BoyarMiller Real Estate eBook August 2013 State of the Industry
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Transcript of BoyarMiller Real Estate eBook August 2013 State of the Industry
REAL ESTATE
2013 State of the Industry
Chairman’s Letter
To Our Readers,
At BoyarMiller, when we partner with clients, we work as
a strategic part of their business team, and that means
we have to be experienced in more than just law. We also
need to understand their industry so that we are able to work
collaboratively with them and add value to their business.
That’s why we bring together the top insights into industry trends
and best practices, and deliver it to you. Not only has this infor-
mation been invaluable to us and to our clients, but we hope
it will be beneficial to you as well.
The information in this publication has been gathered from
industry-leading clients we have partnered with and from our
own energy team. If you find value in it and would like to hear
more, join us for our next BoyarMiller Breakfast Forum.
Sincerely,
Chris Hanslik
Firm Chairman
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TABLE OF CONTENTS
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Your strategic partner should be an expert in your industry, not just law.At BoyarMiller, we’re committed to providing insightful, versatile expertise to organizations
of all sizes as we guide them through complex business issues. We know that in order
to understand how best to collaborate with you, we need to know your industry and
your business.
To this end, we gathered the best insights into industry trends and best practices from
industry-leading clients we have partnered with and from our own real estate team. It’s our
hope that the information we’ve accumulated through years of collaborative work in the
real estate industry will be beneficial for you.
INTRODUCTION
Your strategic partner requires knowledge of trends, industry and law.
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Houston – A National AnomalyJOB GROWTHAs the nation’s economy continues its slug-
gish recovery, Houston continues to reap
the benefits of being a center of industry
and a gateway city for international trade.
Houston added 86,600 jobs over the past
year, leading the state. The city’s job growth
represented 5% of the nation’s, which
totaled 1.7 million new jobs nationwide.
Houston’s 5.8% unemployment rate at the
end of 2012 puts the city significantly ahead of the national average of 7.4%. In addition,
Houston’s job growth rate rose to 4% over the year, outpacing the state and the nation.
POPULATION GROWTHIn the wake of the recession, population growth has coincided with job availability across
the nation, and Houston has been no exception. Houston’s population has increased by
roughly 125,000 per year over the last decade, and the city is expected to lead population
growth for decades to come.
STATE OF THE INDUSTRY
86,600 NEW JOBS
6.08M people in the Greater Houston area
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TOP INDUSTRIESEnergy – In January 2012, employment in oil and gas extraction grew at an 8.7% annual
rate and peaked at 11.1% in May, but by November the rate settled in at 3.6%. While those
rates remain above the 3.2 percent overall employment growth rate for the region, the
slower pace suggests energy will not be as strong of an economic driver in 2013 as it
was in 2012.
Healthcare – Over the last five years, healthcare job growth has outpaced employment
trends overall. Healthcare jobs accounted for one out of every six jobs created in 2012.
Nearly 300,000 news jobs were created in the healthcare industry last year.
Foreign Trade – More than $231.6 billion in foreign trade passed through the Houston-
Galveston Customs District in the first 10 months of 2012, a 4.8% increase from the same
period in 2011.
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Houston – A National Anomaly, continued
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Residential MarketWHAT SETS HOUSTON APART?Houston’s residential real estate market is uniquely flexible. Without strict zoning laws and
bureaucratic control over land development, the city is allowed to grow according to
human intuition, evolving naturally according to the needs of the population. Because of
the flexible free market, Houston experienced neither the bubble nor the bust that the rest
of the nation experienced in the mid-2000s.
2013 PREDICTIONSWill Holder, President, Trendmaker Homes
• POPULATION WILL DOUBLE IN THE NEXT 25–30 YEARS Projections by the Texas State Data Center put Houston at nearly double its current size in
2040 as a result of continued job growth and immigration.
• BUILDING WILL EXPAND TO MEET NEEDS Home building is at two-thirds the level it needs to reach to meet the growing demand.
With continued job and population growth and MLS listings lower than they were a
decade ago, building will have to increase over the next several years.
• REAL ESTATE PRICES WILL RISE The industry was stripped of much of its production capacity during a recession that
slowed building and forced the closing of plants nationwide. This, combined with the
scarcity of high-quality lots as lot absorption continues to double lot delivery will mean
higher prices in the near future.
• RESIDENTIAL MARKET WILL BE STRONG Rental costs are at a premium, demand will continue to grow and prices can only be
expected to rise. All signs point toward a seller’s market and real opportunities for home-
builders in coming years.
