San Francisco / Houston CBD Office Market Comparisons

[lockmat]

http://www.ncreif.com/documents/event_docs/Miami2010/valuation/MarketAnalysisQuantifyingRentAndOccupancyProjections-WincottAndDubicki.pdf

It seems this presentation puts Houston in a bad light compared to San Francisco. Can anyone who knows more please analyze this better than I can?

[TheNiche]

Why do you believe that the presentation puts Houston in a bad light?

[barracuda]

^ They classify Houston's YE 2010 market cycle as recession whereas San Francisco is classified as recovery.

[TheNiche]

^ They classify Houston's YE 2010 market cycle as recession whereas San Francisco is classified as recovery.

I wouldn't disagree with that. Houston entered the recession late as compared to nearly every other major city in the United States. For a while, many people were figuring that we'd sit out the recession on account of our strong energy sector. And even though we certainly haven't taken as bad of a hit, the optimists were decisively proven wrong. It just took a little more time for it to play out, was all.

Honestly though, I don't lend much credence to the market cycle charts. It's the kind of thing that gets thrown into nearly every nationwide and regional market analyst's presentation because it looks good. But the circumstances of cities on the chart do not follow such a clean oscillation, nor is their velocity across the chart the same, nor is the velocity constant. At the end of the day, a good market analyst is chiefly concerned with submarket, class, inventory and the timing of absorption and completions. If a case can be made that occupancy will be trending upward by the time that a new project proposal can be brought to fruition, that's good news for the development community...but this presentation did not attempt a forecast. Thus it's usefulness is limited.

[lockmat]

Why do you believe that the presentation puts Houston in a bad light?

Well, I guess if anything some slides reveal it as bad, some good, but I think in general I'm just dissapointed that their projection is for a slow recovery.

Page 4 is good for Houston b/c the Class A value is better than SF (although you said submarkets are better anyway. btw, is a submarket class B's, C's etc or like the Energy Corridor and Greeway Plaza submarket?)

Slide 9 is good comparable to SF, but just barely.

Slide 10 gives a more hard statistic and it's not favorable for HOU

Slide 18 is most dissappointing but I'm not sure what good growth actually looks like compared to slow growth. (looking at the vacancy rate for the next few years...but then again, I'm thinking you might say absorption is more important anyway?)

[TheNiche]

Well, I guess if anything some slides reveal it as bad, some good, but I think in general I'm just dissapointed that their projection is for a slow recovery.

Page 4 is good for Houston b/c the Class A value is better than SF (although you said submarkets are better anyway. btw, is a submarket class B's, C's etc or like the Energy Corridor and Greeway Plaza submarket?)

Slide 9 is good comparable to SF, but just barely.

Slide 10 gives a more hard statistic and it's not favorable for HOU

Slide 18 is most dissappointing but I'm not sure what good growth actually looks like compared to slow growth. (looking at the vacancy rate for the next few years...but then again, I'm thinking you might say absorption is more important anyway?)

Slide 4: I'd say that they track closely enough over the long term that there isn't a significant or predictable difference. (Check this link for a good discussion of office building classification; it has nothing to do with submarket. What's on Wikipedia is crap, btw.)

Slide 9: Reflects that San Francisco underwent a massive boom and bust during the tech bubble. The chart does reflect that Houston participates in the business cycle, however that our economy is not as volatile...but...you'd have seen a similar pattern in Houston if they'd gone back another decade. Tit for tat. The reality is that this chart is useless to developers in determining market rents because there is still quite a bit of variety among Class A buildings; they will use rent comps that represent newer buildings of similar size and stature (such as typically have the highest rents) in order to assess the viability of a new project.

Slide 10: San Francisco tends to have a lower long-term vacancy rate because there are fairly severe barriers to entry for new projects. That is reflected in other ways that influence the viability of a new project, such as in the prevailing rents, transaction prices, and land prices. You will notice, however, that San Francisco's vacancy rate has significantly diverged from Houston's in recent years, and is trending further upward; that hasn't ever happened before, but it reflects the severity of the financial crisis and San Francisco's exposure to it on account of their large financial sector.

