Property Investment Follows Talent

Knowing where to invest in real estate is a large part of a successful investment strategy and experts recommend following the talent. In other words, many investors are …

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Knowing where to invest in real estate is a large part of a successful investment strategy and experts recommend following the talent. In other words, many investors are watching property development trends as it tracks with the movement of young professionals into areas that already have a low cost of living, but are expanding in jobs availability. This is particularly true in the energy and technology sectors, which are drawing larger workforces to Houston, New York, Austin, Dallas and San Jose, California. For more on this continue reading the following article from National Real Estate Investor.

As job growth in the energy and technology sectors continues to outpace new employment opportunities in the traditional strongholds of finance and legal services, the ranking of major U.S. population centers is beginning to shift. While cities like New York, San Francisco and Washington, D.C., still attract tens of thousands of new residents on a yearly basis, it is places like Houston and Austin, Texas, and San Jose, Calif., that are growing fastest.

From July 2011 through July 2012, Houston added 34,625 new inhabitants, rising to a total of 2.16 million. During that period, the city was second only to New York in population growth, according to the U.S. Census Bureau. Meanwhile, San Jose added 12,751 new residents, pushing its population to 982,765. The list of fastest-growing metro areas in the country is also jam-packed with other Texas cities, including San Antonio, Austin and Dallas.

So what’s behind population booms in the Lone Star State and Silicon Valley? It’s very simple: jobs, combined with a relatively low cost of living.

“The markets with traditional industries, like insurance and finance, are lagging,” notes Dwight Hotchkiss, president of U.S. brokerage services with Colliers International. “When you look at population growth, it’s driven by the economy. And there are really two driving forces—one is intellectual capital, the other is energy. Those industries are outperforming all others. And that’s where you are seeing the most job growth, population growth and development.”

According to Bright Labs, a Web site that tracks employment data, the San Jose/Sunnyvale/Santa Clara area in California has consistently ranked among the top 10 metros for job openings over the past few months. Between August 2012 and August 2013, nonfarm employment in San Jose rose by 3.1 percent, driven by professional services (in particular, computer systems design) and construction, according to the U.S. Bureau of Labor Statistics (BLS).

Meanwhile, Houston ranked number one for job growth among the 12 largest metro areas in the U.S. in June, the most recent period for which data is available. Nonfarm employment in the city rose 3.6 percent on a year-over-year basis, according to the BLS. The trade, transportation and utilities industries brought the most jobs to Houston, followed by education and health services.

“If you look at this particular economic recovery, it has been led by high tech and energy growth,” says Tim Wang, director and head of investment research with Clarion Partners, a real estate investment management firm. “And the companies in the high-value industries—the high-tech, the energy, the creative industries—want to go where they can recruit the best talent.”

What’s providing an added incentive for people to move to places like Houston and San Jose is the relatively low cost of living. Last year, Forbes magazine ranked Houston as number one on the list of most affordable U.S. cities, based on the ratio of cost of living expenses and median home prices to median household incomes. Silicon Valley, which includes San Jose, Sunnyvale and Santa Clara, also made the top 10 list, based on its generous average annual wage ($92,556), which made up for its high housing prices.

As a result, people are moving into Houston and San Jose in droves. Kate Good, development partner and director of multifamily operations with Hunington Residential, the multifamily development arm of Houston-based Hunington Properties, says that when she was moving to Houston from Scottsdale, Ariz., earlier this year, she had trouble securing a moving truck because of the high demand for relocation-related services.

“When you look at Houston, we are competing with cities like Boston, Seattle [and] Washington, D.C., and we are leading,” Good points out. “It’s kind of like the perfect environment for people who are looking for a quality job and low cost of living and still a great urban environment.”

Towering cranes

Of course, all these new residents need places to live, work and shop, which has led to a ramp-up in new development.

Multifamily projects have been the first to come on-line, partly because they take less time to build than office towers or shopping centers, according to Tim Wang. Last year, the City of Houston issued a total of $4.9 billion in building permits, up 33 percent from the volume of building permits issued in 2011, according to the Greater Houston Partnership (GHP). At $1.8 billion, the value of permits for residential construction rose 44.9 percent during the period.

“Apartment construction in Houston has reached pre-recession peaks last quarter,” with 16,449 new units in the works, says Brook Scott, director of divisional research with the global corporate services group at CBRE. “We think it’s a sustainable level.”

CBRE reports that average multifamily rents in the city reached a new record in the second quarter, at $0.96 per sq. ft., an increase of 8.1 percent compared to a year ago.

In the third quarter of 2013, Houston also saw the addition of 22 new office buildings, totaling 2.29 million sq. ft. of space, to its office stock, according to a report from the CoStar Group, a Washington, D.C.–based research firm. That was double the amount of office space delivered during the same period in 2012, in both individual properties and total square footage.

Most new office construction, however, has been taking place not in Houston’s downtown, but in areas including Katy Freeway and the Woodlands, which together accounted for 36 buildings and 4.5 million sq. ft. of office space under construction in the third quarter. Those two submarkets have been the hotbeds for energy firms. For example, ExxonMobil is building a 3-million-sq.-ft. new office campus in Woodlands/Conroe, while 547,000-sq.-ft. Energy Center Three is going up in Katy Freeway West.

“Houston is a little bit different [from other cities],” says CBRE’s Scott. “For instance, in San Francisco, in Boston, there’s still an emphasis on companies moving back into the downtown location, to be close to the younger workers who gravitate toward downtown areas. Houston is different because the energy companies are located outside of downtown. New office development that we are seeing, a lot of it is gravitating toward the energy corridor, the Western suburbs.”

