What year. The pandemic, civil unrest, a shrinking economy, falling oil prices and more have all had varying impacts on Texas markets. With everyone eager to get out of 2020, what’s the real estate outlook for the state’s largest metros in 2021?
According to Michael Caffey, President, Advisory Services, Central-South and Latin America Division at CBREinvestment activity in the Dallas-Fort Worth area has not declined as much as many might have feared.
“Investor activity in Dallas-Fort Worth has continued throughout the year,” Caffey said. “Although activity is down overall, we are still one of the top four markets for total investment volume behind New York, Los Angeles and the Bay Area.”
There is one main attraction, of course. As logistics warehouses remain the most desirable and fastest growing type of commercial property, DFW’s industrial sector has been sheltered from the headwinds of 2020 and has seen year-over-year growth. In fact, demand from tenants in e-commerce, 3PLs and the food and beverage industry has driven up rents and driven vacancy rates to near historic lows.
The industrial submarkets all remained remarkably stable, with activity largely driven by the amount of space available. For example, in the GWS/Arlington submarket, where the vacancy rate is 4.7%, there is naturally less activity than in submarkets that have more available space such as South Dallas or North Fort Worth.
It’s not just investors who want to take advantage of the solid industrial performance of the Metroplex. Developers hardly slowed down even as the pandemic ravaged the global economy. To date, 18.8 million square feet of industrial products have been delivered to the local market in 2020.
“DFW’s development pipeline remained relatively robust throughout the year, particularly in the industrial sector where we are tracking approximately 22.3 million square feet under construction,” Caffey said. “Continued economic growth will drive supply chain activity in Dallas-Fort Worth and across the country, and drive demand for logistics real estate in an already supply constrained environment.”
Caffey said he and his team are also seeing a pick-up in investor activity for multi-family assets, with corresponding construction activity in a bid to keep pace with continued population growth. While there is still capital market activity for office and retail space, demand for these types of products is not as strong as for industrial and multi-family assets.
Office landscaping has slowed, but there are still more than 4 million square feet under construction, following several projects delivered in the third quarter. Historically strong submarkets like North Dallas, Preston Center, Richardson/Plano, as well as North Fort Worth, have all seen positive office absorption so far in 2020. Although overall activity remains depressed, buildings in these submarkets are always well praised.
Year-over-year data shows office investment increased in Metro Houston in the 12 months ending Q3 2020. However, this activity is really driven by two monster transactions in December 2019.
Following the acquisition of Anadarko Petroleum by Occidental Petroleum Corporation, Howard Hughes Corp. – seeking to maintain its virtual monopoly in the submarket – acquired two towers at The Woodlands from Occidental in a $565 million sale-leaseback. Separately, Skanska sold its 90% stake in the Bank of America tower, with Beacon Capital Partners picking up the asset in a record $373 million deal.
“If you take those two deals out of what we’re looking at for 2020, that’s pretty dismal,” said Patrick Duffy, president of the Houston office of International Necklaces. “Underwriting the office market right now is extremely difficult, especially as people have time to digest the impact of working from home and what that does to the long-term occupancy of these buildings.”
According to Duffy, the pandemic caused landlords, investors, developers and tenants to put all real estate-related decisions on hold, waiting to see how the situation unfolded. As a result, he instructed his sales team to start tracking layaway transactions.
“I’ve been doing this for 38 years, I’ve never had to ask anyone to reclassify a deal that was in negotiation or on hold as ‘on hold,'” Duffy said, “but we started to see a lot of chords lock up.”
The Colliers Houston team moved more than $6 million in revenue into this new “pending” category. The good news is that this number has dropped to around $3.4 million. This is partly due to deals that died, but also because previously frozen deals are back on the negotiating table.
The pandemic has hit U.S. markets more or less equally, but Houston has the misfortune, this year anyway, of being dominated by the oil and gas industry. With flights grounded and commuters staying home, gasoline prices have plummeted and the effects could be felt in Houston’s CRE industry. Layoffs at Exxon, Shell and other oil and gas companies continue to drive office vacancy rates higher.
As in the office sector, industrial investment activity in Houston is distorted by a major transaction, the acquisition by Prologis of Liberty Property Trust. If it weren’t for one REIT buying another REIT and recording it as real estate sales, activity would appear to be very slow in the Houston industrial market.
“It’s not a lack of interest on the investor side of the equation, it’s a lack of available property. Nobody wants to sell,” Duffy said. “Really, the industrial market here has been pretty robust.”
Austin has been in growth mode for the past few years, resulting in an explosion of office development. According to Ryan Bohls, director of NAI Partners Austin office, Metro had more than 8 million square feet of office products in the works before the pandemic, nearly all of which is still expected to ship over the next two and a half years. However, the events of 2020 could cause a crisis with this whole new product.
“An additional 7 million square feet of new build is on the way and this is where we get a little more uncertain, with developers and financiers demanding more pre-letting activity before making firm commitments to go vertical,” said said Bohls. “It’s a daunting task when some of these new buildings may experience significant downtime before being leased.”
A high concentration of tech leasing in the CBD could hurt downtown office numbers the most, as these companies are more easily able to work from home. Bohls notes, however, that a correction in the office market was needed, with a deluge of 3 million square feet of space rolled out at the wrong time.
As elsewhere, the industrial is the most unshakeable asset class. Austin trails only Atlanta and the Inland Empire for rental activity as a percentage of inventory with more than 4 million square feet since the first quarter.
Big companies have big effects on Austin’s industrial market. Amazon has leased more than 6 million square feet market-wide, though a slowdown appears imminent. However, Bohls expects a “multiplier effect” as suppliers seek to locate within a tight radius of Tesla’s recently announced Gigafactory.
Hotel room rental rates have been absolutely reduced nationwide after the first outbreak of COVID-19. With cancellations of festivals like South by Southwest and Austin City Limits, in addition to business conferences, Austin’s hospitality industry has been hit hard. Bohls pointed out that more than a third of CMBS-backed loans on buildings near Power Five school stadiums are in default, which is a trend to watch as the University of Texas has capped football attendance.
“Austin, and Texas in general, is probably the best suited state/city in the country to weather a storm like this,” Bohls said. “We have recovered from the Great Recession in record time (20 months vs. 53 months nationally) and post-pandemic circumstances in coastal markets are expected to drive a wave of continued activity in central Texas.”