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Industrial Forecast: Gradual Clearing with Occasional Showers

  The sun will come out Tomorrow; Bet your bottom dollar that Tomorrow there will be sun!”.. from Annie, the musical.

Compared to the rest of the country we didn’t suffer as much, but there is no question the Houston industrial market was under stormy clouds in late 2008, 2009 and 2010.
Developers delivered space from projects started in the glory days of 2006 and 2007 to a receding market, Landlord’s were stuck with unrealistic Pro forma budgets and highly leveraged portfolio’s in a volatile financial market and clients suffering from a scarcity of available capital and an uncertain political and economic environment went into lock-down mode to protect their available cash.

Uncertainty, fear and pessimism ruled the day and decisions based on long-term commitment to the future became a dream of the past.

Personally my activity in 2010 was as good as it has ever been, but the transactions were all short term with short revenue.
Thankfully 2011 has dawned and it appears the skies are clearing a little – the sun is coming out!
The national elections in November started the turnaround.
Whether Democrat or Republican I do not believe it is healthy for one party to control the Congress and the Presidency.
In a faltering economy, uncertainty is exacerbated by an unfettered regulation from an unfettered government.
No one wants to play a game where the rules are changing as you play.

In that environment most would quit playing and head for the sidelines and that is what clients did in droves in 2009 and 2010, taking their money with them.
Since the elections it seems clients are willing to make those decisions they had postponed; adding jobs, doing longer term leases, buying an existing facility, or building that dream facility they have always wanted.
Credit is available for owner occupied buildings at very attractive rates and clients are taking advantage.

In short, Houston Industrial clients are coming off the sidelines and getting into the game again and I believe this optimism will continue to grow through 2011.
The sun is coming out, but there will be scattered showers and it will be important to know when you should have your umbrella.
Because of the lackof investmentcapitol there was virtually no industrial development underway at the end of 2010 with only a paltry 226,000 sql ft slated for delivery.

Other than design build or build-to-suit projects currently planned I see little if any increase in development activity this year.
As Industrial activity increases among existing businesses and as new businesses come to Houston, the lack of additional new product will increase occupancy percentage and rates among a portion of existing Industrial product.

Why a portion and not all? The answer lies in the age of the product, the effect METRO, TXDOT and HCTRA projects will have on the product, and whether the product is located in the City of Houston or Harris County.
A large amount of existing Industrial inventory was built before current Houston and Harris County Fire Codes were in place.
As lease activity increases clients will find they can not get High Pile Storage permits or Certificates of Occupancy because these older warehouses are functionally obsolete.

In order for the client to use the facility a Landlord will have to update the project, or the client will have to lease more square footage to keep his storage height under twelve feet but still store the same amount of product.

In either case the Landlord will be competing with newer product that does meet fire codes; stuck in this Catch-22 the Landlord will have to chose whether to update his project with no prospect of recovering his investment in a reasonable length of time or lowering his square footage rate so the client’s overall monthly expense remains the same for the same amount of storage ability. What other areas will see showers in 2011?

Many Houston Industrial facilities will be affected by ongoing METRO, TXDOT, and HCTRA projects.

Clients will find their project has been condemned, forcing them to look for another location or worse only a portion of the project is condemned, leaving their premises whole but fighting construction as a portion of their building is demolished around them.
At best the client will be fighting access and construction problems for years to come; effecting his customer service and overall business performance.

As leases expire a client will take a hard look at the situation and the hassle factor and the Landlord will be forced to lower rates and offer large lease concessions to entice the client to renew rather than leave.

Is that rain hitting the roof?

Speaking of rain, you have old and new product, located in the City of Houston affected by the recently passed drainage and street fee or Rain Tax.

Admittedly this new fee might not be enforced in 2011 because of court challenges and public out cry; however it is reasonable to expect these challenges could be temporarily ignored by the City Council as they struggle to overcome a massive budget shortfall, If Council goes for the money, clients may find a big surprise in their Operating Expense Reconciliation as Landlords pass through the fee.

The possibility of a huge increase in Operating Expense will be enough for clients to consider other alternatives and rates will have to be adjusted to entice them to lease and renew.

The sun is coming up, but some folks are going to get wet,

2011 is going to be an interesting time in the game between Landlords and Tenants.
Landlords with usable product in Harris County will find occupancy rates growing with corresponding rate increases as available product inventory lessens.
Landlords with functionally obsolete inventory in the City of Houston or product affected by road and rail projects will be forced to lower net rates to maintain a price advantage and occupancy.

 by Bill Ginder,  CCIM,  SIOR Caldwell Companies

From the CCIM Houston / Gulf Coast  – 2011 Forecast Competition

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