Clay & Company » A Texas Commercial Real Estate Blog

Kirksey Architecture recently released its Annual Construction Cost Update for 2012 compiled by statistics from over 20 area construction firms.

Their findings show a slight increase in per square foot construction costs for each category including: one-story flex office buildings, low-rise office buildings, mid-rise office buildings, high-rise office buildings, medical office buildings, and parking structures. Commercial tenant improvements for a typical 25,000-square-foot, full floor office buildout are $27 to $45 per square foot, up $2 per square foot since 2011.

The report says, “construction costs have stabilized at a low point over the past year and have started to move upward while a few material costs and transportation costs have risen.”

Competitive construction costs and low interest rates make now a favorable time to build.

See the specific costs for each category and the full report here.

HOUSTON — (April 24, 2012) —

Houston Office Market

Houston’s office market ended the first quarter with a total of 699,266 square feet of positive net absorption, according to quarterly market research compiled by Commercial Gateway, the commercial division of the Houston Association of REALTORS®.

Reversing last year’s trends, Class B space accounted for 86.3% of the first quarter‟s positive activity, recording its second consecutive quarter of positive activity. This year paints a different picture for Class B properties than in recent years; absorption in First Quarter 2011 was a negative 468,093 square feet for Class B and overall negative 264,293 citywide.

This quarter, Class A buildings citywide recorded negative absorption after seven consecutive positive quarters. Overall, seven of the 13 market areas, including the Central Business District (CBD), recorded more space coming on the market than being taken off, with several large former sublease spaces entering the direct market during the first quarter.

The three submarkets which recorded the largest gains in absorption were the Energy Corridor, North/The Woodlands/Conroe and the Northwest. One large lease committed in the Northwest but not yet counted as absorbed was Noble Energy‟s 497,447 square feet in a former HP building; the building is reported to be undergoing renovations with the company planning a move in Second Quarter 2013, which is when the space will be recorded as absorbed.

The current 12.6% vacancy rate is the lowest vacancy since Second Quarter 2009‟s 12.5% rate, and 1.3% lower than that same period last year. Selected buildings are seeing slight increases in rental rates, but the overall annual, weighted averaged, gross rental rate quoted for this quarter of $22.78 is slightly lower than last quarter‟s $22.90 rate and lower than the same period last year, which was $23.19. The CBD’s quoted rates also showed minimal decreases from the same period last year, reporting $31.46 today vs. $31.60 then.

Overall sublease space, at 2.2 million square feet, decreased almost 300,000 square feet from last quarter, and a total 21.5% decrease from the same quarter a year ago. Sublease space is either being leased at very competitive rates or returned as direct space as lease terms move closer to expiration dates.

Construction activity is looking up with nine buildings currently under construction, four in The Woodlands, two each in the both the Uptown and West submarkets, and one building in the North Belt West submarket. Scheduled for completion in 2012 are the two properties in the West and the one property in the North Belt West submarkets. Total under construction is 1.97 million square feet, following completions in 2011 of six buildings totaling 2.2 million square feet. The Woodlands is home to the largest number and size of buildings and includes the 549,260- square-foot Anadarko Tower II, the 234,589-square-foot Waterway 3, and two 32,000-square- foot buildings in the Black Forest Technology Park. Several other projects in the West, The Woodlands and Westchase have been announced for starts later this year.

Houston Industrial Market

Houston‟s industrial market continues to improve with positive absorption recorded and limited major construction on the horizon, according to statistics

released by Commercial Gateway. With a ninth consecutive quarter of positive absorption, the industrial market has seen a gradual decrease in its vacancy rate and a stabilization of rental rates. Vacancy overall is down to 7.2%, compared to 8.4% a year ago.

Net absorption in the first quarter totaled almost 1.3 million square feet, which is triple the amount noted in First Quarter 2011, but down from last quarter‟s almost 2.6 million square feet. Warehouse/distribution properties recorded about 1.1 million square feet this quarter, continuing a five-year trend of positive absorption and accounting for 85.5% of all absorption.

