What do the high-tech industry’s "Silicon Hills" have in common with Massachusetts’s largest metropolis, the nation’s energy hub, the financial capital of the world, and the City by the Bay? The answer: job growth, and it is fueling real estate development.
Those five metropolitan areas—Austin, Boston, Houston, New York City, and the San Francisco Bay area—are among the markets getting the most attention from investors and developers. They also are hotbeds of creativity and home to some of the nation’s most educated workers.
The Texas capital is receiving increased attention because real estate in competing cities such as Miami, New York City, and Chicago is getting painfully high priced. A lot of institutional investors looking to place cash are looking to other areas, says Mike Shalley, principal at Popp Gray & Hutcheson PLLC, an Austin-based law firm specializing in property taxes. "The institutional and international investors like what they see in the area because the Austin MSA [metropolitan statistical area] is a midsized market of about 1.7 million and has a number of major tech companies, including AMD, Freescale Semiconductor, and Dell," he says. "Austin hasn’t been as affected as many other places in the country by the economic downturn."
A primary reason for this is the area’s solid economic base, led by the University of Texas, numerous high-tech firms including Dell Inc., and the state government. Austin is a vibrant city, ranks high on lists of the best places to live, has employment growth and a good business environment, and possesses a robust multifamily housing sector, Shalley notes. "Rents are strong and so is occupancy," he says. "There are 50,000 students at the University of Texas, which is very good for the city. Austin always has legislative groups moving in and out, filling up the hotels and restaurants. Austin has a good amount of tourism, too."
Nick Moulinet, senior vice president/director of business development at the Austin design firm Bury+Partners, says the multifamily housing sector is very active. "We have a pipeline of projects that is filling quickly, but not all of them will be built," he notes. "Demand for multifamily in Austin started in earnest 18 months ago with a laser-like focus on specific submarkets and has since expanded to include traditional garden apartment deals in strong suburban locations."
As for other sectors, the office market is robust, the retail sector is reporting increasing demand for goods and services, and the single-family market is quickly running out of viable lots, Moulinet says. "All of these factors are contributing to an energy that is palpable just walking around downtown Austin," he says.
Among the Austin projects Bury+Partners is involved in are White Lodging’s new 1,000-room JW Marriott Hotel downtown; expansion of Dell Children’s Medical Center of Central Texas; redevelopment of Highland Mall as an urban mixed-use project blending a community college with retail, office, civic, and residential uses; and numerous office, retail, residential, and civic projects.
The real estate market in Massachusetts’s largest city also is strengthening, says Scott Pollack, a principal at Arrowstreet, a multidisciplinary architecture and planning firm based in Somerville, Massachusetts. "Because Boston is traditionally perceived as difficult to develop, this means it is not overbuilt," he says. "With its intellectual and economic base, the city has not experienced a similar level of decline as some other areas. Much of the activity is in the housing market, which will need to be supported by corresponding development and job creation. Overall, we are seeing formerly dormant projects moving forward into design and construction."
The hospitality sector is robust, and Boston is a strong business destination, says Arrowstreet principal George Tremblay. "The success of the Boston Convention and Exhibition Center has spurred studies for hotel rooms in the Seaport area, and there is a lot of interest from traditional brands and new-to-market concepts," he says. "The challenge is finding the right site and making the economics work. There is a lot of pent-up demand for retail. National retailers that haven’t traditionally been in the Massachusetts market are showing an interest, and existing retail properties are being repositioned to be more competitive."
Arrowstreet is working in the Cambridge life sciences laboratory market, which is hot now. "We developed the Universal Flex Lab for Biomed Realty Trust, which appeals to smaller companies growing quickly with venture capital funding," says Pollack. The Universal Flex Lab is a set of templates for lab, office, and support space that can be quickly customized to suit any technical discipline. "The idea is to be able to get them up and running quickly with a standardized but flexible lab and office environment."
Arrowstreet also is working with New England Development, a private real estate development and management company, on Pier 4 in the Seaport/Innovation District. "We are also involved with Waterfront Square at Revere Beach, a transit-oriented, mixed-use development on 8.8 acres [3.6 ha], and Chestnut Hill Square, an 11-acre [4.5 ha] mixed-use development in Newton," says Tremblay. "We are also working on renovation and new construction of life-science laboratory and associated office space in Cambridge for Biomed Realty Trust."
Good job growth is also being experienced in this energy-focused city, says Gary Greenberg, senior vice president for capital markets at Houston-based Weingarten Realty Investors. "With approximately 1,000 people moving into the area each month, the demand for space is expected to positively impact prices and occupancy," he says. "Houston has one of the strongest economies of all U.S. cities, and this strength is expected to further improve over the next year. Factors such as strong job growth, increasing population, income growth, home value appreciation, and improving net wealth all suggest further improvements in the Houston economy."
Houston’s diverse economy continues to benefit from multiple industries besides energy, Greenberg adds. Consistently ranked first in foreign tonnage and second in overall tonnage among all U.S. ports, the Port of Houston is being widened and deepened to accommodate larger ships that soon will be able to transit the Panama Canal, creating additional jobs in the area, he notes. The Texas Medical Center, with more than 70,000 employees, is another major economic driver for the area.
Weingarten is focused on its 61 shopping centers located in the Greater Houston area, primarily in densely populated, infill locations. "We are not only leasing, but also remodeling and remerchandising," he says. "We’re converting an industrial project to retail on Interstate 10 at Wirt Road. We also recently completed a major enhancement of the River Oaks Shopping Center, which included extending the fascia, enlarging tenant signage, and improving pedestrian traffic. We are discussing other opportunities with specialty grocery stores."
