“Resilient” seems to be the best word to describe the U.S. Gulf Coast real estate industry. No matter what Texas, Louisiana, Mississippi, or Alabama experience— natural disasters, economic downturns, or other unforeseen problems—the region seems to bounce back stronger than ever.
That resilience will be tested following the disastrous oil spill in the Gulf of Mexico. Although those in the real estate industry say it is too early to speculate about how the sector will be affected, the region’s tourism and hospitality industries are forecast to feel the brunt.
“Texas is poised well for recovery, given the state did not experience the over-appreciation and massive depreciation of real estate,” says Michael Thompson, a commercial loan originator in the Houston office of Dallas-based BMC Capital, one of the country’s leading originators of multifamily loans and commercial mortgages. “While the real estate market has taken a hit, there is job growth in T exas and the market is not overbuilt; 2011 will be a good year for real estate in Texas.”
New Orleans, Louisiana
In Louisiana, the overall economy is strong, with home prices stable and interest rates remaining favorable, says Kurt M. Weigle, president and chief executive of the Downtown Development District (DDD) of New Orleans. “Despite national trends, the housing market is thriving in New Orleans and throughout L ouisiana,” he adds. “Real estate experts at the University of New Orleans’s Economic Outlook and Real Estate Forecast Seminar remain optimistic about the strength of the New Orleans metro area’s economy.”
Mississippi is seeing a host of opportunities to continue expansion of existing businesses and attract new business investment to the state, says Gray Swoope, executive director of the Mississippi Development Authority. “Even in the current economy, we have seen numerous opportunities for growth—particularly in international investment, but also in existing Mississippi companies—and we will continue to relentlessly pursue these opportunities as we pull out of this recession,” he says.
As for Alabama, there is an old saying about the state: “Alabama may not be growing so fast as other places, but it’s not going to fall off the cliff,” says Richard S . Brinson, senior vice president in the Alabama office of Charlotte, North Carolina– based Grandbridge Real Estate Capital LL C, a full-service commercial and multifamily mortgage banking company. “Slow and steady—that pretty much describes the state’s real estate market.”
Throughout the region, development is occurring, economies are gaining strength, and companies are eyeing an improving outlook within a year.
“There is good news in Texas,” says Nick Moulinet, vice president and director of business development at the Austin-based development services firm Bury & Partners. “We are seeing positive signs of growth in our offices throughout the state. We are starting to see the transitioning of assets through the banks, which is loosening some of the project logjam we have been facing for the last two and a half years. This is helping even some of the toughest-hit markets such as multifamily and office/industrial take positive steps toward recovery and growth.”
Bury & Partners is also benefiting from a big push in higher education, such as education and lab facilities for community colleges and, more specifically, student housing. “Because we have worked in the multifamily market for the last 25 years, we have been able to transition with our private development clients into the growing student housing market,” says Moulinet. “With increasing enrollment at universities and community colleges, the higher education systems in Texas are building to meet the housing demand.”
Thanks to its strong business atmosphere, lower taxes, and limited regulation, as well as its readily available, educated workforce and central geography, Texas is prospering, says Phil Ritter, executive vice president of Dallas–Fort Worth (DFW) International Airport. “It all works in our favor,” he says.
DFW Airport is expanding, with some $1.6 billion in capital improvements scheduled over the next several years, Ritter says. “DFW has added quite a few additional destinations, including a new international route,” says Ritter. “American Airlines is the biggest tenant at DFW and they have been putting on more flights, so air traffic is growing.”
In urban core areas of the state, highend and mixed-use development will resume, with sustainability an important factor in the multifamily sector, says Brit Perkins, principal at Houston-based EDI Architecture. The firm is currently looking at replacing a class C office building development in Houston’s Galleria submarket with a mixed-use high-end development.
