Future Of Real Estate Depends On Energy Sector Here

[musicman]

In many ways, Houston's housing market last year was a bright star among other big cities across the country.

But a slowdown in the national economy has started to trickle down to this area, where the light has begun to fade in some parts of the housing market, economist Barton Smith said Tuesday at his annual symposium on real estate and the economy.

Over the next year, the performance of the local residential and commercial real estate markets will depend greatly on the health of the energy industry, since other segments of Houston's economy will limp along with the rest of the country, said Smith, director of the Institute for Regional Forecasting at the University of Houston.

While employment in the energy-related manufacturing and construction sectors have eclipsed national rates, Smith said they won't rise as fast this year as the energy industry plateaus and residential construction declines.

"The housing market in Houston is going to slow down," he said, adding that the starter home market will be most affected as loans become harder to come by for those with less-than-stellar credit.

Still, Houston doesn't have all the problems plaguing other large residential markets.

While this area has seen foreclosures multiply, it hasn't experienced excessive housing price increases or overbuilding.

Home prices have dropped in some big cities, but the Houston area is an exception, Smith said. The area was one of the few in the U.S. where the rate of appreciation in 2006 was higher than the previous year.

full article

[mpbro]

I guess Professor Smith can't see the Med Center from his office at UH!

Just an unscientific observation, but doctors are driving the market around here as much or more than energy. In 1982, there were over 1M geoscientists employed in the industry. Today, we make do with somewhere north of 100K. Sure, the locus of the industy is here, and people from around the world are moving here, but it's just not as manpower intensive as it used to be. Now medical...THAT's manpower intensive!

Maybe he was also discussing commercial RE, which sure is strong on the westside. An amazing pace of building along I-10.

[musicman]

i can understand his point. the energy sector does affect our economy the most, therefore a healthy energy market will result in overall good real estate market. the med center sure does drive that immediate area real estatewise.

[TheNiche]

I guess Professor Smith can't see the Med Center from his office at UH!

Just an unscientific observation, but doctors are driving the market around here as much or more than energy. In 1982, there were over 1M geoscientists employed in the industry. Today, we make do with somewhere north of 100K. Sure, the locus of the industy is here, and people from around the world are moving here, but it's just not as manpower intensive as it used to be. Now medical...THAT's manpower intensive!

Maybe he was also discussing commercial RE, which sure is strong on the westside. An amazing pace of building along I-10.

No, he can't. The trees obscure it, as he's only on the second floor. But it doesn't really matter that he can't.

There are two kinds of employment growth: core and non-core. Core employment growth is related to firms that produce exports from our region, such as the energy and manufacturing sectors. Stakeholders of such firms then in turn demand services such as from the government, healthcare, primary and secondary education, financial services, transportation, retail, and other sectors, which also trade within themselves, but are fundamentally linked to and supported by the core employers.

That part of TMC employment that is related to healthcare services is primarily non-core. While it is true that we capture a fair bit of healthcare demand from outside of our region and that the matter can sometimes be skewed by government policy at the federal level, the bulk of healthcare business comes from people that already live and work here. Another component of TMC employment is primarily funded by the federal government or related to post-secondary education and research; it would be considered a part of core employment, but is in truth a fairly small part of the regional economy.

It should also be borne in mind that for about every three square feet of new occupiable space built in the TMC, it only has the capacity to handle as many employees as about two square feet of general office space, and also that a lot of the new TMC construction requires that older buildings first be demolished, and that the new buildings devote up to or in excess of two thirds of their gross square footage to parking. Don't get me wrong...the TMC is certainly a major source of employment growth, but gauging its impact by counting the number of cranes at any given time is perhaps misleading.

[mpbro]

There are two kinds of employment growth: core and non-core. Core employment growth is related to firms that produce exports from our region, such as the energy and manufacturing sectors. Stakeholders of such firms then in turn demand services such as from the government, healthcare, primary and secondary education, financial services, transportation, retail, and other sectors, which also trade within themselves, but are fundamentally linked to and supported by the core employers.

Interesting. What effect does the distinction between non-core and core employment industries have on RE? Is it primarily an income issue?