Properties classified as manufacturing are reporting the lowest vacancy rate of 4.6%, with crane-ready buildings still in short supply. Properties classified as warehouse/distribution represent about 72.5% of the total market. The two largest leases of the quarter were Gulf Winds International’s 247,240-square-foot lease at Port Crossing and Francesca’s Collection‟s 217,869-square-foot lease at Clay Point Distribution Park.

Rental rates have increased marginally during the last four quarters, with this quarter’s quoted, weighted averaged annual rental rate of $5.65 per square foot slightly higher than reported a year ago. Sublease space has not fluctuated much during the last two years, with 1.8 million reported in the first quarter, which represents a slight drop from fourth quarter but is about the same as this time last year.Construction activity is still brisk, with build-to-suits leading the way. Currently, 43 buildings in 33 projects totaling about 2.2 million square feet are under construction, with only the largest, the 475,000-square-foot, build-to-suit for Ben E. Keith Food Distribution Center, scheduled for completion in 2013. All others should be completed in 2012, with 13 properties slatedforcompletioninthesecondquarter. Thispastyearalsorecordedthecompletionof22 buildings totaling 1.6 million square feet, with nine of those representing 802,027 square feet built specifically for individual companies.

Source: Press Release

The flow of office investment sales in Austin is expected to increase this year due to an improving economy and a tightening supply of office space, according to the 2012 Annual Report published by Marcus & Millichap.

About 27,000 new jobs will be added in office this year, predominantly in the health care and education sectors.

Only 50,000 square feet of new office space will be delivered this year, according to the survey. Thus, vacancy rates are dropping to an average of 19.2 percent this year. Asking rents will rise about 2.1 percent to $26.14 per square foot with effective rents increasing about 3.1 percent to $21.40 per square foot.

Though cap rates remain lower than in other parts of the state, the favorable economic outlook should attract a significant amount of capital to local office properties.

Excerpted from the Austin Business Journal

In a market featuring rock-bottom building prices and record-low interest rates, now is an ideal time for businesses to consider purchasing instead of leasing their real estate.

That was the consensus of the panelists on the most recent episode of the “Commercial Real Estate Show,” which provided a look at the factors making owner-occupied real estate a more attractive option for businesses.

Show host Michael Bull, the president and founder of Bull Realty, said the possibility of rent spikes is one reason to consider buying.

“These prices are so low, it’s incredible,” he said. “With the lack of new construction [in recent years], I think we’re going to see some huge rents in about five years.”

Banks also are enthusiastic about owner-occupied real estate, noted Brant Standridge, a state president for BB&T.

“It’s very, very attractive for banks,” he said. “Financing is readily available, and banks are requiring less and less equity.”

Firms that own their own buildings have a valuable tool for acquiring the funds needed to grow their operations, panelists observed.

“Businesses that are looking to expand, particularly small businesses, often use their real estate,” said Brent Baker, a managing partner with CIB Partners LLC. “It’s an attractive way to get long-term financing and to accomplish some things: expansion of marketing programs, adding equipment, any number of things they may want to do.”

Companies also can dramatically increase their wealth by buying a distressed building, occupying it and then later doing a sale-leaseback.

“The sale-leaseback market and the single-tenant net lease market are as hot as firecrackers,” Bull said. “The value and the demand for these fully occupied properties are just huge.”

Possible changes in accounting rules provide yet another reason for firms to consider buying real estate. The Financial Accounting Standards Board has proposed changes that would classify leases as liabilities on balance sheets.

“What happens when your liabilities go up but your equity doesn’t change?” said Jeff Olson, a partner with Babush, Neiman, Kornman & Johnson. “Your leverage ratios go off the charts.”

Implementation of the changes could spur some businesses to buy instead of lease their buildings.

“They’ll say, ‘I’ll put the debt on my books but I’ll get the asset, and I’ll have an investment,’” Olson added.

He predicted that, if passed, the new rules wouldn’t be implemented until 2014 at the earliest.

Daniel Latshaw, a partner with Bull Realty, said markets such as Atlanta, Phoenix and Las Vegas could offer particularly good opportunities for purchasing buildings. “But don’t generalize,” he cautioned listeners. “Look closely at your market or submarket.”

The full show is available for download at CREShow.com. The next “Commercial Real Estate Show” will be available April 12 and will provide an update on the U.S. office market.