That’s also where a lot of new multifamily projects are beginning to crop up as well. While Houston’s Inner Loop neighborhood remains the most popular area for new apartment buildings because of its active nightlife and hip vibe, there are approximately 1,000 multifamily units under construction in Katy/Far West and 2,000 multifamily units under construction in Tomball/Far Northwest, Woodlands/Far North and Conroe/Montgomery, according to CBRE.

Hunington Residential’s Good notes that new apartment complexes in the areas surrounding the Energy Corridor, the area along Interstate 10 on the Katy Freeway where many energy companies are based, are signing dozens of leases a week.

The reason is that while Houston remains a car-centric city, all the young workers who are moving in still want the live/work/play environment they would get in places like New York or San Francisco, notes Tim Wang. Renting an apartment a short drive away from their office building allows them to replicate that feeling. The desire to avoid long commutes can be seen in the types of multifamily projects that are going up, Wang says. While the units themselves are getting smaller, there is great demand for on-site amenities such as rooftops, gyms and nearby parks and restaurants.

“The young people would rather have a smaller unit, but have those amenities,” Wang notes.

“Houston is very different from New York or Boston or San Francisco, where you have mass transit,” he adds. “And it’s a little bit wider spread—you have the CBD area, the Energy Corridor and the Woodlands. But if you look at old and new development for apartments, it’s all happening around the city, not in the suburbs. It’s definitely much denser, much closer to the center of all the activity.”

Retail development has not yet caught up to the pace of office and multifamily construction in Houston, but there are projects in the pipeline. Hunington Properties, for instance, which has traditionally specialized in strip centers, is experiencing one of the best years for new retail construction in its 30-year history, according to Good. CBRE reports that in the third quarter of the year, there were seven new shopping centers completed in Houston, totaling 789,052 sq. ft. of space. There was also 1.48 million sq. ft. of new retail space under construction. Many of the new centers are going up near office and multifamily projects, in the Energy Corridor and the Woodlands area.

Average retail vacancy in Houston currently stands at 7.4 percent, the lowest level in four years, according to CBRE. The most active tenants so far have been supermarket chains, notes Paul Leonard, a real estate economist with the CoStar Group. Trader Joe’s recently announced that it will be opening its fourth store in the city, in Katy. Whole Foods and The Fresh Market have also been ramping up store openings in the area.

In the Valley

San Jose is experiencing a similar phenomenon, with most of the new development in the city taking place outside the traditional downtown area. San Jose’s mass transit is more developed than Houston’s—it has the Caltrain, which connects San Francisco with the Silicon Valley and the VTA light rail service, which runs through San Jose, Santa Clara, Sunnyvale, Campbell and Mountain View. But because few young people want to live in downtown San Jose, which houses only one major employer (Adobe) and is not particularly pedestrian friendly, cars remain the primary means of transportation, according to Carlos Ortea, a real estate economist with CoStar.

“In San Jose, the construction of multifamily properties has really been focused in the North, where people are attracted to employers” Ortea notes. “I would say in terms of development, you are going to see San Jose built up more and more, with both multifamily and office, and you’ll continue to see more individuals moving closer” to places they work.

Brokerage firm Marcus & Millichap Real Estate Investment Services estimates that this year multifamily developers in San Jose will complete 3,700 new rental units—a decade-long peak. The firm projects that average rental rates for apartments will reach $1,991 a month by the end of 2013, representing an increase of 3.9 percent. That’s after apartment rents already rose 7.8 percent in 2012. In the North San Jose area of the city, average rents are even higher, at $2,062 per month. Multifamily vacancy in the city is currently at 3.3 percent.

New multifamily projects in North San Jose include Crescent Village Apartment Homes, the largest apartment complex to open in the city since the recession, with 1,750 units, and Epic, a 769-unit development, among others. Many of the residents at these apartment complexes will be in close proximity to their offices.

There is currently 650,000 sq. ft. of new office space under construction in North San Jose, according to CoStar. Newly constructed buildings have included a 357,481-sq.-ft. complex for Amazon at 1100 Enterprise Way and a 318,712-sq.-ft. building for Juniper Networks at 1223 North Mathilda Avenue. Two buildings, totaling 650,000 sq. ft. of space, are also in the works for Samsung at 3655 N. 1st Street.

So far this year, the largest office leases in the San Jose/South Bay area have included Google signing up for 500,000 sq. ft. at 100-222 Mayfield Avenue in Mountain View, Netflix signing a 242,500-sq.-ft. deal at Albright Way in Campbell and Nvidia signing a 200,000-sq.-ft. deal at 2880 Scott Boulevard in Santa Clara.

“If you looked at the third quarter of this year in Silicon Valley, you’d see that the [office] vacancy rate was almost cut in half,” says Maria Sicola, executive managing director of research with Cushman & Wakefield. “We’ve got 3 million sq. ft. of construction activity in Silicon Valley right now, so that really speaks to the influence of technology. If you had driven through there a few years ago, you’d see a lot of campus settings that looked really isolated, and now it’s a hotbed of activity.”

Ortea notes that while there is definitely a need for more retail in North San Jose to support new residents and office workers, development in that sector hasn’t picked up in earnest yet, although some new multifamily buildings feature retail on the ground floor. According to Marcus & Millichap, approximately 450,000 sq. ft. of new retail projects will come on-line in the city this year, while another 2 million sq. ft. may be in the pipeline.

In North San Jose, the retail vacancy rate currently stands at 3 percent, down from 7.3 percent last year. Average retail rents rose 6 percent since 2012, to $31.60 per sq. ft.  

This article was republished with permission from National Real Estate Investor.

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