NEWS RELEASES

04/2006
Urban Land Institute

By Mike Sheridan

Lone Star State’s Robust Economy Brightens Real Estate Sector

With strong job growth in major metropolitan areas, a still-robust economy, and continuing demand for residential, retail, commercial, and multifamily offerings, the Lone Star State’s real estate industry is poised to prosper in the years ahead.

“Texas is a very young state when compared with many parts of the U.S. and it has a substantive and growing base to build on just from its native population,” says Walter F. “Ted” Nelson, president/Texas of San Diego, California–based Newland Communities. “In addition to this base of young homebuyers, Texas continues to attract many in-migrants due to the strong job growth that we are currently experiencing.”

All of Texas’s four major metropolitan areas—Houston, Dallas/Fort Worth, San Antonio, and Austin—are consistently cited as places where “business likes to do business,” he continues. “Such things as a ‘pro business’ attitude, exceptional cost of living, great air connectivity to the U.S. and abroad, and a moderate climate are very attractive elements for Texas,” says Nelson. “And, each major city offers unique attributes and has a substantially different economic base.”

Bobby Adams, senior vice president at Houston-based TCB—an engineering firm with major practice areas in natural resources planning, transportation, public works, and land development—agrees. “The state’s economy should stay strong for the next several years due to job growth and the state’s ability to compete in the national and global job markets,” he explains.

Adams adds that forecasters are still predicting significant job growth in the state. “The starter-home market has outpaced the growth of the neighborhood retail market and, as a result, commercial and retail land development appears to remain strong,” he says.

Even the Texas multifamily sector, which has been an area of investor concern, is looking up, says Ron Witten, president of Dallas-based Witten Advisors, an apartment market advisory firm, “aided by strong occupancy rates, a robust economy, the influx of Louisiana residents following Hurricane Katrina, and reduced apartment building in major cities.”

Not only that, but Scott Galloway, executive managing director in the Houston office of Holliday Fenoglio Fowler, LP (HFF), of Houston, also foresees that there will be continued strong inflows of capital into the Texas real estate market as well as increased demand in some areas for multifamily and offices. The economy will remain strong, he adds, thanks to population and job growth.
Statistics show that Texas nonfarm employment is growing at a faster pace than the national average. The state’s economy posted an annualized employment growth rate of 1.6 percent from December 2004 to December 2005 compared with 1.5 percent for the United States. At the same time, Texas’s construction industry gained more than 17,000 jobs over the year, which represents an annual growth rate of 3.2 percent.

Overall job growth in Houston, Dallas/Fort Worth, San Antonio, and Austin has been exceptionally strong over the past several years, emphasizes Nelson, “and by all accounts, we are looking to sustain these levels of growth at or near these record levels for the years to come. Housing starts in these cities totaled roughly 130,000 during 2005 and are projected at or near the same level in 2006. All of the basics are in place for this to continue, barring interest rate or world event ‘jolts.’”
Others share such an upbeat outlook. Kenneth Hughes, president of Dallas-based Hughes Development LP, points out that Texas is experiencing stable housing prices that are lower than those seen in many other parts of the country. “Texas home prices are not increasing at the same rate as the rest of nation, but we’re seeing steady increases in value,” he continues, “and that’s good for the homebuilding business.”

Hughes is currently developing So7—South of Seventh at Seventh Avenue and Trinity Park in Fort Worth—a joint venture with Australia’s Paracor Financial. Current plans include 150,000 square feet of retail space, 99 townhouses, 150 apartments, 60 condominiums, and a 150-room Marriott Residence Inn. “So7 is a 25-acre, urban mixed-use project that benefits from a central location and beautiful surroundings,” says Hughes. “It is also the only privately owned frontage along Trinity Park.”
Perhaps one of the most eagerly awaited strategic redevelopment initiatives and infrastructure improvements in the Dallas/Fort Worth metropolitan area is the Trinity River Corridor Project, which will unite the northern and southern parts of the Dallas community. Construction began last year on the Margaret Hunt Hill Bridge—designed by architect Santiago Calatrava—that will extend the Woodall Rodgers Freeway to Singleton Boulevard, creating a new link from west Dallas and Oak Cliff to downtown and the Stemmons Corridor.

