TEXAS SNAPSHOT, MAY 2008

Lubbock

Despite signs of a slowing U.S. economy and possible recession, as well as some trickle down effects of the national credit crisis, the Lubbock real estate market remains generally healthy and improving. Due to a diverse local economy, Lubbock never seems to experience the boom or bust real estate cycles seen in other parts of the country — or even other parts of the state. Nearly every sector of the local economy improved in 2007 over 2006, and indications are that 2008 is continuing in the same direction, though perhaps not at as fast a pace. Trends over the past year and continuing into 2008 include the second highest job growth rate in the state; the fourth lowest unemployment rate in the state; increased population and retail sales growth; and continued strong commercial construction activity. During the first quarter of 2008, nearly a third as much new non-residential construction projects were permitted as in all of 2007.

On the commercial side, the real estate market continues to steadily grow. The Lubbock Apartment Association’s survey of members shows that citywide multifamily occupancy rates are up to almost 90 percent as of the start of 2008 (compared to 87 percent a year ago and up from a 10-year low of only 81 percent in June of 2006). Although occupancies are improving, citywide rents have remained relatively flat or increased only marginally from a year ago, other than the newer, student-oriented properties located near the Texas Tech University campus.

The city of Lubbock’s planning department indicates that during the past 5 years there have been over 10,000 new apartment bedrooms added to the market, which includes rent-by-the-bedroom, student-oriented projects, but that the student population has not increased that much. This indicates that the student-oriented projects close to Texas Tech are pulling tenants from other complexes citywide. New apartment development continues at a brisk pace, even though demand for new units citywide is lagging. According to the Lubbock Building Inspection Department, the number of apartment units permitted so far in 2008 has already exceeded the total number of apartment units permitted in all of 2007. Most of the new apartment projects in the pipeline are geared toward Texas Tech University students and include a 192-unit complex being developed not far from the Texas Tech campus by North Carolina-based Campus Crest LLC, a developer of student-oriented housing. Local developer McDougal Companies is building a 400-unit project in Overton Park, east of the Texas Tech campus, and a 205-unit development geared toward graduate students north of the Tech campus. 

In the retail sector, the big news continues to be the 140-acre, mixed-use Canyon West development on the west side of Lubbock. The project, which is located west of Loop 289 along U.S. 62/82 (also known as the Marsha Sharp Freeway), is being developed by Hodges Development, Hub West Development and De La Vega Development. Canyon West already includes a tenant line-up with Target, Cost Plus World Market, Ross Dress for Less, Burlington Coat Factory, DSW Shoe Warehouse, Office Depot, PetSmart, Kirklands, Life Way Books, Main Event Entertainment Center, Starbucks Coffee, Cracker Barrel and specialty retailers. Planned to be 800,000 square feet, the project will be the largest shopping and entertainment venue in Lubbock since the opening of the 1.5 million-square-foot South Plains Mall in 1972.

Other new retail development over the past year includes numerous neighborhood strip retail centers along the West 82nd Street corridor from Frankford Avenue extending to the neighboring community of Wolfforth, Texas; outside Loop 289 at Fourth Street; and around Fourth Street and Avenue Q. All three  All three of those areas have new Wal-Mart Supercenters that have opened in recent years. Other strip center development has occurred along West Loop 289; along Spur 327 west of Loop 289; and along 98th Street in south Lubbock. Lease rates for the newer neighborhood strip centers are running $15 to $25 per square foot and occupancies are running in the 75 percent to 80 percent range as lease-up continues. Rates in older Class A strip centers are running in the $12 to $17 range and in the $9 to $12 range for Class B centers. Older centers in more mature areas of the city seem to be holding their own on occupancy, but they are not able to increase rents very much. One anomaly in the retail sector is an over supply of box space. Grocery chain Albertson’s decided the market was over grocery-supplied after the third and fourth Wal-Mart Supercenters opened in Lubbock and United Supermarket’s addition of a second upscale Market Street concept. The Albertson’s pull out from the Lubbock market over the past 1.5 years shuttered four approximately 60,000-square-foot spaces, and those stores are being redeveloped or reconfigured and are in various stages of re-leasing.

On the industrial front, occupancy rates for manufacturing and distribution space are running in the 90 percent to 95 percent range, the highest they have ever been in Lubbock. Big box distribution space of over 50,000 square feet with tall ceilings and rail is in demand and in short supply. What little warehouse space that is available is either outdated or was purpose built for a specific use. The Lubbock Economic Development Alliance, the city’s business attraction and recruiting arm, is well under way developing the 586-acre Lubbock Business Park located south of the airport on Interstate 27 and the 300-acre Lubbock Rail Port north of the airport on I-27. New businesses that the Lubbock Economic Development Alliance has landed over the past year or so include a $20 million, 225,000-square-foot O’Reilly Auto Parts distribution center; a new $37 million, 66,000-square-foot regional headquarters and forensics lab for Texas Department of Public Safety; a new $7 million, 60,000-square-foot manufacturing plant for Standard Bag; and a new $4 million, 40,000-square-foot Macsa corn four mill plant.

Office space also is fairing well in Lubbock. Vacancy rates in south and southwest Lubbock are less than 10 percent and even the downtown central business district (CBD) is running less than 25 percent vacancy, with the majority of vacant space concentrated in a large, partially redeveloped office tower and old, closed single-tenant or former owner-occupied buildings. There have been several downtown redevelopment projects kicked off in the past several years and several buildings have been converted to loft apartments. Full-service office lease rates, which include utilities and janitorial service in the CBD, are running in the $11 to $15 per square foot per year range and newer southwest Lubbock buildings are bringing $15 to $18 for Class A space and $12 to $14 for Class B and C space. Medical office space in the hospital district is running in the $13 to $18 range for older properties, and newer medical office space is bringing $19 to $25 or higher for specialty space. Construction has begun at 98th and Slide Road in southwest Lubbock on a new 109,000-square-foot medical office, diagnostic and surgical facility for Covenant Hospital. The complex also will include a new 57,000-square-foot corporate headquarters facility for First Bank & Trust of Lubbock and approximately 44,000 square feet of restaurant and retail space. Paul Kite Company is developing the project in conjunction with First Bank & Trust.

Areas of the most commercial real estate activity over the next several years will be continued re-development of the 400-acre Overton Park area of Lubbock, between Texas Tech University and the CBD. Plans are on track there for new single-family and multifamily projects and the proposed new Garfield Traub hotel and convention center. Other areas of activity will be along the new east/west Marsha Sharp Freeway, which will connect West Loop 289 to I-27. It is partially completed now and is scheduled to be finished in 2012. Slide Road, a major north/south traffic artery on the west side of Lubbock is scheduled to be extended from Fourth Street across northwest Loop 289 in 2010. That will create a major new intersection in northwest Lubbock, which will attract new development.  Recently completed, seven-lane Milwaukee Avenue, which runs north and south the entire length of Lubbock outside of West Loop 289, is already starting to attract new development — including kick off of construction of the new $14 million Raider Ranch seniors/retirement center. The outlook for Lubbock real estate indeed remains positive.

— Wes Hallmark is senior investment advisor with Lubbock, Texas-based Sperry Van Ness/Hallmark & Associates, Inc.

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