The energy industry itself has undergone quite a transformation since the last energy boom. 30 years ago, there was a lot more direct operational activity in Houston. East Texas field and other now-marginal onshore fields were much more important to the majors. International operations are more important these days, so much of the grunt work is outsourced to non-Americans. During the cost-cutting years of the 1980's and 90's, companies consolidated field offices to Houston, primarily to cut costs. But in the last 10 years, Houston has really reached a critical mass as a Silicon Valley-like entity. More than the sum of its parts, in other words. Some firms have moved headquarters here (COP), and those that haven't have pretty much moved everything except for senior management and pure finance functions.

In other words, the demographic of the energy industry's employee base in Houston has changed a lot, and to the benefit of Houston! More white collar, more educated, more money.

[TheNiche]

Interesting. What effect does the distinction between non-core and core employment industries have on RE? Is it primarily an income issue?

It is the difference between microeconomics and macroeconomics. Core employment is almost entirely independent of non-core, while non-core is entirely dependent upon core in the long run. So a collapse of the energy sector, which comprises approximately half of our core employment, would in the long run result in a partial collapse of secondary employment. I say "partial collapse" because we'd look kind of like an economic cross between Detroit and the Rio Grande Valley; we wouldn't lose population quickly enough because many households are insufficiently mobile to maintain a wage equilibreum even in the long run, so we would still have a lot of federal monies supporting sectors such as government, education, and healthcare that serve a large and very poor population. Likewise, though, the predicament that we're in is that core employment has grown by leaps and bounds, but secondary is having a hard time catching up. Secondary is 'sticky'.

As far as the impact on real estate is concerned, regional core employment growth is the most key indicator of regional household creation and household income. Growth within particular sectors, depending upon their particular traits, guides the type of housing and the location of housing. The price of housing is determined by land values and improvement values, which are affected by a whole littany of factors, including income, geography, regulatorty environment, the Federal Reserve and financial markets, insurance rates, construction costs, and of course the wild card: investor expectations/psychology.

[MidtownCoog]

Am I the only one dissapointed in The Chron's coverage of Dr. Smith's symposium?

This is a big deal each year, and the best The Chron can do is an awkard association to the housing market?

I guess next year I just need to attend for myself.

[musicman]

Am I the only one dissapointed in The Chron's coverage of Dr. Smith's symposium?

This is a big deal each year, and the best The Chron can do is an awkard association to the housing market?

with the battle in Glenbrook going on, they were probably short of reporters.

[lockmat]

Houston's Global Market Drives $3.4B Sales Year

HOUSTON-The stage is set for an active first quarter in terms of investment sales activity and new debuts of office buildings to sell in Greater Houston. The brisk start is merely a continuation of a record-setting '07 when $3.4 billion of office assets changed hands.

Betts says Houston's emergence as "truly an international city" has catapulted it onto radar screens of investors worldwide.

Although it's too early to say what will happen, Betts says the rest of the US might slow down, but Houston isn't likely to falter. "People expect our volume not to slow down," he says.

Can somene explain to me in sub-laymens terms what this actually means? This might be Economics 101, but I didn't do all that great in that class. I'm having a hard time understanding why real estate property changing hands so much is a good thing. I understand that the opposite is bad b/c well, if nobody wants to buy it then that can't be good. Why don't the investors hold onto it even longer to maximize profit? Are they just seeing a good market and making sure they get their profits before it's no longer available?

Also, what does it mean exactly that foreign investors will be looking at the Houston market? Is this only in terms of purchasing commercial properties or does it mean more development as well? B/c there's a finite amount of properties to be sold. Does this just mean more properties will be sold that otherwise would go unsold?

[RedScare]

He is actually saying two things. One, the rising value of already existing buildings makes them valuable for sale to others. Two, the tight office market means investors are looking to build new buildings to satisfy demand.

[jgriff]

It looks like energy industry in Houston is out of it's holiday related slow-down and off to a good start again this year. I'm getting cold call job offers at work and I haven't sent out a resume in 10 years. Many people are still getting 10% raises every 6 months also. An old timer that works with me has been in the business 47 years and he says he's never seen it like this.

[TheNiche]

Can somene explain to me in sub-laymens terms what this actually means? This might be Economics 101, but I didn't do all that great in that class. I'm having a hard time understanding why real estate property changing hands so much is a good thing. I understand that the opposite is bad b/c well, if nobody wants to buy it then that can't be good. Why don't the investors hold onto it even longer to maximize profit? Are they just seeing a good market and making sure they get their profits before it's no longer available?