J. Frank Miller III, chairman and chief executive of Irving, Texas–based residential builder JPI, notes that more than $1.7 billion in infrastructure improvements are planned in the area.
“The Trinity River development will help get people to the water and will be a beautiful amenity for the city,” says Miller. “It’s an exciting, much-anticipated development in Dallas because we don’t have the water and recreational amenities other cities have. The Trinity project will bring a new element to all the good things happening in downtown Dallas and the area.”

Mark Bryant, senior vice president at JPI, added that the company has purchased about 37 acres at the foot of the Margaret Hunt Hill Bridge and is planning a mixed-use project that will include, hotel, office, retail, and residential development.
“This is an area of Dallas that has been overlooked for many decades, even though it is an extension of downtown Dallas and the Uptown area,” says Bryant. “We do business from California to Washington, D.C., to Boston to southern Florida, and the Trinity River and related improvements [constitute] one of the most exciting development opportunities that we see around the country. Mayor Laura Miller has compared the impact of the Trinity River corridor project to that of DFW airport. JPI and other developers are looking at the urban core and how to revitalize downtown, where some $5 billion to $6 billion in public infrastructure improvements are underway.”

In Fort Worth, Trinity Bluff Development—a partnership that includes developers Tom L. Struhs, Elizabeth Falconer, and Rudy Renda—is developing the $350 million, 30-acre Trinity Bluff project in the northern section of downtown now called “Uptown.” Plans call for 2,250 apartments, condominiums, and townhouses on 30 rolling acres on an 80-foot bluff that overlooks the Trinity River. The project lies three blocks from the old county courthouse and within walking distance of the city’s famed Sundance Square.

Struhs says the master-planned, mixed-use development is a natural extension of the city’s central business district, adding that the trio hopes to create a unique residential, retail, restaurant, and hospitality destination.

Already, Dallas-based Lincoln Property Co. is erecting Lincoln at Trinity Bluff—300 luxury apartments—in the area designed as one brick-clad building wrapped around a parking garage. Plans also call for a mid-rise development at the north end of downtown Fort Worth across Samuels Avenue, expected to begin development later this year.

Not all multifamily development in the Lone Star State is new, notes Stephanie Moore, president and owner of Moore Design Group of Dallas. The repositioning of older buildings for multifamily has become a major trend as urban residents develop an increasing appetite for historic properties. Moore cites the Depot, which includes a “repurposed” 1911 railroad depot in downtown Fort Worth, as one example. “Developers saved the original depot building and razed a nearby warehouse, making room for 210 loft-style apartment units,” she explains. “The historic designation of the original building presented construction challenges, and the developer worked closely with local zoning and cultural landmarks commissions to ensure compliance.”

At the mixed-use property called AMLI Downtown in the warehouse district of Austin, historic elements were salvaged from the razed property that previously stood on the site. “AMLI Downtown . . . is on the site of the historic Walter Tips warehouse, originally constructed in 1927,” says Moore. “Our team respected the legacy of the original construction, utilizing brick interior walls and an original antique scale and Otis elevator as decorative elements.”

With additional projects completed or underway, some analysts say the Texas multifamily market remains robust. “Houston had an almost overnight recovery with the influx of Katrina evacuees,” says Witten, “with occupancy rates up 4 to 5 percentage points over the past nine months. Houston’s market is in very good shape today, but the unknown about Houston is what happens when those evacuees evaluate their future—not only how many remain in Houston, but also how many stay but decide to buy a home. Thus, we may see the Houston multifamily market lose a little bit of steam later this year. But we see the market generally stable over the next couple of years.”