The big news about Houston’s economy involves jobs, agrees David S. Brewer, principal of BrewerEscalante, a Houston-based civil engineering and mechanical engineering firm. "Last year, Houston added over 80,000 new jobs," he says. "This number may be revised upward. We clearly have replaced all of the jobs lost in the recession, and all new jobs created now are new growth. Another 80,000 to 100,000 new jobs are forecast for this year. This will help the real estate market here grow faster than at any time since 2008."
Among the projects BrewerEscalante is involved in is New Hope Housing at Rittenhouse, a 160-unit property developed by a winner of the 2011 ULI Awards for Excellence: Americas, New Hope Housing Inc., a Houston nonprofit that provides supportive, single-room-occupancy housing for adults who live alone on extremely low incomes. Brewer adds that oil shale drilling in Texas and elsewhere in the United States is having an enormous impact on the economy. "Houston is not just the oil capital of the world," he boasts. "It is the energy capital of the world."
New York City
With small upticks in head counts for technology, media, and services firms that will translate into additional demand for real estate and office space—combined with increased tourism—New York City’s economy is brightening, says Joseph Brancato, managing principal for the northeast region of Gensler, a global architecture, design, planning, and consulting firm. "Since office developers did not overbuild this past decade in Manhattan, the vacancy rate for newer buildings is very low. We will begin to see new office buildings coming on line beginning in 2014 and beyond," he says. "We will see this specifically in some major developments like the World Trade Center and Hudson Yards, as well as individual sites throughout midtown Manhattan."
Condé Nast’s decision to move its offices to One World Trade Center in lower Manhattan was a market indicator. "Since then, there has been a changing dynamic, and we are seeing a shift in job location for the creative culture," Brancato says. "The creative jobs are replacing the financial sector jobs that traditionally dominated and existed downtown."
Numerous older buildings have been or are in the process of being upgraded to today’s office standards. "Building repositioning is common practice as landlords are taking a long-term view as they reinvest in their properties," Brancato says. "Buildings like 685 Third Avenue are creating great value and good options for office tenants. With so many older buildings in New York City on the brink of irrelevancy, we see new investment and positioning occurring to help upgrade entire neighborhoods with a mix of uses."
New York City is experiencing a surprisingly strong office environment, says John H. Alschuler, Jr., chairman of HR&A Advisors, which provides strategic advisory services for mixed-use, neighborhood, downtown, campus, and regional developments. "We’re seeing a significant recovery in rents and leasing," he says. "We’ve got increasing demand from creative industries—from advertising to consulting to media publishing and fashion."
New York City is also seeing high demand for residences, Alschuler notes. "We’re building too few units to accommodate the market," he says. "The question is going to be at what point does that pent-up demand get released in the market."
Overseas investors are scrambling to put their cash into the city. "Capital from all over the world wants to invest here," Alschuler continues. "Cap rates remain very attractive, and that means prices have risen very dramatically in the last 12 to 24 months. Class A office properties in prime markets with credit tenants are in demand. We’re seeing cap rates in the 4 percent range, and that’s very competitive. It tells us the world wants to invest here."
Healthy job growth boosted by an expanding tech sector is contributing to increased real estate activity in San Francisco, says Michael S. Robb, executive vice president for the real estate division at Pacific Life Insurance Company. "We just committed to financing two major apartment projects in the city—one with Crescent Heights of Miami at Tenth and Market across from the Twitter new corporate headquarters, and the other on Sutton and Van Ness, a project of Portland, Oregon’s Gerding Edlen Development Co. There haven’t been many new multifamily developments in San Francisco for ten-plus years, so we think both these projects will do extremely well."
What makes San Francisco attractive from an investment viewpoint—but frustrates developers—is the lengthy approval process associated with construction. "It takes years to start projects in the San Francisco area," Robb says. "The barriers to competition are very high. So there isn’t a lot of competition."
Robb adds that Pacific Life, along with Metropolitan Life, refinanced the Bank of America building at 555 Market Street—a $600 million transaction. "It shows the market is strong," he notes. "We’re a best-in-class lender and we only deal with top projects in top markets. San Francisco remains one of the top cities for overseas investment."
The San Francisco real estate market continues to grow, thanks to the tech industry and major public infrastructure projects, including the new Transbay Terminal development and the San Francisco Municipal Transportation Agency’s Central Subway, says John Ashworth, a principal with Bull Stockwell Allen, a leading Bay Area design firm.
"Emerging technology and the high-tech industry are at the root of the city’s resilience, including the trend of savvy young techies wanting to live in a city environment versus the suburbs," Ashworth says. "The health industry seems to have flattened out a bit, and the public sector and nonprofits will continue to be tough, but with infrastructure, new housing, and a raft of tenant improvement projects, San Francisco’s real estate and construction industries continue to benefit from the local environment. Just look at the number of construction cranes around the city and you know things are getting better."
Bull Stockwell Allen is working on a U.S. Department of Veterans Affairs office development at the Presidio campus as well as commercial tenant improvement projects, including the firm’s new and expanded office at 300 Montgomery Street. On the Peninsula, Bull Stockwell Allen is completing new public safety facilities for the city of Mountain View and a new interpretive center for a privately funded state park project in the Santa Cruz Mountains.