The Texas real estate industry is known for its optimism. As the national economy shows signs of regaining traction, Lone Star State developers are encouraged by improving fundamentals in certain sectors and the hope that the others have seen their worst.
“Texas developers are dusting off plans and reviewing project feasibility in light of improving indicators, looking at sites and engaging consultants to evaluate the possibilities, and searching for positive signs in the capital markets,” says Mark Culwell, senior vice president of development at Denver-based UDR Inc., a multifamily real estate investment trust (REIT) with a major Texas presence. “I believe there will be increasing activity in the multifamily sector, followed by the industrial side as manufacturing gains traction. It appears that retail and office developers are likely to remain tentative for much of the coming year. Single-family [housing] markets in Texas may see some marginal improvement driven by population growth and gains in job formation, but a psychological hangover remains, and new financing guidelines will dampen activity for some potential buyers.”
The most significant bright spot in Texas is job growth, notes Kimberly W. Kittle, senior vice president in the Dallas office of Bank of Texas. “Dallas–Fort Worth [DFW] is leading the nation in job growth,” she says. “For the 12-month period ending January 2011, DFW generated 63,600 new jobs. Houston, second in the nation in job growth, produced 56,600 new jobs.”
Not only that, but Texas was the last state affected by the recession and is one of the first to emerge. It benefits from both population and job growth and from being a business- and tax-friendly state, says John Schrader, associate principal and director of design at Dallas-based JHP Architecture/Urban Design. “Bright spots in the Texas real estate sector include major markets—including Dallas–Fort Worth and Austin—and sectors such as urban infill multifamily, senior living, and assisted care,” he says. “We’re seeing market-rate multifamily growth in primary markets, although tepid mixed-use growth as retail remains saturated in most markets. Workforce housing, especially financed through HUD [U.S. Department of Housing and Urban Development] or low-income tax credits, is strong, and there is improvement in the occupancy of the senior living market.”
Part of the business appeal of Texas is its central location, says Cameron C. Curtis, director of project development at Turner Construction Company and chair of the ULI North Texas Sustainability Best Practices Group. This makes it convenient for world travel and movement of cargo and commercial goods, while also creating opportunities for business and a high quality of life. “As more people and businesses recognize this, we expect to see continued and sustained growth and development for decades to come,” he says. “Through proactive planning and decision making, Texas truly will become the model for the rest of the world and be at the helm of the new global economy.”
One of the state’s primary economic drivers—the oil and gas industry—remains in place, and the lack of a state income tax also makes Texas attractive, says Jim Manskey, principal at Texas landscape architecture and planning firm TBG. “Unlike many states, Texas was not hit particularly hard by the subprime market crisis or collapsing of the banking industry,” he says. “These factors have collectively left Texas in a relatively strong economic position as compared to other large states.”
If job growth continues, Texas will see a significant amount of new multifamily housing built this year and next, Kittle says. “There is still an overhang of space in both the retail and office sectors, which will need to be absorbed before there is any new construction,” Kittle says. “Industrial still has enough vacancy to deter new starts until more space is absorbed. Although there are pockets of developed residential lots that may take years to absorb, we may begin to see some new lots being developed in the major markets where the subdivisions have been successful.”
Life insurance companies are indicating they have increased financing allocations this year, says Dan O’Connor, senior vice president of San Antonio–based Frost Bank. “Lenders are willing and motivated to finance real estate projects that meet their underwriting requirements, including projects that have a strong, experienced development and ownership team that brings financial strength and important real estate development skills to the project,” he says.
The developers must also have leasing and project management skills, construction management skills, and a strong, capable, and experienced construction contractor, he adds, “as well as an appropriate level of owner equity in the project and a well-located site with good visibility and access.”
Frost focuses on the banking relationship, underwriting the experience, strength, and character of the people in the relationship that are responsible for the project, and their ability to assemble the appropriate team for the development, marketing, and leasing of the project, O’Connor says. “Our culture defines all our customer interactions,” he adds. “When we look at a loan opportunity in Texas, we want to get to know the people behind the projects as much as understanding the project itself.”
UDR’s Belmont, the development offers studio
and one- and two-bedroom apartments, as
well as two-bedroom townhouses.
Those developers with access to capital are rebuilding their teams in preparation for increased activity, notes Culwell. “Land prices have firmed in Dallas and Austin,” he says. “Pricing power has returned to multifamily operators in Austin and Dallas, while Houston and San Antonio have stabilized, with expectations for moderate growth this year. Continuing immigration and contraction in homeownership rates will be a driver of rental demand statewide.”