Dallas is in the midst of a more gradual recovery, Witten says, with the area receiving some benefit from Katrina evacuates, but nothing compared with Houston. The Dallas economy continues to recover, and job growth is improving—not quite as rapidly as Houston—but Dallas is showing solid improvements, he continues. “We see the market firming gradually over the next two to three years,” Witten says. “There will be a period of improved prosperity, but not boom conditions. The outlook is for gradual improvement from where we are today.”

Austin’s economy is one of the strongest in the state, Witten points out. “We’re more bullish on Austin multifamily markets than any other Texas market,” he explains. “Austin’s relatively higher home prices make for a friendlier leasing environment. It’s not as easy for consumers to buy a home in the Austin area and that’s a plus for multifamily developers. Austin is also experiencing good job growth and multifamily construction starts picking up, but not at a level to be of concern.”

San Antonio has perhaps one of the most stable multifamily markets and has had steady growth over the past two to three years, capped by the opening of a new $850 million Toyota manufacturing plant in the Alamo City. However, says Witten, “all that good news has not escaped the development community and multifamily starts are up significantly. In 2004, 1,800 apartments were finished in San Antonio. That jumped to 3,600 in 2005 and we expect to see 6,100 apartments completed this year. That’s a lot of construction. We expect the San Antonio market to deteriorate over the next 12 to 18 months, solely up because of increased construction starts, and not weakening of demand.”

Not all the demand for residences is in the state’s major metropolises. While residents seek to be closer to the city, they also desire to get away to a place where they can relax and be with family and friends, fueling additional real estate development, says Dallas Addison, a partner in the Dallas-based Addison Law Firm. “This means second homes, and the market is starting to develop in Texas for higher-end properties, including exclusive ranch properties,” he explains. “We believe driving distance to large population centers is the key, around two hours or less. The hill country of Texas is an exception to that, as it has always been very popular for the entire state and particularly Houston and Dallas.”

A few examples of new, higher-end projects, Addison says, are Boot Ranch in Fredericksburg—a high-end, PGA-winning professional golfer Hal Sutton project—Waterford in Marble Falls; and Escondido, also in Marble Falls and featuring a Tom Fazio–designed course.

“Around Dallas, our company, Preservation Land Company, has been involved with several successful shared ownership ranches located about 90 minutes outside Dallas,” continues Addison. “In addition, we have seen rural land prices in areas around Dallas significantly increase in the last three years. We believe the market for amenitized second-home projects in these areas will remain strong as the metropolitan areas continue to expand. People are definitely looking for places where they can spend leisure time with family and friends outside of the congested cities.”

On the hospitality front, the Texas real estate industry is talking about two projects—one in Space City, the other in Dallas. In Houston, developer Giorgio Borlenghi’s Interfin—a developer of luxury high-rise condominiums in Houston—is creating a new hospitality product: the six story, 132-room Granduca Luxury Residential Hotel, scheduled to open in September.

“It’s not just a hotel, but a property with real residential amenities and a true residential feel, where our guests can spend one night or much longer periods of time, enjoying the comfort and luxury of a much more spacious environment,” says Borlenghi. “We are going beyond the boundaries of our marketplace by offering a product that still does not exist here. We believe there is a tremendous need for this building in Houston and in many other markets.”

In downtown Dallas, the Headington Companies and Gatehouse Capital Corp. are partnering to develop Joule, a high-fashion boutique hotel now under construction in the historic former Dallas National Bank building. The 120-room urban hotel will include a signature restaurant with a high-profile chef, a club operated by a nationally acclaimed operator, and a 1,000-square-foot fitness center. Kimpton Hotels & Restaurants, a San Francisco–based company specializing in boutique hotels, will operate the hotel, which is scheduled to open in 2007.

Other development is occurring. In Irving, Texas, for example, Koll Development Company (KDC) and Prudential Real Estate Services have purchased land to develop the nation’s third Intellicenter office building. The 200,000-square-foot branded, high-performance office structure, which will be in compliance with the Leadership in Energy and Environmental Design (LEED) Building Rating System administered by the U.S. Green Building Council, is planned for Regent Center, a 123-acre master-planned business park that KDC developed.

