Houston To See ‘Absolute Explosion’ Of Life Sciences, But One Asset Class Won't Be Catching Fire Soon
Houston is well-positioned to ride out any economic difficulty ahead, with its strong industrial market, high employment rate, robust population growth and continuous development.
But it’s not all rosy ahead, according to experts at Transwestern’s Trendlines event last week — and at least one commercial real estate asset class is poised for a downturn in the near term, according to some.
Greater Houston Partnership Senior Vice President of Research Patrick Jankowski said he is worried about the Class-A multifamily market as rents continue to soften and units continue to be built.
“The best years for multifamily are over,” Jankowski said. “One of my concerns is we’re seeing some slack-off in Class-A … we have roughly 21,000 units under construction, and so far this year, Class-A is not showing very much activity. And actually, last year, we only absorbed about 3,200, 3,300 Class-A [units.] There’s a potential for Class-A to get really soft.”
The expiration of stimulus and pandemic relief money is also pushing up vacancy as Class-B and Class-C renters move out, he said.
Transwestern responded with a slightly different perspective.
The oversupply of Class-A units will be an issue, but “the real movement” is in Class-B multifamily products, said Kevin Roberts, president of Transwestern’s Southwest operations.
“So many people bought those things at the top of the market with floating rate debt and interest rate caps that are expiring, and those are all going to trade,” Roberts said. “You’re going to see significant trade starting in 2023.”
Considering the overall asset class has been doing “phenomenally,” Roberts disagreed that the best days of multifamily are gone.
“The demographic is going in the right direction … as are the incomes in Houston, Texas,” he said.
One consensus point was the status of the labor market in Houston. Houston lost 359,400 jobs from March to April of 2020, according to Jankowski’s presentation. Since then, there have been 523,200 jobs created in Houston, a recovery rate of 145%, Jankowski said.
“There are a lot of reasons in Houston to be incredibly optimistic,” Roberts said. “From an economic standpoint, we’re at full employment … Our view on Houston is, notwithstanding some of these headwinds, we’re going to outperform our peer cities in ‘23 and ‘24.”
One thorn in the city’s side is the lack of local governments' incentives to lure companies here, like Chapter 313 tax breaks, which expired last year, he said. But one sector Roberts is not concerned about is life sciences.
“The life science market is on the verge of an absolute explosion,” he said. “There's 6.4M SF of occupied space and an 8.4M SF base," with 1.2M SF of purpose-built life and lab sciences buildings under construction.
Though Houston remains “in the discovery phase” of life sciences demand, Transwestern expects venture capital to increase above pre-pandemic levels this year, and about 190K SF of spec lab space to be absorbed due to lack of availability in Houston.
“Expect multiple purpose-built development starts in 2023, as investors see the success of the initial assets being delivered,” Transwestern said.