Slide 18: I don't think my browser opened up all of the presentation earlier, so I hadn't seen the forecasts. The arithmetic structure of their forecast appears sound, however they are making an assumption that after 2010, no new supply comes onto the market. Realistically, if San Francisco ever had 3.8% vacancy (tech boom levels), barriers to new supply would be overcome and massive new buildings would go up. That's what happened before. And Houston's threshold for new development is at a higher vacancy rate than San Francisco's, so we'd probably see more supply as well. Frankly though, I have no confidence in the employment forecast. I don't think that recovery is going to be so quick--or assured--and I have grave reservations about trying to predict the employment composition of a submarket, even one as large as Houston's CBD. But of course...PWC has to make it look like it is a sure thing because that's what their clients need to hear in order to get their deals done. And so they found a way to do that. Yay for groupthink!

[lockmat]

Thanks for the explanation and information. Regarding your comment from Slide 18 about recovery being slower than people expect (which I agree with), I know this is off thread topic, but what cities are poised to make a strong comback? Is Houson one of them? Who are the other players?

Slide 4: I'd say that they track closely enough over the long term that there isn't a significant or predictable difference. (Check this link for a good discussion of office building classification; it has nothing to do with submarket. What's on Wikipedia is crap, btw.)

Slide 9: Reflects that San Francisco underwent a massive boom and bust during the tech bubble. The chart does reflect that Houston participates in the business cycle, however that our economy is not as volatile...but...you'd have seen a similar pattern in Houston if they'd gone back another decade. Tit for tat. The reality is that this chart is useless to developers in determining market rents because there is still quite a bit of variety among Class A buildings; they will use rent comps that represent newer buildings of similar size and stature (such as typically have the highest rents) in order to assess the viability of a new project.

Slide 10: San Francisco tends to have a lower long-term vacancy rate because there are fairly severe barriers to entry for new projects. That is reflected in other ways that influence the viability of a new project, such as in the prevailing rents, transaction prices, and land prices. You will notice, however, that San Francisco's vacancy rate has significantly diverged from Houston's in recent years, and is trending further upward; that hasn't ever happened before, but it reflects the severity of the financial crisis and San Francisco's exposure to it on account of their large financial sector.

Slide 18: I don't think my browser opened up all of the presentation earlier, so I hadn't seen the forecasts. The arithmetic structure of their forecast appears sound, however they are making an assumption that after 2010, no new supply comes onto the market. Realistically, if San Francisco ever had 3.8% vacancy (tech boom levels), barriers to new supply would be overcome and massive new buildings would go up. That's what happened before. And Houston's threshold for new development is at a higher vacancy rate than San Francisco's, so we'd probably see more supply as well. Frankly though, I have no confidence in the employment forecast. I don't think that recovery is going to be so quick--or assured--and I have grave reservations about trying to predict the employment composition of a submarket, even one as large as Houston's CBD. But of course...PWC has to make it look like it is a sure thing because that's what their clients need to hear in order to get their deals done. And so they found a way to do that. Yay for groupthink!

[LTAWACS]

I wouldn't disagree with that. Houston entered the recession late as compared to nearly every other major city in the United States. For a while, many people were figuring that we'd sit out the recession on account of our strong energy sector. And even though we certainly haven't taken as bad of a hit, the optimists were decisively proven wrong. It just took a little more time for it to play out, was all.

Honestly though, I don't lend much credence to the market cycle charts. It's the kind of thing that gets thrown into nearly every nationwide and regional market analyst's presentation because it looks good. But the circumstances of cities on the chart do not follow such a clean oscillation, nor is their velocity across the chart the same, nor is the velocity constant. At the end of the day, a good market analyst is chiefly concerned with submarket, class, inventory and the timing of absorption and completions. If a case can be made that occupancy will be trending upward by the time that a new project proposal can be brought to fruition, that's good news for the development community...but this presentation did not attempt a forecast. Thus it's usefulness is limited.