Koll has also been selected to develop a new build-to-suit corporate headquarters for Fluor Corporation on 26 acres in Las Colinas. The 120,000-square-foot corporate campus facility, slated for completion in April, will feature a three-story, dual-wing office building and amenities including an auditorium, a cafeteria, a fitness center, and a covered parking garage.

The 900-acre master-planned development of Solana in North Dallas was chosen for the new 615,000-square-foot headquarters of First American Real Estate Information Services. First American’s campus will consist of four main buildings that will be interconnected with a glass-enclosed sky bridge; an adjacent executive office, dining, and client conference center; and a stand-alone data center.

Retail is also strong in Texas nowadays. Consider Houston, where the region’s population is expected to increase from 5.3 million to 8.8 million by 2035. Not only that, but the Greater Houston Partnership has projected that 60,000 new jobs will be created in 2006 in the Houston Metropolitan Statistical Area on top of the 42,500 that were added in 2005. “All of these people will need schools, office buildings, and places to shop,” says E.D. Wulfe, president of Wulfe & Co., a Houston brokerage firm. “Houses and businesses will spring up on prairies and rice fields.”

According to an analysis by Wulfe & Company, approximately 3.6 million square feet of new retail space will be completed and opened in 2006, which is a 14.2 percent increase over the 3.2 million square feet that was completed and opened last year and in 2004.

Of that total, 36 percent will be in new super-discount department stores. Supermarket expansion is expected to be minimal, with only one new Kroger and one new HEB slated to open this year. Says Wulfe: “The most significant aspect of all the new retail space projected for 2006 is that much of it will be developed, constructed, and/or owned by the retailers themselves.”

What does the future hold for Texas? Teague G. Harris III, senior vice president of Pate Engineers, Inc., a full-service civil engineering consulting firm headquartered in Houston, says there will be a greater focus on trying to create urban-like spaces in residential developments, typically in larger master-planned communities (MPCs).

“Also, what we’re seeing is added emphasis on a higher, larger level of other amenities such as water parks in MPCs,” says Harris. “Of course, the idea is not brand new, but we’re seeing more and more of them, sort of like the amenities you seeing at splash parks—large slides, amenities where water shoots up and kids play around it, and so forth. It makes a lot of sense for our climate.”
Randy Stone, group manager/retail centers of Carter & Burgess, a Fort Worth–based architecture, engineering, and construction management firm, says another trend in Texas is more varied mixed-use developments. “Many start out with a common retail thread, but then branch out to include entities like resort hotels or medical office buildings and even a regional hospital,” says Stone. “Developers are becoming more creative. They want to have more variety in their projects that fulfill more needs.”
At the same time, Stone says some of the biggest challenges many developers in Texas face are political—many communities that have experienced dramatic growth over the past several years want to slow development down. “In some areas, it’s getting to be harder to get approval for projects,” continues Stone. “It just takes more time and a lot more listening to citizen concerns about development.”

Even so, development continues throughout the Lone Star State. Cognizant that overbuilding adversely affected the real estate sector during the 1980s, many developers are cautious about new projects but remain optimistic about the future of real estate in Texas.

Nelson of Newland Communities notes that the underlying basics of the residential and retail real estate industry remain strong along with population and job growth. “We see much written about the ‘graying’ of the baby boom generation, but often overlooked are the children of this huge generation—the ‘echo boomers’—and the significant immigration that we see on an annual basis,” he continues. “The front wave of this echo generation is now beginning to hit both the job market and the housing market. And one truism about our business should never be overlooked: Everyone must sleep and shop somewhere, so consequently I see these underlying basics as strong for the next ten to 20 years.”

Mike Sheridan, a former Texas resident, is a past president of the National Association of Real Estate Editors (NAREE).