Source

This report by the Wharton School of the University of Pennsylvania says there is no single answer as to whether a company should own or lease its real estate. See below for the reports summary and conclusions.

One of the most important capital decisions made by corporations is whether they should own or lease their operating real estate (offices, industrial and warehouse facilities, and retail space). This decision is generally viewed by corporations as a trade-off between the pres- ent value of rental payments versus that of the operating costs of owning the real estate, net of expected capital appreciation and the depreciation tax benefits from ownership. The rule of thumb is that only if the present value of future rent is less than the present value of costs of self-ownership of the space (net of depreciation benefits, and expected property appreciation), should the firm lease rather than own. However, as this paper demonstrates, this analysis is fundamentally flawed, lead- ing companies to own far more corporate real estate than is economically justified. This is true in countries such as Germany, where corporate users own as much as 75 percent of their real estate, as well the United States, where roughly 40 percent is owned by corporate users.

The correct model for the own-versus-lease decision must compare the present value of profits the corporation expects if it leases versus the present value of expect- ed profits if it decides to own its real estate. The key insight provided by this corrected approach is that the own-versus-lease decision revolves around the com- parison of the lost profits associated with moving corporate capital from core operations to real estate, versus the profits achieved by real estate owners. That is, capital freed up from real estate ownership generates the company’s core business rate of return, while rents reflect the rate of return earned by landlords on their real estate capital. Since most companies have higher expected rates of return in their core business than are achievable through real estate ownership, this decision model indicates that the vast majority of corporate real estate should be leased. The intuition of this result is simply that by moving capital from low-yielding real estate to high-yielding core operations, companies increase profits.

The model [in this paper] demonstrates that there is no single answer as to whether a company should own or lease its real estate. Instead, it depends upon the nature of the firm, the nature of the real estate market, the type of the real estate, and taxes. But the model demonstrates that high-multiple firms with high core rates of return, particularly if they are looking for real estate that is readily available in a competitive real estate environment, should lease. The model also suggests that for idiosyncratic properties in less competitive property markets, companies with low rates of return in their core business will gain by owning their real estate, particularly if the rental market is very inefficient. Our model can be easily applied to every property to determine if the firm should own or lease the property. A critical insight is that shifting dollars from EBIT-DA to rent can enhance corporate value, as the capital is allocated to higher return core businesses, generating greater bang on the firm’s limited capital, by freeing capital from relatively low-yielding real estate to high-yielding corporate operations. This decision also allows corporate management to focus its energies on its core competencies, which generally both lowers risk and adds value.

Source

If portfolio managers and brokers hope to compete in the changing corporate real estate landscape, they need to understand how companies are preparing for tomorrow’s office.

So, what does tomorrow’s office look like?

Recent studies suggest that we are advancing toward a smaller but smarter office that is more compact and collaborative and increasingly mobile.

Many companies originally sought out more efficient office space as a way to save money and resources during tough economic times and found through studying their occupancy needs, they had excess space that could be shed or used more efficiently. However, the continual evolution of technology and changing demographics will allow smaller, more efficient, and collaborative office space to become the norm.

The Building Owners and Managers Association (BOMA) Foundation and the Georgetown University School of Continuing Studies and its Masters of Professional Studies in Real Estate Program brought together the best and brightest minds in real estate on November 10 for their second annual Thought Leader Symposium, 2025: A Vision for Commercial Real Estate.

The panel of experts said to remain competitive, the existing stock of commercial real estate must be reconfigured to keep pace with a mobile, Internet-connected workforce; ongoing changes in technology, and to support the way companies are structuring their staffs to foster more collaboration and efficiency.

Martha A. O’Mara, PhD, CRE, managing director of Corporate Portfolio Analytics, whose firm advises large companies and organizations that collectively occupy 500 million square feet, said increased density in office buildings is here to stay, and she foresees radical changes in the workspace environment.

According to Teknion’s recent Workplace of the Future study, 46 percent of companies surveyed currently employ cloud computing — which allows employees to access company data from any computer. Another study by Cisco found that three out of five workers say they don’t need to be in the office to be productive anymore. With a laptop, tablet, smartphone, or some combination of those devices, many office employees can work anywhere they can get online.