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Will Holder has worked in the homebuilding and residential land develop-ment industry for more than 30 years in Houston and in several other U.S. metro markets. He joined Trendmaker homes in 1993, and has led the company to become the leader in luxury production homebuilding and MPC development. Will is the 2012 president of The Greater Houston Homebuilders Association and a guest expert on Real Estate forecasts and homebuilding trends for local and national news, radio, TV, magazines and newspapers, including Fox Business Report and USA Today.
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Retail MarketWHAT SETS HOUSTON APART?The retail market is dependent on the job market, and Houston has a matchlessly vibrant
job market. Markets with explosive population growth like Katy are seeing sales up by
20–30%. Even in longer-established areas in the east side of Houston, centers have low
vacancy and stores report high sales. Houston is a stable market with stable housing
and stable retail performance.
2013 PREDICTIONSJay K. Sears, Managing Partner, NewQuest Properties
• CONSUMER SPENDING WILL CONTINUE TO IMPROVE For retail to do well, consumers have to feel confident that there is money in their pocket,
and the consumer sentiment index is on an upward swing. Texas and Houston outpaced
the nation in retail sales in 2012 and will continue to improve.
• INTERNET SALES WILL NOT KILL BRICK-AND-MORTAR STORES Although Internet sales continue to grow at about 15% per year, they still represent just
over 5% of the overall retail sales. Good retailers see the Internet not as a growing threat,
but as a chance to enhance their own online platforms and deliver a more meaningful
experience to shoppers in the store and on the Web.
• HOUSTON WILL LEAD RENT GROWTH In well-anchored centers, Houston leads the nation in rent growth and is projected to
lead it over the next five years. Competition is high for Class A anchored space. Not a lot
of new product is being built; significant numbers of big box centers will not be built any
time soon.
• GROCERS WILL BE INNOVATIVE Well-established grocers like Kroger that continue to reinvent themselves are posting pos-
itive sales. In Houston, there is also a growing market for dynamic, niche grocers like
Trader Joe’s and Fresh Market.
Jay Sears is a 27-year veteran of the retail/commercial brokerage and development industry. As a co-founder and managing partner of New-Quest Properties, Jay focuses on new development opportunities, on the leasing activities of NewQuest’s development pipeline and on managing key client relationships with retailers and clients. Jay is a member of the International Council of Shopping Centers (ICSC), a member of the Urban Land Institute, a member of the Rice Design Alliance, and is also involved extensively with KIPP-Houston, serving on their Board of Trustees.
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Office MarketWHAT SETS HOUSTON APART?Obviously, Houston is a large city, with almost 200 million square feet of office space in the
Greater Houston area. Growth in the office market is driven by a strong economy and job
growth, two things Houston has delivered throughout the recession and as the nation
recovers. Houston is perceived as a business-friendly climate, and that is a driver for the
office real estate market.
2013 PREDICTIONSRobert S. Parsley, Co-Chairman/Principal, Colliers International
• DOWNTOWN’S ALLEN CENTER WILL BRING BIG BUSINESS Because of relocations by current tenants, more than one million square feet of space
are available in Allen Center. This is a huge opportunity for a large company or compa-
nies who want a Central Business District location in this city.
• HOUSTON WILL REMAIN A MAGNET FOR BUSINESS The energy industry is a huge part of Houston’s economy and energy companies con-
tinue to be attracted to the Energy Corridor and Westchase, where they can take
advantage of proximity to residential and recreational amenities in the area. Even as
economic concerns continue, office leasing activity will be robust.
• GREATEST GROWTH WILL BE IN SUBURBAN SUBMARKETS There will be continued growth in The Woodlands, Westchase and the Energy Corridor.
The Woodlands in particular is exploding; when Colliers began a new building project in
the area, it was 96% leased as they broke ground.
• COMPANIES WILL LEAVE GREENSPOINT Greenspoint saw negative absorption in 2012 and will likely see a mass exodus of compa-
nies looking to move because of concerns about security, perceptions and attracting
the youngest generation of workers.
Bob Parsley has been involved in and responsible for all phases of commer-cial real estate brokerage activity for the past 29 years. A native Houstonian, he combines real estate experience with an understanding of the legal issues involved in real estate transactions. Bob became Colliers International Co-Chairman in 2004. He has served as director of numerous organizations, including Strake Jesuit College Preparatory, Development Board of the Univer-sity of Texas – Houston Health Science Center, Houston Area Urban League, Houston Office Leasing Brokers Association and Leadership Houston.
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Industrial MarketWHAT SETS HOUSTON APART?Houston has been called the energy capital of the world and city of opportunity because
industry is booming here. The Houston industrial real estate market totals about 834 million
square feet, and there are two million square feet under construction – a supply that signif-
icantly trails demand. Houston’s industrial vacancy rate is 4.8%, in stark contrast to the
nation’s average of just under 10%.
