THIS AIN T THE 80s! And Houston isn t going anywhere.

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Moses Julian Norton
5 years ago
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EXPECTEDLY, A DRAMATIC DOWNTURN IN OIL, ONE THAT

2008-2009, RAISED ALARM ABOUT THE STABILITY OF

NONETHELESS, WITH OIL PRICES DIPPING BELOW $30 A

1 THIS AIN T THE 80s! And Houston isn t going anywhere. EXPECTEDLY, A DRAMATIC DOWNTURN IN OIL, ONE THAT HAS RUN EVEN FASTER AND DEEPER THAN DURING , RAISED ALARM ABOUT THE STABILITY OF THE HOUSTON ECONOMY. NONETHELESS, WITH OIL PRICES DIPPING BELOW $30 A BARREL REMINDING US OF THE BEARISH HOUSTON ECONOMY OF THE MID-TO-LATE 80s, TODAY S MARKET CONDITIONS ARE VASTLY DIFFERENT.

2 2 WHAT SETS TODAY APART FROM 30 YEARS AGO? EMPLOYMENT HOUSTON TODAY HOUSTON IN THE 80S IN 2015, DESPITE THE DRAMATIC DROP IN OIL PRICES HOUSTON LOST 53,600 ENERGY JOBS 13 % THE HOUSTON ECONOMY GAINED 15,200 JOBS VS 221,000 JOBS DURING THE 1980s OIL DOWNTURN HIRE ME! A TESTAMENT TO THE CITY S INCREASED INVESTMENT IN DIVERSIFICATION Source: CBRE Research 2016 HOUSTON HAS INCREASINGLY DIVERSIFIED Downturns within the energy industry tend toward consolidation into Houston from energy peripheral cities (New Orleans, Tulsa, & Denver) TRADE, TRANSP. & UTILITIES PROFES. & BUSINESS SERVICES GOVERNMENT EDUCATION & HEALTH SERVICES LEISURE & HOSPITALITY MANUFACTURING CONSTRUCTION FINANCIAL ACTIVITIES MINING AND LOGGING INFORMATION OTHER Source: U.S. Bureau of Labor Statistics, March 2016 OVERALL EMPLOYMENT REMAINS STRONG As historic job growth shows resiliency despite oil shocks RECESSIONS: EMPLOYMENT: OIL PRICE: JOBS (MILLIONS) WTI ($/bbl) Source: U.S. Bureau of Labor Statistics, March 2016

3 INTEREST RATES/INFLATION HOUSTON TODAY HOUSTON IN THE 80S INFLATION AND INTEREST RATES REMAIN AT HISTORICALLY LOW LEVELS UNTIL DECEMBER 2015, RATES HAD NOT RISEN FOR MORE THAN 7 YEARS RATES SHOULD

3 3 INTEREST RATES/INFLATION HOUSTON TODAY HOUSTON IN THE 80S INFLATION AND INTEREST RATES REMAIN AT HISTORICALLY LOW LEVELS UNTIL DECEMBER 2015, RATES HAD NOT RISEN FOR MORE THAN 7 YEARS RATES SHOULD REMAIN AT NEAR-ZERO LEVELS IN THE NEAR-TERM, ABSENT THE THREATS OF INFLATION OR A CLEARLY IDENTIFIABLE ASSET BUBBLE. VS HIGH INTEREST RATES WERE A POLICY RESPONSE TO RUNAWAY INFLATION IN THE MID 1970s IN AN EFFORT TO CURB RUNAWAY INFLATION OF THE 1970s, THE FED CONTINUED TO RAISE INTEREST RATES, EVENTUALLY LEADING TO SEVERE RECESSION Source: CBRE Research 2016 INTEREST RATES AT HISTORICALLY LOW LEVELS % (PERCENTAGE) RECESSIONS INFLATION RATE FEDERAL FUNDS INTEREST 10 YEAR - TREASURY TERM Source: Federal Reserve Bank of St. Louis, 2016

PARTICULARLY FOLLOWING THE CONSOLIDATION POST GREAT RECESSION.

4 4 WHAT SETS TODAY APART FROM 30 YEARS AGO? DEVELOPMENT CAPITAL/BANKING SYSTEM HOUSTON TODAY HOUSTON IN THE 80S LOW LEVERAGE FROM STRONG BANKS AND INSTITUTIONAL EQUITY WELL-CAPITALIZED, INTER-STATE BANKS & INSTITUTIONAL INVESTORS, PARTICULARLY FOLLOWING THE CONSOLIDATION POST GREAT RECESSION. VS HIGH LEVERAGE FROM UNDER CAPITALIZED BANKS AND SAVINGS & LOANS THAT EVENTUALLY FAILED UNDER-CAPITALIZED & OVERLEVERAGED LOCAL OWNERSHIP BY BOTH BANKS & INVESTORS. LAX REGULATIONS RESULTED IN BANKS FINANCING 100% OF THE LOAN. ALMOST EVERY BANK FAILED OR RECEIVED FDIC ASSISTANCE Source: CBRE Research 2016 WHILE MUCH OF THE NATION CONTINUES ITS RECOVERY FROM THE GREAT RECESSION, HOUSTON S RECOVERY, AS THE LAST MAJOR METRO IN THE U.S. TO ENTER THE RECESSION AND THE FIRST TO EMERGE, BEGAN IN 2011.