This also means that time spent in the office is often dedicated to meetings and other face-to-face activities rather than sitting at a desk.

With technology supporting an increasingly mobile workforce, “people are not going to want to come in to a workplace unless it is an exciting environment,” said O’Mara. “The ideal situation may be where you go into the office two or three days per week and work remotely the other days, which reduces our carbon footprint by 20% – 40% and has a huge impact on improved quality of life.” It also makes people more productive when they do come into the office, she said.

O’Mara points out that changing demographics will also contribute largely to this new office structure. By 2025, about half of the baby boomers will be out of the workplace, she noted.

The average age of employees at Goldman Sachs headquarters in Manhattan is 32, said James B. King, AIA, principal of AREA Advisor LLC King. “Half the people working there are millenials.”

The working habits of millenials, or Generation Y, and office needs are radically different from what the industry is used to providing. Perkins & Will Principal Joan Blumenfeld noted that Gen-Xers and Millenials are more comfortable blending work and home life than their baby boomer parents.

According to Patricia Lynn, CCIM, principal of consulting firm Lynnk, the millenials, are using three distinct places: the traditional corporate HQ about 30% of the time, the home office another 30% of the time, leaving a giant opportunity in what Lynn called “the third place – a kind of Starbucks on steroids. She says new working spaces will not be based on lease occupancy but instead will be based on membership – anywhere from $150-$425 a slot – where the millenials stop to connect, collaborate and create.

Blumenfeld also noted a distinction in workplace trends among different types of firms.

Large-scale financial services, consultants and other professional services firms place increasing value on supporting their employees outside the office to encourage more client-facing time. On the other hand, technology firms and other creative process-focused companies are seeking to make their workspaces more accommodating. They want to keep employees interacting together in the same environment.

As such, companies are changing their corporate environments is by combining the work environment with elements of a home environment preferred by new generations of workers, as opposed to baby boomers who prefer to keep the two separate. Companies are altering their workspace design to incorporate more open floor plans and “common areas” with extensive seating and collaboration areas, while providing employees the technology to connect from anywhere.

It’s important to keep these trends in mind when investing in and managing buildings. Can you reinvent your space for a tenant with these changing needs?

“If the last 15 years are any indication of the pace of change in our industry, the next 15 will be phenomenal,” said BOMA Foundation Chair Marilyn Wilbarger. “Our thought leaders are going to give us a lot to think about in terms of how we should strategize to ensure that our future buildings are places where people want to work.”

Please note the author started this piece from her home office where she works on Wednesdays and finished it from her shared office space (pictured) on Thursday.

Sources
Will We Need Any More Office Space?
Resizing or Right-Sizing?
Tomorrow’s Office Worker and Their Spaces

REAL ESTATE
Energy Spurs a Recovery in Houston
By KRISTINA SHEVORY
Published: February 7, 2012
Rising oil prices and a boom in shale exploration are leading companies to add office space in the Houston area, most notably Exxon Mobil.

HOUSTON — In most cities, companies are holding tight, mothballing office expansions and delaying new hires. But not in Houston.

Powered by a rise in oil prices and a shale exploration boom, Houston is the first major metropolitan region to regain all the jobs it lost in the recession. The region added about 76,000 jobs last year, according to the Texas Workforce Commission, and is on pace to pick up tens of thousands more this year.

Oil and gas companies, from the biggest names like Exxon Mobil to the smallest independents, are dusting off plans to expand, relocate or put up new buildings. Last year, 1.8 million square feet of commercial space was vacuumed up, and real estate brokers expect the same or greater this year. “No question, it’s energy,” said Jim Arket, a senior vice president at Grubb & Ellis in Houston. “That’s been the plus multiplier of Houston.”

The resurgence can be partly tied to the lifting in fall 2010 of the government moratorium on deepwater drilling in the Gulf of Mexico after the BP oil spill. The bulk of the gulf’s drilling and profits comes from those offshore waters. Shale drilling has also bolstered balance sheets.

See full article here.

12 PREDICTIONS FOR 2012 via Real Estate Bisnow Houston

1. HOTELS IMPROVE

Performance in the hospitality industry is on the up, according to Smith Travel Research and PKF Hospitality Research. Smith reports that Houston is doing particularly well; our hotels rank second in the US (behind Nashville) for year-over-year gain in room demand.

