After being characterized as the global energy capital for so long, Houston has enjoyed many added reasons to feel the power over the past 25 years. Other sectors of the MSA’s economy, including commerce and medicine, have emerged and gained recognition internationally. In particular, the Texas Medical Center and the Port of Houston, combined with the technology industry, have lessened Houston’s energy dependency and turned the city into a job-generating machine. It’s little wonder Houston’s population growth is forecasted to surge as people flock to the area with great employment expectations and, with them, a need for housing.
The Houston MSA not only leads the nation in job growth (as of December), but according to the U.S. Bureau of Labor Statistics, the city is the first of the 12 largest U.S. markets to recover all jobs lost during the recession (121,000). Houston added 75,800 jobs over the 12 months ending December 2011, an increase of 3 percent. In comparison, the nation’s second-largest area of employment growth, the Dallas–Fort Worth MSA, increased by only 1.6 percent, according to the Texas Workforce Commission, with 45,700 new jobs. Indeed, Houston’s job machine is running very smoothly, gaining momentum, and is expected to generate equally impressive numbers for 2012.
Despite the recent evolution of Houston’s economy, energy is still the most important of its sectors, with approximately 3,300 energy-related companies calling the city home, including 500+ exploration and production firms and more than 150 pipeline transportation companies. As well, 42 of the nation’s top 137 publicly traded oil and gas exploration firms reside in Houston, and 23 percent of the country’s crude operable capacity lies in the Bayou City.
But fossil fuels aren’t the metro’s only source of energy production. Houston has made strides in renewable energy, too, and ranks first among municipal purchasers of such energy in the nation. In addition, it has the third-largest base of green jobs in the United States and the third-highest concentration of energy-efficient commercial buildings in the country. Houston is home to The Institute for Energy Research as well as the Advanced Energy Consortium, both of which focus on expanding the research and development of alternative and renewable forms of energy. In fact, Houston is an established leader in alternative energy research, with a concentration in wind, solar, biofuel, and smart-grid technologies.
Houston’s medical sector is nearly as impressive as its energy sector. The city is home to the world’s largest medical center, the Texas Medical Center (TMC), whose campus comprises 1,000 acres and 33.8 million square feet across 162 buildings. Its member institutions include 14 hospitals, 21 academic institutions, and 15 support service organizations. Employees total 93,500, 25,200 of whom have been with the TMC for more than a decade.
The TMC supports 121,500 indirect jobs, as well, adding $14.5 billion to Houston’s economy annually. On average, 160,000 visitors come to the Center every day, and the facility invests $1.8 billion a year conducting research, with The University of Texas’ M.D. Anderson Cancer Center, housed at the Center, leading the way. The demand for medical research and office space within the TMC has resulted in a significant amount of development in the area. Currently, 23 projects are completed or under way. And TMC member institutions have built new suburban campuses and added 80,000 jobs in the past decade.
Houston’s commerce sector, too, is fueling the metro’s growth. The Port of Houston, the No. 1 energy port in the world, is first in tonnage in both U.S. exports and U.S. imports. More than 44 million tons of cargo moved through the port in 2010, ranking it 10th in the world. The facility accounts for 287,000 jobs (direct and indirect), $7.2 billion in wages and salaries, and $11 billion in business revenue and generates more than $650 million in state and local taxes. Further, the port stands to benefit greatly from the widening of the Panama Canal in 2014. Port Authority managers recently awarded Dannenbaum Engineering a $3 million contract to help manage the refurbishing of the Barbours Cut container facility to meet expected demand from the Panama Canal widening.
According to technology trade association TechAmerica, Texas ranks second behind California (by 1,000 jobs) and ahead of New York for gains in high-tech employment in 2010. In November 2011, Forbes ranked Houston 18th among the “Best Cities for Technology Jobs,” ahead of both Austin (32nd) and Dallas (46th). Houston may be best remembered for “black gold” or “Texas Tea,” but Houston technology is leading the way for the jobs of tomorrow.
Fundamentals Stay Strong
The 75,800 new jobs Houston added from December 2010 to December 2011 is very good news for the multifamily market. Couple that with the continuing decline in single-family homeownership, and there is real reason to get excited about sustained strength for fundamentals in the apartment space.
Houston multifamily occupancy has gained almost 200 basis points since 2010 and now averages 88 percent. This figure is even more impressive for a market, 46 percent of which consists of Class C and Class D units. The market absorbed an all-time high of 15,722 units in 2010 and absorbed another 14,036 units in 2011. While the Class A market (93 percent occupancy) has clearly been the biggest beneficiary of the area’s strengthening job market, Class B units (91 percent occupancy) are beginning to benefit as well, particularly the northwestern submarkets of Champions, Steeplechase, Bear Creek, and Tomball. The surge in Class A occupancies and rents is also starting a trickle-down effect that’s helping improve the performance of Class B assets.
Rental rate increases nearing and, in some instances, exceeding double digits over the past 12 months have been the strongest for Class A units with infill locations near Houston’s major job centers. Montrose Museum District, The Heights, Inner Loop East, Greenway Plaza, and Medical Center continue to be the best submarkets.
This strong demand and outstanding performance have certainly caused development to increase in Houston. Currently, 31 properties containing 7,822 units are under construction across the metro. Approximately 4,600 of these units have close-in/infill locations in the city’s strongest submarkets. Near-suburban or suburban development accounts for the remaining 3,200 units, 1,200 of which are affordable or senior housing product.
While the number of high-end, expensive rental properties is cause for pause, Houston’s anticipated job growth and declining single-family homeownership trend should easily create more than enough absorption for these developments. Suburban development has been exceedingly difficult to capitalize; the lack of new suburban development in the area will drive strong improvement for existing suburban product over the next 12 to 24 months.
Transaction volume for Houston through the third quarter of 2011 increased significantly over 2010 as several portfolios and trophy assets changed hands. Camden Property Trust acquired the Verde portfolio, with five out of 11 assets located in Houston. AREA purchased a five-property Houston portfolio from Gables Residential and another nine-property portfolio from Western Rim with three assets in Houston.
Institutional investors, especially, were aggressive buyers last year. New pricing records approaching $200,000 per unit were set because of a general lack of available core product across the country and the positive outlook for Houston’s future. J.P. Morgan, AMLI, and Crow Holdings acquired the best of the best in Houston during 2011.
Uncertainty did creep into the equity market during the fourth quarter, however. The European debt crisis, on top of a less-than-strong U.S. economy, created nervousness among private capital investors. Deals were harder to get done, but get done they did, nevertheless. Meanwhile, major real estate investors are indicating increased allocations for real estate in 2012, and fundamentals are continuing to improve.
With a little luck from across the pond, 2012 could be another stellar year.