Perkins and others say sustainability will be an important part of development in the years ahead, particularly in the multifamily market. “There are currently only two LEED-certified [Leadership in Energy and Environmental Design] projects in Texas, and the present economic situation has discouraged other projects from completing the certification process,” says Perkins. “It will only be when the few certified projects start to demonstrate a market advantage that more projects will resume seeking certification. Long term, I believe that within five years a project that is not certified will be at a market disadvantage.”
Commercial growth is beginning to flatten and stabilize in previously high- growth areas in Texas, such as Houston and the Interstate 35 corridor between San Antonio and Dallas–Fort Worth, says Steve Landrum, manager of marketing communications at Houston-based CenterPoint Energy, which serves those areas. “Texas hasn’t experienced the rapid downturn that other areas have,” he says. “Our Houston service area benefited from a history of affordable housing relative to other markets that experienced almost hyper-appreciation and a corresponding escalation in home prices. So our housing market fall was not as steep and painful as in other parts of the country.”
Texas continues to attract investors. Currently, there is no shortage of equity searching for the “right” deal—only a shortage of supply, says T hompson. “Many investors are looking for value-add possibilities,” he says. “While there are such opportunities in the market, financing for such opportunities can be a challenge. Cash deals—assuming existing debt and lowleverage financing—are the norm. While sometimes challenging, lending is available in the market for experienced, preferably local, and well-capitalized borrowers.”
BMC Capital is working on numerous refinancing deals, loan assumptions, and acquisition loans for both multifamily developments and triple-net properties— those for which the lessee pays all real estate taxes, building insurance, and maintenance, in addition to normal fees. “We recently received approval from a local bank on a 172-unit multifamily development in Houston,” he says. “The property had an in-place loan; however, the note was nonperforming. BMC Capital represented the out-of-state buyer to the existing lender and enabled them to get comfortable with the fact that despite being out of state, the new buyer put them in a much stronger position than the existing borrower.”
Even so, there has been a slowing of commercial real estate transactions over the past few years, says Deborah Ryan, a partner and cochair of the business department in the Dallas office of national law firm Patton Boggs LL P. “The reason there is not movement of existing product is that lenders have not yet begun aggressively pursuing bad debt,” she says. “As such, there are fewer forced-sale scenarios than there could be. In addition, there is scant availability of debt to finance acquisitions, and the ask/bid price differential is still wide. Until lenders feel the need to push harder to collect bad debt, forcing product into the market, transaction volume will remain low. In addition, without economic drivers creating new employment, there is no force driving absorption of existing space.”
Patton Boggs is seeing companies renegotiate their leases for less space in exchange for a longer term to reduce monthly cash outlays. “Until absorption meets existing—and projected—vacancies, no new construction of commercial real estate product can be expected,” Ryan continues. “I’ve read reports stating it may be 2014 before we see a healthy demand for new construction. For construction, development, and transaction-based companies and professionals, this means there may be several sparse years ahead.”
A planned $2 billion complex to include the VA Medical Center is expected to provide the foundation for New Orleans’s budding bioscience industry.
Artist’s renderings provided by Studio Nova.
Louisiana is also experiencing an uptick in the real estate sector. David Waltemath, president of Classic Properties, a New Orleans–based development firm specializing in community projects, says the Louisiana market was slow last year, but his firm is seeing improvement. “We’re definitely experiencing a pickup in traffic and phone calls,” says Waltemath. “We’re seeing a beginning of the end of the bottom and what is going to be a slow, steady climb up.”
Classic Properties has broken ground on a new community development in upper Plaquemines Parish, nine miles (14.5 km) south of New Orleans. “The first phase contains 74 single-family lots, and half of those were sold before we broke ground,” says Waltemath. “We expect to deliver the first phase of the lots for custom homes in the $300,000-to-$700,000 range in June.”