2. WESTCHASE RISES

With at least two spec office buildings slated to break ground in 2012, Westchase may just be the hottest submarket this year. Westchase District’s Sherry Fox tells us leasing volume in the submarket had topped 1M SF by Q3 ’11, well ahead of 2010 numbers. That put occupancy at 86.7% by the end of Q3, and Sherry says very big blocks are available.

3. FUNDS ARE UNPOPULAR

Ernst & Young American RE sector leader Mike Straneva (we snapped him at an E&Y/Baker Botts event in December to the right of Archstone’s Neil Bown and HFF’s Jody Thornton) says the recession taught people that they need to know who all investors are in a deal. That said, funds that do exist are attracted to RE because of returns.

4. CMBS IMPROVES, BUT IS THAT ENOUGH?

Commercial Mortgage Backed Security values will be on the rise this year: Wells Fargo Securities expects $25B, and Credit Suisse Group AG and UBS AG predict as much as $45B issued in 2012. But Andrews Myers CRE attorney Patrick Hayes has less confidence. Although Patrick has seen a resurgence of CMBS loans, he cautions borrowers that underwriting is tough to the point of being unreasonable. He suggests borrowers avoid that route unless they’re confident their properties can withstand the underwriting process.

5. INVESTORS COME TO CRE

Texas A&M Real Estate Center chief economist Mark Dotzour thinks US stocks and CRE broken deals are the most undervalued assets in the country right now. People are bound to catch on soon, making them the next investment trend.

6. AND TEXAS IN PARTICULAR

Houston and Dallas are among the top CRE hot spots (NY and DC are the others) generating investor interest, says Younan Properties chairman/CEO Zaya Younan. Foreign investors (including the Chinese and Europeans) only want to talk Texas because of its fast-growing, strong fundamentals.

7. DRIVING AUSTIN

A problem everywhere: traffic congestion. For Austin and San Antonio, the problem compounds with 70% of the NAFTA truck traffic making its way up I-35. But, that also means opportunities, too, according to the experts at the Bisnow Future of the I-35 Corridor in Austin yesterday. Only 80 miles apart, the two major metro areas may one day mesh into one greater MSA with a population of about four million. Major universities, international airports, and the NAFTA superhighway are a recipe for growth between the two cities.

7. OFFICE ABSORPTION INCREASES

Houston’s office leasing market fundamentals improved remarkably last year, according to PMRG VP of research Ariel Guerrero. Office product absorbed 3.2M SF, the most since ’08. Look for a continued shift to a landlord-favorable market as rents rise and quality space options diminish.

8. CLASS-A WILL DO EVEN BETTER

Of the 3.2M SF Houston absorbed last year, 2.4M SF was Class-A.

9. HEALTHCARE’S ABOUT CLASS-B

Marcus & Millichap’s Tanner McGraw tells us investors in the healthcare space are paying more attention to Class-B product. According to Marcus & Millichap’s October report, statewide MOB transaction velocity increased 28% from the same period in 2010. Activity accelerated dramatically for buildings below 5,000 SF, and lower-quality properties were the lion’s share of deals. Tanner is also seeing more health systems building and acquiring off-campus assets through physician practice acquisitions.

10. SPECIALTY GROCERS COME TO MARKET

The retail market in 2011 was dominated by HEB and Walmart, but look for specialty stores to creep into Houston in 2012. Transwestern’s Nick Hernandez says we’ll see Aldi, Trader Joe’s, Sprouts, and others open their first Houston stores this year. And here’s two for the price of one: Nick also says we can expect retail landlords to squeeze more value out of existing centers by adding pad sites in parking lots or tacking on small buildings for additional SF.

11. SELECTED CONSTRUCTION GAINS

Expect modest gains in construction this year, according to Andrews Myers construction attorney Ben Westcott. He expects construction to increase in infrastructure, municipal, education-driven, and multifamily projects. The latter three project types will see a bump from the population spread across our fair city. This is leading to more construction jobs: The Labor Department reports that 9,000 were added in November and 17,000 in December. Plus, construction spending increased over three of the last four months of 2011.