2013 PREDICTIONSWelcome W. Wilson, Jr., President & CEO, GSL Welcome Group
• DEMAND FOR CRANE-READY BUILDINGS WILL GROW A growing demand in the industrial market is for crane-ready buildings, and builders are
already responding. Warehouse and distribution centers will need to be able to accom-
modate the large parts and equipment for the oil and gas industry as they restaff and
restage the oil and gas activity around the world.
• HOUSTON WILL GROW EVERYWHERE – NOT JUST THE NORTHWEST CORNER Job stability is giving everyone in the industrial sector the confidence for more spec
products to meet the demand for warehousing. This is not restricted to the northwest and
north submarkets, although those are the most active, with 603,000 square feet and
284,000 square feet of absorption in 2012, respectively.
• PORT OF HOUSTON WILL SEE INCREASED ACTIVITY The Panama Canal expansion is target to open in late 2014, which will mean a boost for
the petrochemical companies located on the Gulf Coast, as the canal will be able to
support bigger LNG tankers with more cargo. Houston will be making the long-term
investment to deepen the Houston ship channel to handle this bigger product.
• CAP RATES WILL BE DRIVEN DOWN Institutional buyers and investors are under allocated in industrial, meaning a push to get
more space. There will be twice as many bidders for every Class A industrial project, and
there is very little product scheduled to come on the market in 2013.
As President & CEO of GSL Welcome Group, Welcome oversees the devel-opment, leasing, construction and purchase of single tenant office, lab, manufacturing and industrial facilities in Texas. A real estate developer for more than 35 years, he has extensive experience in industrial develop-ment, residential subdividing, retail centers and office buildings. He also serves as principal of Kingham • Dalton • Wilson Ltd., a Design/Build affili-ate of GSL Welcome and is Director of River Oaks Financial Group, Inc.
ARTICLE FOR LANDLORDS
Negotiating Alignment, Not Agreement: A Guide to Effective TenantBy Bill Boyar
A well-prepared negotiator can be manipulation proof, avoid the second-guessing and
achieve valuable results. This article provides an approach that can better prepare you for
negotiating with tenants and help produce valuable results.
MOST NEGOTIATORS TRADITIONALLY FALL INTO ONE OF THREE CATEGORIES:
• Position-Driven, negotiators driven by leverage and a desire to win.
• Affinity-Driven, your classic “win-win” people.
• Criteria-Driven, negotiators who use objective criteria to assure fair market outcomes.
All three of these styles leave room for being manipulated and second-guessed. So, is there
a different and more valuable approach? We say it’s Alignment-Driven negotiations. Align-
ment-driven negotiations have five cycles: Research, Align, Design, Confer and Close.
RESEARCHTruly effective negotiators prepare, and this starts with extensive Research. In the context
of negotiating with a tenant, you should understand everything you can about the tenant
— its business, industry, financial condition, market share, growth prospects, senior manage-
ment team, other offices in other locations, leasing history, etc. In addition to research
about the tenant, your research should include in-depth analysis of your lease space, your
building, market alternatives, competitive properties, trends, absorptions and vacancy, etc.
RELEVANT TOPICS
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ALIGNInternal alignment starts with a clear understanding of your organization’s senior purpose
and the outcome that you are trying to achieve. External alignment involves taking into
account the tenant’s issues, purposes and concerns. Your objective is to attempt to find
the critical intersection of: 1) the facts, 2) your organization’s issues, purposes and con-
cerns, and 3) the tenant’s issues, purposes and concerns.
DESIGNIn the Design phase, you are encouraged to work on the actual design of the negotiation
conference. Where will the meeting be held? Who will be present? Who will be doing the
talking on which subjects and issues? Who will control the agenda, timing and flow? Once
these questions are answered, the next step is to practice. Yes, practice. Even the most
skilled negotiators practice, and so should you.
CONFERThe Confer cycle involves the management of the actual conference. When conferring,
the most effective negotiators clarify an essential purpose and reveal intersections for
actions. They have genuine appreciation for various views and factors and research where
they intersect to identify new insight and opportunity.
CLOSEOnce the negotiations session ends and an agreement is made, the real work begins —
the deployment of time, money and talent. It is up to you to make sure that the agreement
is executed (put in writing) and that resources are effectively deployed. Finally, you should
debrief your organization on the negotiations, including all five cycles.
LEARN MORE ABOUT EFFECTIVE NEGOTIATING IN THE FULL ARTICLE.