The Savoye in Addison and Belmont in Dallas, two multifamily housing communities completed by UDR last year, leased quickly, he adds, noting that a second phase of the Savoye is currently under construction, and will begin delivering apartments this summer.
The current Texas real estate market does not seem to have been as overbuilt as was commercial office and retail space during past recessions, says Kip Daniel, managing director at Beck, a national design, construction, real estate, and technology company in Dallas. This could mean a faster rebound once commercial financing availability opens up. “Developments seem to be starting for both single-family and multifamily residential projects across north Texas,” Daniel says. “Although we don’t see commercial developments following suit as a trend, we are seeing some people with money start to investigate certain specific niche markets or projects.”
Beck has been involved with the Hippolito Federal Courthouse renovation in San Antonio, the Kimball Art Museum expansion in Fort Worth, and the new First Baptist Church campus in downtown Dallas, among other projects.
There has been a strong rebound in the urban residential multifamily market, says R. Scott Ziegler, principal in charge of the Living Place Studio at Ziegler Cooper Architects in Houston. “High-density mid-rise and high-rise multifamily developments will be breaking ground in Houston, Austin, and Dallas markets,” he says.
The Savoye at Vitruvian Park in Addison.
His firm is working on five large-scale urban residential mid-rise and high-rise projects in Austin and Houston. Park Plaza Tower, an 18-story mixed-use multifamily and retail development in Austin developed by Gables Residential, is slated for construction before year-end. In addition, the Austonian, a 56-story residential tower in Austin—the tallest residential building in Texas—was recently completed by developer Benchmark Development with funding by Grupo Villar Mir. Also recently completed were the Broadway, a 21-story tower in San Antonio near the Witte Museum and the San Antonio Zoo, developed by Koontz McCombs, and Highland Tower, a 16-story residential building inside Loop 610 in Houston near Highland Village, a project of Pelican Builders Inc.
Job growth and retirement migration to Texas will continue to generate demand in the marketplace for more high-quality urban living, Ziegler says. “High-density mixed-use projects will lead the way for the next wave of urbanization across the nation and, in particular, Texas,” he predicts. “High-density microvillages have become a sustainable growth strategy for our future.”
Texas will continue to see a steady uptick of growth with a continuing emphasis on the urban living, says TBG principal Bill Odle. “While this emphasis on the urban experience, often depicted as a live/work/play lifestyle, is fueling urban development, suburban development continues to take place, although the model is changing so that suburban developments require an urban sense of place,” he says. “This is often conceived as a livable center, which serves as a mixed-use hub with live/work/play amenities.”
Highland Tower in Houston.
Turner Construction Company’s strongest markets in Texas have been education, data centers/technology firms, court and municipal facilities, and interiors. Its projects include the expansion of Collin County Courthouse in McKinney and the South Side on Lamar project in Dallas. At South Side on Lamar, Turner converted a 1910 building known as the Sears catalog warehouse to provide 456 loft apartments and 200,000 square feet (19,000 sq m) of office and retail space for the Matthews Southwest development company. The project helped breathe life back into the neighborhood and spur additional development, including the 2008 conversion of the building next door into the Dallas County Community College District offices, also a Turner project.
In Sugar Land outside Houston, TBG is leading the transformation of the historic Imperial Sugar refinery into a mixed-use development, while in San Antonio, the firm is developing a headquarters for Rackspace Managed Hosting, a San Antonio–based technology company.
The rise in real estate activity is being felt throughout the state. David N. Condon, an attorney with Condon Thornton Sladek Harrell LLP in Dallas, says the firm’s business has increased over the past year, particularly in leasing activity in retail shopping center and office projects. “We have been representing both landlords and tenants in filling vacancies for second-generation tenants in existing shopping centers, and working on leases for a number of family/casual and quick-serve restaurant expansions, particularly in connection with the development of new shopping center out parcels,” he says. “We have also seen a significant uptick in office leasing over the past six months and have been working with new office tenants as well as on the expansion of existing office space.”
Condon says his firm expects business to increase over the next 12 months, along with a slow but sure recovery of Texas commercial real estate. “Specifically, we expect to see a continued acceleration in leasing of retail shopping centers and office projects,” he says.
All signs point toward continued expansion in the Lone Star State, which bodes well for the real estate industry. Companies continue to relocate to the Texas market because of its high quality of life, low cost of living, expanding economy, talented labor force, and distribution networks—all of which create a favorable business climate.