12. INDUSTRIAL STAYS HOT

Many of the spec developments under way will deliver this year, most have significant preleasing. And that means that concessions are burning off. The team predicts they’ll become the exception rather than the rule, a nice change for landlords from the previous three years. The north submarket will be the hottest, possibly running the risk of being overbuilt.

Each number has been summarized. See more on each category HERE.

The CCIM Gulf Coast Chapter held a forum on architectural trends in commercial offices spaces. Randall Walker with Kirksey Architects, Steve Mechler of SpawMaxwell, and Don Grieb with Development Systems touched on new office space trends and construction markets. Here is Barton Kelly’s summary of the day’s topics.

Office Space Trends

Randall Walker with Kirksey Architects, AIA, LEED AP discussed current trends in office architecture. Walker says he sees tremendous interest from his clients in open floor plans and transparency; glass fronts on offices are easy to do and make a huge difference. Day light, views, and ease of interaction are the top requests from tenants in the last several years. Companies, now more than ever, are seeing the benefits of “shared knowledge” between employees and bright, open and comfortable spaces are providing the environment for a better exchange of ideas.

Flexibility is also key in a 21st century building. Conference rooms are doubling as offices and cubicles are being replaced with adaptable and spacious multi-user work zones that can accommodate an on-the-go professional. Areas formerly hidden – such as a production floor at a light industrial facility – can become a source of pride and are being showcased through extensive use of glass walls. Gone are the days of executive suites stealing the floor’s premium views—conference rooms and shared spaces are commanding the well-lit corner areas for the benefit of all. Walker suggests that vibrant interior colors will also remain popular.

In addition, Walker has incorporated coffee bars into almost every project he has worked on this year. The coffee bar is an informal gathering spot similar to a break room or a large work station where workers can congregate and share thoughts. It is casual and centrally located on the floor many times directly off the elevator.

Growth in Renovation and Remodels Post-Recession

Walker notes that the majority of post-recessionary construction projects will be in the form of renovations and remodels. Houston is littered with 1980s office parks that are falling behind in energy efficiencies and tenant demands. Re-skinning a building can provide the look and feel that modern users want while retaining the core structure. New glass curtain walls, increased ceiling heights and open floor plans can adapt an office to 2011 while lowering its utilities. However, tenants should beware that most renovations require significant upgrades to meet current codes. Owners are finding that they are only able to keep the framing making total costs comparable to building new. Despite this, there is strong growth in renovations and an increased demand to retro-fit existing spaces, especially when the location trumps creating a new facility. Something project coordinators often neglect is that furniture expenses can often be as high as a third of total project costs.

Average Tenant Improvement Costs

If your company is looking to move locations, expect average tenant improvement costs to hover somewhere around $40/SF in 2011 says Steve Mechler of SpawMaxwell. He thinks now is a good time to build, especially in Houston. He estimates that labor costs will increase by only about 1% this year while material costs could rise between 6% and 8%. Subcontractor fees in 2011 are running between 5% and 8% and general contractors are only asking half of what they were in 2008. Don Grieb of Development Systems adds that A&E fees (Architectural and Engineering) are lower than one would expect and can be found around 4% of the total project’s cost. After looking at Houston’s growth during the recession years, Mechler sees multi-family, healthcare and K-12 educational facilities as dominating the construction market for the next decade.

Public-Private Partnerships

Another big trend will be public/private partnerships. While the concept isn’t new, it’s gaining momentum throughout the country and the Texas Senate is currently pondering bill 1048 which would establish a commission to set rules for partnerships between public entities and private developers. Mechler says builders and developers would be able to provide unsolicited bids to the city for sites they deem worthwhile. An increase in public/private ventures would benefit everyone involved if properly executed with both parties sharing in the risks and rewards. Private companies can bring great efficiencies, new technologies and better planning to a project while the public sector holds legal authority, can provide tax free debt and will protect public assets. With budget shortfalls and a lagging infrastructure, many cities and states are seeking private builder involvement. In the UK, an estimated 15% of all construction projects are of this nature.