5 OVERBUILDING VS. MARKET SIZE 5 HOUSTON TODAY HOUSTON IN THE 80S HOUSTON MSA POPULATION 6.6 MILLION OFFICE CONSTRUCTION HOUSTON MSA POPULATION 3.5 MILLION OFFICE CONSTRUCTION 23 MSF BUILT 11% OF THE TOTAL MARKET IN FIVE YEARS VS 80.8 MSF BUILT 58% OF THE TOTAL OFFICE MARKET IN FIVE YEARS 63,000 UNITS BUILT MULTIFAMILY MARKET 10% OF INVENTORY 131,000 UNITS BUILT MULTIFAMILY MARKET 33.3% OF INVENTORY Source: CBRE Research 2016 HOUSTON MSA BUILDING PERMITS ISSUED The Houston residential market was drastically overbuilt in the 80s but a steady rise in population has sustained demand. UNITS 60,000 50,000 40,000 30,000 20,000 10,000 RECESSIONS MULTI FAMILY SINGLE FAMILY POPULATION Source: US Census Bureau 2016 Multifamily, as a percentage of overall permitting continues to grow; however, this growth is at the expense of single family permits. Regardless of the housing mix, Houston is delivering fewer housing units post-recession than it did pre-recession. SINGLE FAMILY MULTIFAMILY RECESSIONS A CLOSER LOOK - HOUSTON RESIDENTIAL BUILDING PERMITS PERMITS 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Jan 02 Aug 02 Mar 03 PRE-RECESSION AVERAGE Oct 03 May 04 Dec 04 Jul 05 Feb 06 Sep 06 HOUSTON SINGLE FAMILY SUPPLY Source: Houston Association of REALTORS, 2016 Apr 07 Nov 07 Jun 08 Jan 09 Aug 09 Mar 10 Oct 10 POST-RECESSION AVERAGE may 11 Source: US Census Bureau 2016 Dec 11 Jul 12 Feb 13 Sep 13 Apr 14 Nov MONTHS INVENTORY MONTHS INVENTORY *balanced housing market is 6 months inventory Jun 15

6 TRENDS BY SECTOR STRONG POPULATION AND EMPLOYMENT GROWTH IS DRIVING RETAIL EXPANSION, MULTIFAMILY AND SINGLE-FAMILY HOUSING DEMAND, AND

INDUSTRIAL DEMAND IS STABLE; PETROCHEMICAL AND THIRD PARTY LOGISTICS DOMINATE TENANT ACTIVITY.

EXPORTING STATE IN 2014 TEXAS 289 WASHINGTON 174 ENERGY HOUSTON 32 % ECONOMY BILLIONS NEW YORK ILLINOIS LOUISIANA 68 65 86 THE PORT OF

6 6 TRENDS BY SECTOR STRONG POPULATION AND EMPLOYMENT GROWTH IS DRIVING RETAIL EXPANSION, MULTIFAMILY AND SINGLE-FAMILY HOUSING DEMAND, AND CONTINUED GROWTH WITHIN THE HEALTH CARE SECTOR. OFFICE The most vulnerable real estate sector in the region. PROJECTED VACANCY COULD REACH 15.2%. INDUSTRIAL While manufacturing slows across the state, the Southeast submarket will see the strongest activity. INDUSTRIAL DEMAND IS STABLE; PETROCHEMICAL AND THIRD PARTY LOGISTICS DOMINATE TENANT ACTIVITY. ECONOMIC IMPACT HOUSTON ENERGY SECTOR THE PORT OF HOUSTON, TX 3,700+ ENERGY RELATED ESTABLISHMENTS LOCATED WITHIN THE HOUSTON MSA TEXAS: TOP EXPORTING STATE IN 2014 TEXAS 289 WASHINGTON 174 ENERGY HOUSTON 32 % ECONOMY BILLIONS NEW YORK ILLINOIS LOUISIANA THE PORT OF HOUSTON IS THE LARGEST EXPORT MARKET IN THE U.S. AND THE WORLD S TOP RESEARCH FACILITIES Source: U.S. Department of Commerce, CBRE Research, Q $166 BILLION ECONOMIC IMPACT $178.5 BILLION ECONOMIC IMPACT Source: Greater Houston Partnership/CBRE Research 2016 Source: U.S. Department of Commerce, CBRE Research, Q

7 RETAIL Strong population growth, limited supply and constrained construction cycle are driving retail demand.

MULTIFAMILY After two years of record construction activity, an imbalance of supply and demand is starting to reveal

HOTEL Hotel occupancy trailed off at the end of the year at 70.5%. ROOM RATES ARE AT RECORD HIGHS OF $108.