Louisiana has generally fared better than several other states, proving more resilient for a number of reasons, says Gary J . McNamara, executive vice president of corporate real estate at New Orleans–based First Bank and Trust. “South Louisiana, including New Orleans and some of the Gulf Coast, is still seeing some benefit from post–Hurricane Katrina rebuilding and an influx of insurance and government funds for various projects,” he says. “New Orleans continues to receive benefits of some positive news and excitement, including an uptick in tourism, positive national press from the New Orleans Saints Super Bowl victory, increased movie location production, pending construction of a $1 billion state and VA [Veterans Administration] hospital complex, political and educational reforms, and the election of a new mayor.”
Financing remains “somewhat possible” for commercial real estate, but it is much more difficult to assemble component parts with tighter equity, guarantor, and global cash flow requirements, he adds. “Finding participant banks remains challenging due to various banks having historically high exposure to real estate and the disruption or demise of several prior national commercial real estate exit strategies, such as commercial mortgage–backed securities,” he says.
New Orleans is experiencing an influx of talent and an overall spirit of innovation, dynamism, and entrepreneurship, says Weigle. “We think that in addition to our naturally creative and diverse culture, our best-in-country state tax incentives—those in digital media, film, music, and sound recording in particular—are helping us increase our talent pool and support what we call ‘industries of the mind,’” he explains. “The recent citywide election has brought added excitement and opportunity.”
|As a model for health care of the future, the VA Medical Center will respect New Orleans neighborhoods, authentically reflect the culture of the region, and be the cornerstone for the emerging biosciences industry in the city.|
The DDD has been a strong advocate for the creation of a $2 billion health care complex adjacent to downtown, he adds, and has completed a $17 million streetscape improvement on Canal Street, the city’s historic thoroughfare. “The redevelopment of the Old Charity complex buildings [a massive 1939 art deco hospital complex on Tulane Avenue] is also a major priority, and the DDD is working with the state of Louisiana to issue a request for proposals for redevelopment of the property,” he says.
In Mississippi, while the state has been affected by the global recession, economic development officials continue to work to attract new business and help existing companies expand and create additional jobs. “Mississippi has continued to experience real successes in these areas,” says Swoope. Earlier this year, Wilh. Schulz G mbH, a global supplier of pipe components, selected Tunica County as the site of its first North A merican manufacturing plant—a $300 million, 450,000-square-foot (42,000-sq-m) facility that will create 500 jobs over the next five years, he reports. In April, Twin Creeks Technologies, a venture-backed solar technology company, announced it is building a 250,000-square-foot (23,000-sq-m) solar panel production facility in Senatobia—a $175 million investment that will create more than 512 jobs over the next five years.
Alabama, with an educated workforce, a low cost of living, and a good quality of life, continues to prosper, notes Brinson. “You don’t see a lot of new building here, but our markets are in better shape,” he says. “We’ve got new types of industry coming here, including EADS [European Aeronautic Defence and Space], which is bidding for an A ir Force tanker contract. Huntsville continues to grow, thanks to high tech, including a large NASA component.”
Alabama’s other major cities, including Birmingham, Montgomery, and Mobile, are also doing well. “In Mobile, ThyssenKrupp is building a $4 billion steel mill,” says Brinson. “We have clients who are building apartments in Mobile because there is good job growth there. Multifamily is doing well in Birmingham, too. I’m very positive about Alabama.”
The real estate market in the Huntsville area is robust, with its aerospace/ defense/technology focus and infusion of money through the federal government’s Base Closure and Realignment Commission (BRAC), says Fred L. Keith, president of HKW A ssociates, a Birmingham-based firm specializing in commercial design and planning for developer clients. “Huntsville is booming,” he adds.
Redevelopment opportunities are more prevalent as developers fill vacant space and hold on to what they have. “The smart money is beginning to reenter the picture with strategic acquisitions of prime properties and land held by developers in distress and lenders under pressure to clear their portfolios,” says Keith. “Bargains abound—if you have cash. I think this activity is the clearest signal yet that we’ve reached bottom.”
Despite challenges from outside and within, the Gulf Coast states remain on an upward trajectory. While the real estate sector in Texas, Louisiana, Mississippi, and Alabama is not as strong as it once was, it certainly is not as bad as in some other parts of the country.