Also, what does it mean exactly that foreign investors will be looking at the Houston market? Is this only in terms of purchasing commercial properties or does it mean more development as well? B/c there's a finite amount of properties to be sold. Does this just mean more properties will be sold that otherwise would go unsold?

Red answered it succinctly. I'd have tried to get a jump on him, but was out of town at the time, listening to various bigshot real estate investors from all over the country gush about Texas cities, especially Houston and Austin.

That sales volume is high indicates several things. Firstly, it indicates rising prices. Secondly, some investors want to get out while they can, while others are confident that there's still further upside, or at least that the Houston market will weather a recession better than other cities due to its energy sector; the story is similar in Seattle, Boston, Austin, and Raleigh/Durham, which are all pushing the high tech/aerospace/education/government angles with moderate success, citing increased exports, stability of hospital employment, and countercyclical educational and government employment. So the short and sweet of it is that buyers, sellers, and their lenders can all reach an agreement about a transaction; that isn't the case everywhere or in every real estate asset class. Third, having a high sales volume allows for better underwriting of transactions, which in and of itself is a lubricant to keep buyers, sellers, and lenders at the table, and is attractive to new entrants looking at Houston that need good market data.

Foreign investors are starting to really take a good hard look at American assets. They perceive them as inexpensive, and those foreigners that are bullish on the dollar see it as an opportunity to make money off of sound fundamentals and from having dollar-denominated assets. Except possibly in the short run, I don't know that Houston makes quite as much sense as a target for foreign investment, because as the dollar stregnthens--during or immediately following a recession--oil prices could fall dramatically, killing our office market fundamentals. To enter this late in the game may be ill-advised without a very clear and easily executed exit strategy.

[Subdude]

Foreign investors are starting to really take a good hard look at American assets. They perceive them as inexpensive, and those foreigners that are bullish on the dollar see it as an opportunity to make money off of sound fundamentals and from having dollar-denominated assets. Except possibly in the short run, I don't know that Houston makes quite as much sense as a target for foreign investment, because as the dollar stregnthens--during or immediately following a recession--oil prices could fall dramatically, killing our office market fundamentals. To enter this late in the game may be ill-advised without a very clear and easily executed exit strategy.

Not just wholesale investors. I've heard that Florida residential properties are being advertised as investment/vacation homes in Europe. At current exchange rates and market prices they are considered dirt cheap.

[mumbles]

Illegal immigrants come to Texas from inside the U.S. as other states pass tough laws The investors should do well with their rentals now that more illegals are coming.

[Chris51]

It looks like energy industry in Houston is out of it's holiday related slow-down and off to a good start again this year. I'm getting cold call job offers at work and I haven't sent out a resume in 10 years. Many people are still getting 10% raises every 6 months also. An old timer that works with me has been in the business 47 years and he says he's never seen it like this.

Please tell me what line of work within the energy field you are in, I have 2 college soph. majoring in chemistry and math because they like it and don't have a clue what careers to focus on.

[Porchman]

Last week, I attended a speech by Robert Gilmer, The VP and economist of the Federal Reserve Bank

Edited February 12, 2008 by Porchman

[jgriff]

Please tell me what line of work within the energy field you are in, I have 2 college soph. majoring in chemistry and math because they like it and don't have a clue what careers to focus on.

If they're interested in Chemistry a chemical engineering degree would get them a job right away as an entry level process engineer. Chemistry and math may do also, it's not my disicpline so I'm not sure. You'll see ads on Monster for process engineers in the $100k range but good ones can make a lot more than that. Check the chronicle for open houses at the big petrochem engineering companies. KBR, CDI, Foster Wheeler, Bechtel, Jacobs, Mustang, etc... There will be people there that will be happy to give them advice and maybe an internship while they are in college.

I'll PM you with my e-mail adress. Have them send a resume to me. I get a $5000 referal bonus for process engineers.

The pay rates are getting so high for experienced people that engineering companies are starting to actively recruit entry level people that they can train. This hasn't happened in decades. There's a big gap of people in the industry between 20 somethings and 50 somethings. During the big downturn in the 80s and early 90s no one went into the business and very little was invested in infrastructure. That's one reason gas prices are so high, almost everyone quit the business. There's few people left with the expertise to build plants that make gasoline and other petrochem products.