This is true.

[TheNiche]

Thanks for the explanation and information. Regarding your comment from Slide 18 about recovery being slower than people expect (which I agree with), I know this is off thread topic, but what cities are poised to make a strong comback? Is Houson one of them? Who are the other players?

Barring the possibility that new energy and environmental legislation doesn't pull the rug out from under us, I think Houston will perform well as compared to most other cities. Even though we managed to attract more than our fair share of attention in terms of corporate scandal--as usual--our financial sector just isn't that large and was never really a driving force behind our economy. So we never fell so far that recovery might be so difficult. Large financial centers like New York, Chicago, Boston, and San Francisco are going to have a slower go of it. Phoenix, Las Vegas, and Atlanta also took it on the chin, but they'll spring back. Los Angeles (and California in general) is all kinds of screwed up.

[lockmat]

Barring the possibility that new energy and environmental legislation doesn't pull the rug out from under us, I think Houston will perform well as compared to most other cities. Even though we managed to attract more than our fair share of attention in terms of corporate scandal--as usual--our financial sector just isn't that large and was never really a driving force behind our economy. So we never fell so far that recovery might be so difficult. Large financial centers like New York, Chicago, Boston, and San Francisco are going to have a slower go of it. Phoenix, Las Vegas, and Atlanta also took it on the chin, but they'll spring back. Los Angeles (and California in general) is all kinds of screwed up.

I guess it's just hard for me to get a real grasp on the effects of the recession in other parts of the country b/c I don't really know anyone who was laid off besides coworkers and the only other visual indication I see is less traffic and a few closed stores. So to me, I barely even see and understand Houston's state, much less the rest of the country.

[TheNiche]

I guess it's just hard for me to get a real grasp on the effects of the recession in other parts of the country b/c I don't really know anyone who was laid off besides coworkers and the only other visual indication I see is less traffic and a few closed stores. So to me, I barely even see and understand Houston's state, much less the rest of the country.

Check out this Interactive Job Loss Map from Slate.com for a bit of perspective.

Census migration data from between Sept. 2008 and Sept. 2009 is another indication of where the hurt is. Houston (+77,658), DFW (+76,812), and Washington D.C. (+50,093) are the most popular places to move. NYC (-9,609), Chicago (-7,026), and Los Angeles (-4,834) are not; and those cities are only losing so few folks because they're magnets for international immigration. Domestic out-migration from those cities is -110,278, -40,389, and -79,900, respectively.

Some people may recall that Houston and Dallas each grew by about 140,000 people over the last year. This is from the same dataset, however I've excluded births/deaths because it isn't pertinent to the economic discussion. Also, I excluded Detroit for obvious reasons.

Edited April 20, 2010 by TheNiche

[lockmat]

Check out this Interactive Job Loss Map from Slate.com for a bit of perspective.

Census migration data from between Sept. 2008 and Sept. 2009 is another indication of where the hurt is. Houston (+77,658), DFW (+76,812), and Washington D.C. (+50,093) are the most popular places to move. NYC (-9,609), Chicago (-7,026), and Los Angeles (-4,834) are not; and those cities are only losing so few folks because they're magnets for international immigration. Domestic out-migration from those cities is -110,278, -40,389, and -79,900, respectively.

Some people may recall that Houston and Dallas each grew by about 140,000 people over the last year. This is from the same dataset, however I've excluded births/deaths because it isn't pertinent to the economic discussion. Also, I excluded Detroit for obvious reasons.

Wow, the slate map shows Texas to be relatively very impressive. I am sure I still cannot truly imagine what it is like to be in the hardest hit areas of the country though. Numbers are only just that, it must be something quite different to experience first hand.