Smaller Deals, Longer Time Frames, Lots Of Phone Calls: Houston CRE Deals With ‘Upside-Down’ Market
Developments are getting smaller and harder to finance, interest rates and cap rates are going up, and office rents might soon peak, then begin trailing down.
The sands of Houston's commercial real estate industry are shifting rapidly, Partners Development brokers and partners said at an industry update Thursday morning, and those involved need to work to keep up.
“The inputs have changed faster in the last 14, 15 months than they have in the last 20 years,” Carter Perrin, partner and managing director for Partners, said at the event. “Across the board, construction pricing, rents moving 15% last year, and then leverage points coming down and then starting to inch back up.”
For industrial development, the typical size of a project has shrunk from 30-50 acres to 10-20 acres, partner Clay Pritchett said, and financing is increasingly hard to come by.
“We're hearing from a lot of industrial developers, they’re having a difficult time getting [financing],” Pritchett said. “The lending market is upside-down. Most regional banks aren't doing new loans.”
Developers used to call three to five of their “go-to banks” to get terms, but now they have to call 10 to 15 to get things moving, he said, adding that it is slowing the process down. What used to be a 90-day close on a piece of land is now 180 to 300 days.
“There's a disconnect between what developers need because of the lending environment and what the sellers of land want,” Pritchett said. “Sellers of land still think it's Q2 2022 and aren’t really recognizing the new market environment we’re in.”
Brokers’ ability to recognize and adapt to changes in the market is what keeps deals coming, said Scott Lunine, partner and executive vice president of brokerage services.
“We're pretty much even where we were last year,” Lunine said. “It's a situation of really understanding what's happening in this marketplace. You can't do business like you did three years ago.”
Sixty percent of offers on deals today are coming from outside of Texas, he said, adding that 20% are coming from outside of the U.S. Partners’ sales division is targeting the buyers that no one knows about, Lunine said.
“Not every broker in Texas is going to know about the guy in Mexico or South America or China or Europe that's willing to come to the United States,” he said.
With distress in the office sector a bit of a constant right now, the market is starting to see a “reset” and transition of ownership through foreclosures or givebacks, partner Dan Boyles said.
“That will start a kind of domino effect” of downward pressure on prices, Boyles said.
“That reset and basis gives that investor-owner an opportunity to be much more competitive in the marketplace."
Rental rates are still going up, something of a paradox because vacancies are going up as well, Boyles said. But that is because transactions are primarily in newer office product, he said.
“As this reset continues to occur … [and as] you have the amount of new construction slowing down because of interest rates and cost, the combination of those two, you got to see those rates peak out and start trailing down going forward,” he said.