New Rules affect Tenants’ Leases

It should also be noted that the new FASB (Financial Accounting Standards Board) rules for leases will be adopted this year and are expected to be implemented before 2014. Developers be warned. Both existing and newly written leases over one year in length will no longer distinguish between operating and capital leases but will all be structured solely as capital leases. Don Grieb explains what this means for tenants. Instead of treating a lease as a monthly expense and accounting for it as it occurs, a lessee must recognize the entire value of the lease as a liability on its balance sheet. This large lease obligation will affect the tenant’s financial statements, especially in the early years of the lease, and short-termed leases with tenant options will become much more common. When leases are a less attractive vehicle for a firm’s real estate needs, expect to see more build-to-suit deals, more companies building and buying offices themselves, and developers lamenting the decline in value of their assets as tenants negotiate shorter leases.

Last Friday, the CCIM Gulf Coast Chapter held the 18th Annual CRE Forecast Competition. Here Barton Kelly has summarized the days lectures for you.

Dr. Mark Dotzour, Chief Economist at the Real Estate Center at Texas A&M University, opened the competition with a report on the state of the national economy giving a positive outlook for the commercial real estate industry. Below are some of his key points.

• Every metro area in Texas is experiencing positive job growth this month and the private sector is ready to get back to work. Government layoffs are inevitable in the coming years, but the private sector’s willingness to hire should offset this.

• Banks need to clear their shadow inventory to bring normal values back to CRE. Thorough auditing and foreclosures of bank’s underperforming assets will help the nation in the long run. “Extend and pretend” practices need to stop. While it is unfortunate that many banks will go out of business, Dotzour sees new banks quickly taking their place.

• Look for Class A properties in large gateway cities to perform well; however, all other assets seem to be frozen. This is causing a “double bubble” effect in certain cities and inflated prices in Washington, New York, and San Francisco.

• In closing Dotzour stressed how important it is that the government show confidence this year and that banks stop solely buying treasuries.

Other area real estate experts were asked their opinions on the industrial, land, retail, office, and apartment sectors. Below we’ve broken down their predictions:

Industrial:

• Times are good for tenants with economical rental rates available; but with low vacancies and very little new construction, potential tenants are having a hard time finding the right property, especially on the north and west sides of town where very few crane-served buildings are on the market.

• Industrial cap rates are coming down: expect to see quality assets in the 7.5-8.5 cap range.

Land:

• Insiders predict midtown Houston land prices to remain high at $45-55/SF. Multi-family developers are purchasing land; currently there are 10 very large land deals in the Houston area set for apartment development, 6 of those inside the 610 loop.

• As housing is concerned, there’s only a 4-5 month land supply of quality lots in Houston.

• Interesting facts: Walmart paid $50/SF for the land between Washington Avenue and I-10, part of the new Washington Heights development by Ainbinder. Kroger recently paid $49/SF for the land to build their new store on Studemont.

Office:

• Insiders predict Class A, downtown office space will command rental rates between $34- $37/SF and sales will average $200-230/SF.

• Job growth was repeatedly stressed as the saving grace for the industry, and experts expect corporate management to finally make hiring decisions this year.

• Large nationwide firms perceive Houston to have office rents at below market rates, a favorable outlook for the city.

• To the investors out there: Don’t be looking for steals, because you won’t find any. Expect to pay market prices.

Retail:

• Service-oriented retail will weather this recession stronger than solely merchandize-driven stores because internet sales are hurting brick-and-mortar companies harder than you’d expect. Given this fact, companies looking to open additional stores need to tap into the opportunites that internet sales provide.

• Zip codes and shipping addresses of current customers are an invaluable asset for expanding chains.

• Similar to the industrial markets, rental rates will increase in 2011 with quality space hard to find.

• “Lifestyle” retail centers with the “right” tenant mix and well-conceived parking garages will see a comeback after the recessionary years; however, population densities are key to their success.

• Investors best bets: size matters, small grocery-anchored centers with stable tenants.

Apartments:

• Big life insurance companies will be prolific lenders in the 2011 multi-family markets but expect to pony up at least 60% equity for such deals.

• We should expect big buys from large institutional investors in core, inner-city markets and for smaller, private companies to acquire apartments in the suburbs.

• Panelists forecast a $1.25/SF rental rate in Class A properties with average market occupancy rates to hover near 88%.