SURGERIES MOST HEART SURGERIES IN THE WORLD WORLDS LARGEST MEDICAL COMPLEX NASA/JOHNSON SPACE CENTER 1,620-ACRE COMPLEX

2 MILLION PATIENTS/YEAR A $1.5 BILLION COMPLEX HOUSING ONE OF NASA S LARGEST R&D FACILITIES $27.5 BILLION $14 BILLION $1.

7 7 RETAIL Strong population growth, limited supply and constrained construction cycle are driving retail demand. HOUSTON ABSORBED 2.5 MILLION SQ. FT. IN 2015, THE MOST IN TEN YEARS. MULTIFAMILY After two years of record construction activity, an imbalance of supply and demand is starting to reveal itself, especially in Class A properties. CLASS B PROPERTIES ARE STRENGTHENING WITH OCCUPANCY RISING TO 93.6%. HOTEL Hotel occupancy trailed off at the end of the year at 70.5%. ROOM RATES ARE AT RECORD HIGHS OF $ HOUSTON AIRPORT SYSTEM 53 MILLION PASSENGERS 446,152 METRIC TONS OF CARGO TEXAS MEDICAL CENTER 171,000 ANNUAL SURGERIES MOST HEART SURGERIES IN THE WORLD WORLDS LARGEST MEDICAL COMPLEX NASA/JOHNSON SPACE CENTER 1,620-ACRE COMPLEX MAJOR EMPLOYERS INCLUDE: BOEING, LOCKHEED MARTIN, BROWN & ROOT AND JOHNSON ENGINEERING IAH IS 10TH BUSIEST AIRPORT IN U.S. 7.2 MILLION PATIENTS/YEAR A $1.5 BILLION COMPLEX HOUSING ONE OF NASA S LARGEST R&D FACILITIES $27.5 BILLION $14 BILLION $1.8 BILLION ECONOMIC IMPACT ECONOMIC IMPACT ECONOMIC IMPACT Source: Greater Houston Partnership/CBRE Research 2016 Source: Greater Houston Partnership/CBRE Research 2016 Source: Greater Houston Partnership/CBRE Research 2016

This ain t the 80s! And Houston isn t going anywhere. HOUSTON A GLOBAL MARKETPLACE ONE OF THE WORLD S LEADING CITIES: 4TH LARGEST CITY IN THE U.S. (BEHIND NYC, LA, CHICAGO) 2ND MOST FORTUNE 500 HQS IN THE U.

8 This ain t the 80s! And Houston isn t going anywhere. HOUSTON A GLOBAL MARKETPLACE ONE OF THE WORLD S LEADING CITIES: 4TH LARGEST CITY IN THE U.S. (BEHIND NYC, LA, CHICAGO) 2ND MOST FORTUNE 500 HQS IN THE U.S. (BEHIND NYC) $525 BILLION ANNUAL GROSS AREA PRODUCT (larger than the gross domestic product of Norway) 4.9% UNEMPLOYMENT RATE Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Greater Houston Partnership, March 2016 ECONOMIC ADVANTAGES CENTRAL TIME ZONE NO CORPORATE OR INDIVIDUAL STATE INCOME TAXES RIGHT TO WORK STATE (NO REQUIREMENTS FOR UNION LABOR) AFFORDABLE HOUSING (LOWEST COST OF LIVING AMONG THE LARGEST U.S. METROS 2800 Post Oak Blvd, Suite 2300 Houston, TX Robert C. Kramp Director, Research & Analysis Texas-Oklahoma Tel: robert.kramp@cbre.com Jeff Stein Senior Vice President Tel: jeff.stein@cbre.com Jim Kirkpatrick Senior Vice President Tel: jim.kirkpatrick@cbre.com Michael Thompson Senior Vice President Tel: michael.thompson3@cbre.com David Aaronson Executive Vice President Tel: david.aaronson@cbre.com Hal Holliday Executive Vice President Tel: hal.holliday@cbre.com Jim Richards Executive Vice President Tel: jim.richards@cbre.com John Fenoglio Executive Vice President Tel: john.fenoglio@cbre.com Brent Crawford Vice President Tel: brent.crawford@cbre.com Chad Collins Vice President Tel: chad.collins@cbre.com CBRE 2016 Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.

The Houston Economy Jesse Thompson Regional Business Economist The Federal Reserve Bank of Dallas, Houston Branch June 2016

The Houston Economy Jesse Thompson Regional Business Economist The Federal Reserve Bank of Dallas, Houston Branch June 2016 Image from http://peoplesguidetohouston.wordpress.com/category/uncategorized/