Article for Landlords, continued
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ARTICLE FOR INVESTORS/BORROWERS
Borrowers BewareBy Timothy J. Heinrich
Over the past seven to eight years, many real estate investors-borrowers have been
enticed by lenders and mortgage brokers to eschew the more traditional forms of real
estate financings in favor of “securitized” loans. Securitized loans are commercial real
estate loans that are pooled with other similar loans and sold as securities. They are
sometimes referred to as “commercial mortgage-backed securities.”
Lenders and mortgage brokers often promote securitized loans to real estate investors
as a cheaper and safer form of financing. Of course, many real estate investors and their
attorneys long ago caught on to the fact that any cost-savings associated with lower
interest rates are quickly eaten up by the lenders’ fees, the mortgage brokers’ fees, the
lenders’ attorneys’ fees and due-diligence expenses.
Despite the additional fees and costs associated with securitized loans, many real estate
investors believe these higher fees and costs are worth the price of obtaining a nonre-
course loan. However, in our practice, we are beginning to see first-hand what appears
to be a disturbing trend as lenders and their attorneys try to strip away the nonrecourse
security blanket and leave the borrower — and most importantly its individual principal(s)
— exposed to full recourse liability for the repayment of the loan.
The best way to describe how lenders and their attorneys attempt to turn nonrecourse,
securitized loans into full recourse loans is classic bait-and-switch marketing. The lender
or mortgage broker convinces the borrower to enter into a securitized loan with promises
of low rates, long terms and no personal liability — except, of course, for the “standard
carve-outs.” The loan application simply describes these standard recourse carve-outs
as fraud, misapplication of funds and “other customary items. “
The principal’s “limited recourse” obligations subsequently are expanded in the loan com-
mitment, and the phrase “other customary items” mushrooms into a laundry list of items
that, if triggered, will result in personal liability for the borrower’s principal. Although most
of these triggering events are limited to “bad-boy” events (fraud, misapplication of funds,
failure to pay taxes, etc.), sometimes hidden in this lengthy list is an unassuming reference
that the borrower will continue to maintain its status as a single-purpose entity.
How does this potentially result in personal liability for the borrower’s principal? Assume
that the borrower owns a 75,000-square-foot shopping center anchored by a large dis-
count retailer occupying 50,000 square feet. Suppose this large discount retailer files for
bankruptcy, rejects the lease and the borrower is unable to find a replacement tenant.
The borrower, lacking the cash flow to make the payments required under the loan, offers
to deliver and convey the property to the lender. The lender, instead of accepting its
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collateral, counters by asserting that the borrower’s principal is personally liable under
the loan. The lender reasons that if the borrower cannot pay its debts as they become
due, the borrower must be insolvent. If so, the borrower violated its single-purpose status
and triggered the principal’s personal liability.
In short, with maintaining solvency and adequate capital as single-purpose entity
requirements, lenders may attempt to use these requirements as a sword and a shield
when faced with the possibility of taking back an underperforming property. Borrowers
and their counsel must be steadfast in their resolve to remove such single-purpose require-
ments or be prepared to walk away from these “cheap and safe” loans.
LEARN MORE ABOUT WHAT TO LOOK FOR IN A COMMERCIAL LEASE IN THE FULL ARTICLE.
Article for Investors/Borrowers, continued
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Bill Boyar Shareholder, Business Group
Represents the various parties involved in the acquisition, disposition,
capitalization and financing of national and international busi-
nesses. Served as lead counsel for numerous complex, multi-party
acquisitions and project financings with significant experience in
corporate finance, mergers and acquisitions, private equity and
structured finance.
Cassie B. Stinson Counsel, Business Group
My practice focuses on commercial real estate and finance,
public/private projects, business transactions and public law,
with a particular emphasis on complex projects and multi-party
transactions. I have significant experience with office, heavy
industrial and manufacturing, multi-family, hospitality and
restaurants, institutional facilities and governmental infrastructure.
REAL ESTATE PRACTICE LEADERS
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PRAC
TICE LEA
DERS
Stephen L. Johnson Shareholder, Business Group
My practice has been primarily devoted to commercial real estate
law, transactional law, commercial transactions and general
corporate representation. My real estate practice includes the
financing, acquisition, development and disposition of commer-
cial real estate, with an emphasis on hospitality and commercial
office and retail.
Timothy J. Heinrich Shareholder, Business Group
My focus is on real estate law and commercial transactions.
My real estate practice is devoted primarily to the acquisition,
development, financing and disposition of all product types
of commercial real estate.
Lee A. Collins Shareholder, Litigation Group
A significant focus of my practice relates to the representation
of developers, owners and managers of commercial real estate
in state and federal court, including tenant disputes, easement
and restrictive covenant enforcement, condemnation, adverse
possession, construction litigation, lien enforcement and creditor
bankruptcy representation.
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