COVER STORY, JANUARY 2012

INDUSTRY SURVEY REVEALS UPBEAT SENTIMENT
Brokers and lenders expect deal volume to increase and developers anticipate more construction in 2012.
John Nelson

The results of Texas Real Estate Business magazine’s survey of commercial real estate insiders showed optimism about business potential in the new year. The optimism is ubiquitous across all three surveys — brokers expect more investment sales and leasing activity, developers and owners anticipate to break ground on new developments (as well as purchase existing properties) and lenders and financial intermediaries expect to provide more capital in 2012.

The lasting effects of the recession have been bridled in Texas this past year by a strong recovery. The major markets in Texas have all had exciting years. In Houston, 100 percent of the jobs lost in the recession have been regained, and Shell’s lease renewal of 1.22 million square feet of office space in One & Two Shell Plaza was recorded as the year’s largest office lease transaction in the world. In addition, San
Antonio was named the top-performing MSA in the 2011 Milken Institute Best-Performing Cities Index, which named nine Texas cities in the Top 25 and four in the Top 5. In Dallas/Fort Worth, the 953,622-square-foot Energy Square office development recently traded hands. In Austin, several new developments have been announced recently and companies such as Facebook have expanded their presence into the Lone Star capital.

Even with the relative success within Texas, there are still concerns that the survey participants voiced. The concerns include creditworthiness of tenants, the health of the overall economy and contentions between landlords and tenants.

With such a strong year behind them, it’s curious to see that a majority of the participants believe that 2012 will be even better for their firms and for commercial real estate in general.

Thanks to all survey participants for providing us with exclusive research into the Texas commercial real estate market.

BROKER SURVEY

Respondents to the broker survey were generally optimistic about the amount of business they expect to transact in 2012, with 72 percent anticipating a higher volume of transactions in 2012 than 2011. Approximately 5 percent are projecting that sales transactions will decrease, while approximately 23 percent are estimating that sales activity will remain roughly the same.

Of these transactions, brokers are anticipating that multifamily will outperform other property types in the new year. Approximately 68 percent say that multifamily will experience a higher velocity of sales in 2012, an interesting result considering only 16 percent characterized themselves as being specialists in multifamily properties. Brokers are on the outside looking in and feel that multifamily is slated for a productive year. On the other side, most participants (47 percent) feel that retail mall properties will have an unproductive 2012.

In Texas, the energy boom and the high oil prices in 2011 have generated significant buzz nationally and internationally. However, participants did not choose energy as the main driver for increased leasing in the office market. Instead, respondents feel that the biggest driver for leasing will be healthcare at almost 69 percent. Energy followed closely behind at nearly 66 percent.

The participants’ optimism is seen again with a large amount feeling that the worst is in the rearview mirror. A nearly even number of respondents either feel that commercial real estate values have bottomed out (approximately 44 percent) or the values vary by property type and location and are therefore spotty (approximately 46 percent). Most respondents displayed a cautious optimism, but some participants displayed a strong belief of a productive 2012.

“The commercial real estate brokerage market is wide open,” said David Simmonds, principal of Retail Solutions, a Texas-based retail brokerage firm, in a write-in comment. “It’s a great time to be in the business.”

Most of the respondents were in the business of representing tenants and landlords in lease negotiations. In fact, a majority (73.2 percent) of respondents felt that new leases and lease renewals will bring in the most money for their firm.

For 2012, the participants feel that the most contentious sticking point between landlords and tenants in retail and office properties will be tenant improvement (TI) costs or concessions, followed closely by base rent. As fundamentals and values are projected to improve, Texas should give landlords more leverage in leasing negotiations. The struggle over costs of tenant improvement and base rents will likely be a natural growing pain stemming from the overall improvement in the market.

DEVELOPER/OWNER/MANAGER SURVEY

Since the construction boom of the early to mid-2000s and the subsequent recession, commercial development has been in a general lull across all property sectors. Despite the relative standstill that most markets are experiencing, 62 percent of participants in the survey have a development project in the pipeline that will break ground in 2012.

Among those participants, a majority (27.5 percent) is developing grocery/drug-anchored retail centers, followed by single-tenant retail (21.6 percent) and multifamily (19.6 percent) properties. (For more detail, see the “What’s Hot With Developers” chart.)

The uptick in retail starts projected for 2012 is consistent with Texas’ job gains in the retail sector, and consumer confidence has increased with retail sales up 8 percent in 2011 from 2010, according to the U.S. Department of Commerce.

The participants displayed confidence that they will undertake more development in 2012 in 2011. A majority of participants felt they would be net buyers, while a nearly equal amount expected to be a net seller (21.4 percent) or were uncertain (20.2 percent).

Of those that figured to be net buyers, a majority (31.1 percent) are planning to purchase suburban office space. Other popular options include grocery/drug-anchored centers and industrial facilities (both at 24.4 percent). Of the sellers, most participants (25 percent) are looking to dispose of an industrial property.

Management and leasing services are expected to be the biggest
drivers of revenue for 2012, according to 42.7 percent of the participants. As such, negotiations with tenants are paramount to these respondents. A majority felt uncertain on whether their negotiating leverage with office and industrial tenants would be stronger or weaker in 2012. For retail tenants, most participants (45.1 percent) believe their leverage will be the same as it was in 2011.

Even with uncertainty about leasing leverage looming, new construction and a steady amount of net buyers in the marketplace signifies optimism in real estate investment for the new year. In true Texas style, one participant wrote in, “Keep a tight belt, this rodeo isn’t over yet.”

LENDER SURVEY

Keeping in line with the respondents of the broker survey, lenders showed a penchant for multifamily properties. When asked, an overwhelming 95.5 percent of respondents felt that multifamily provides an attractive investment opportunity for lenders.

“Apartments are a great fit for lenders because they offer steady cash flow returns when stabilized,” said Jonathan Gilfillan, senior vice president of Berkadia Commercial Mortgage’s Houston office. “Also, the nature of multifamily’s short-term lease structures make them ideally suited to capitalize on rent growth trends.”

The demand for multifamily investment has been tremendous since the housing market has yet to gain significant traction. Approximately 77 percent of respondents in the survey feel that the housing market will have a moderate to high impact on the debt financing market for commercial real estate in 2012.

The housing market is one of several outside influences that can impact commercial real estate. The survey reveals that some factors have a heavier impact on the lending community than others. Participants in the survey were especially wary of the fate of Fannie Mae and Freddie Mac, the health of the U.S. economy and the 2012 presidential race.

The respondents in the lenders survey, just like in the other two surveys, displayed optimism about what 2012 has in store. Approximately 86 percent of participants feel their companies will close more loans in 2012 than in 2011 and approximately 14 percent felt it would remain the same. No participant believes their company will close less loans in 2012 than in 2011.

“Contrary to what you hear on the street, there is a tremendous amount of capital available, at a cost that is lower than it has been at any time during the working career of most of the participants in the commercial real estate industry today.” said Charles Mohrle, principal of Mohrle-Morris & Associates, a commercial real estate financing firm based in Dallas.

Additionally, a majority (36.8 percent) of the participants who felt their firms’ lending volume would increase feel that the amount will increase by more than 20 percent. The lenders have strong expectations for this upcoming year and are primed to increase their provisions.

Bill Jackson, senior vice president and managing director of NorthMarq Capital’s Dallas office, voiced optimism in the write-in portion when he said, “Lenders will be conservative but active. Equity will be available for well-sponsored, well-located deals, and we look for 2012 to be similar to 2011.”

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