks is the seventh fastest-growing job market in the US, with lower unemployment than Texas and the nation as a whole. In March 2008, 3.7% local unemployment compared to 4.2% in Texas and 5.2% nationally.
Austin will remain a top-performing economy, both organically and through corporate relocation. The influx of venture capital investment and diversification of the Austin economy beyond that of just technology will create a lasting benefit for an economy that is already outperforming the rest of the nation. Austin is projected to rank thirteenth nationally in employment growth with the creation of 106,600 jobs. Austin is estimated to rank twelfth nationally in population growth, due to the relative attractiveness of Austin’s natural amenities and educated workforce, with the nearby University of Texas graduating 10,000 students every year.
San Antonio
San Antonio, the seventh largest city in the nation and second largest in Texas, is often overlooked as a major economy, despite its relative size to Austin and Dallas. Through 1Q08 San Antonio was the sixteenth fastest-growing job market in the US, driven by its location as a growing transportation hub and major exporter to and from Mexico. Like Austin, San Antonio has experienced low unemployment compared to Texas and the broader US. In March 2008, San Antonio had 3.9% local unemployment compared to 4.2% in Texas and 5.2% nationally, evidence that Central Texas is outperforming the nation through the current economic downturn.
Strong population, job growth, good transportation infrastructure, a diversified business climate and low business and living costs are all positive economic factors for San Antonio. Annual job growth of 2.5% over the next 5 years ranks San Antonio fourteenth in the US, which exceeds population growth of 2.0% over the next 5 years. San Antonio’s economy will continue to benefit over the coming years as a transportation hub and a major exporter to Mexico, driving population growth and real estate values.
Real Estate Market (Central Texas)
The Central Texas real estate market has slowed from a leasing perspective, primarily driven by macroeconomic uncertainty rather than local market conditions. In addition, Central Texas has experienced substantial new development over the last few years. With all the new supply, certain submarkets will fare differently, depending on each product type.
The Central Business District (CBD) office market continues to lease well, in spite of rising rates. Suburban office markets have the most supply being delivered with very little pre-leasing and slow leasing velocity. A key investment concern is suburban office, specifically, the Northwest and Southwest submarkets. Oversupply and lack leasing velocity will create an attractive market for both tenants and opportunistic investors over the next 12-18 months.
The industrial market is also experiencing a wave of new supply, mostly in bulk product. Dell’s decision to move its PC and laptop manufacturing to North Carolina has already impacted many vendors, and negative effects will continue as other tenants give back space in the coming months. In spite of the negative effects of new supply and Dell’s downsizing, absorption continues at a good pace, specifically in flex product, as tenants realize the significant cost savings between Class A office and flex.
Retail leasing in San Antonio has slowed over the recent months, primarily due to major anchors delaying expansion plans for existing and new locations due to national economic factors. However, HPI continues to successfully line up anchor and non-anchor tenants with well-located projects and superior leasing and management.
Tenant Health
Overall, the tenants in Central Texas are very healthy in contrast to other US markets. This is the direct result of a relatively stable housing market and job growth. In Austin, tenant health is very strong across all industries, most importantly in the technology and service industries. Unlike in the tech bubble of 2001, Austin firms are experiencing positive, yet controllable, growth driven by product demand and not by the aggressive venture capital investment of the late 1990s. The resurgence of venture capital funding (VC) is once-again bolstering growth in new and existing companies. In 1Q08, Texas saw a 21% increase in VC investments over 1Q07. Of the $360MM invested in VC in Texas, the majority of these dollars are focused on Austin. In addition, many Austin technology companies are not nearly as reliant upon natural resources and, as a result, are somewhat protected from rising oil and commodity prices haunting the broader economy.
In San Antonio, increasing exports and demand for products from Mexico continues to drive growth and tenant stability. 2006 data reveals that exports increased 31% over 2005, which is twice the national average of 15% over that time period. Given the depressed value of the dollar through 1Q08, a strong demand for exports is expected to continue for San Antonio as the city continues to prosper as a transportation hub.
Lending Market (Central Texas)
Central Texas remains an attractive lending market for certain product types and opportunities including core and value-add office and industrial as well as retail with significant pre-leasing. Products in disfavor include speculative office development, condominiums and single family development.
The "lender paralysis" associated with volatile credit markets over the last year have, for the most part, subsided with banks. However, lenders remain cautious in making new loans and refinancing existing projects. A handful of lenders have decreased lending appetite due to overexposure to certain product types, however, lenders continue to lend to strong sponsors with the proven ability to execute.
The permanent lending market in Central Texas mirrors more closely that of the rest of the nation with a similar "lender paralysis" that has improved in recent months. The permanent market has felt the effects of the mortgage crisis through the elimination of CMBS as a lending source, resulting in a smaller lender pool of traditional life companies. Life companies are overrun with loan requests and, therefore, have their pick of the litter. The result is “fairway deals” with lower loan-to-values, wider spreads and generally more conservative underwriting.
Investment Market (Central Texas)
In spite of the new supply coming to the market, strength of the local economy combined with stabilized commercial and residential real estate values, make Central Texas a relatively attractive investment market for certain products in specific submarkets. With capital-driven financial buyers on the sidelines, overall demand in the investment market is down from a year ago. The capital markets disruption has created a bid-ask price disconnect due to buyer value uncertainty and seller price expectations, resulting in very few asset trades post-credit crunch. The bid-ask gap has narrowed, as seller expectations have started to normalize while buyers are more confident about values and ability to finance and close acquisitions.
Overall values and cap rates have stabilized across all product types; however, concerns about oversupply and macroeconomic uncertainty remain. As the real estate market works through the new supply, another concern for investors becomes the repeat of 2001-2004. Given the general economic strength and tenant health in Austin, this scenario will not be repeated in Austin. HPI has a history of indentifying outstanding investment opportunities during times of great uncertainty, and the current slowdown is no exception. The investment market may remain slow for the next 12-18 months, but Austin’s ability to ride through the recessionary period will only benefit investors as values increase and the leasing market transitions through the current slowdown.
