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Higher Values Projected for Houston

by Kenneth Graeber, Houston, March 2012

Despite continued weakness in many major real estate markets, Houston's economy is doing remarkably well.

 

With some recent sales prices coming in double the existing property tax values, reappraisal notices may come as quite a shock to certain owners this year.

 

Office

 

The Bayou city's office market finished 2011 with almost two million square feet of positive net absorption, according to research compiled by Commercial Gateway, the commercial division of the Houston Association of Realtors.

 

Class A office space accounted for 74% of fourth-quarter leasing. Shell Oil Company's decision to renew its space in One and Two Shell Plaza, noted as the largest lease in the world, created even more optimism for Class A space.

 

The submarkets that recorded the largest annual gains were:

 

  • Central Business District

  • Energy Corridor

  • North/The Woodlands/Conroe

  • West and Westchase

 

The city's office vacancy rate is 13.5% and construction activity is looking up. Five office buildings currently under construction total more than one million square feet.

 

Rental rates are increasing. The city's overall gross rent of $22.88 per square foot is 7.9% higher than a year earlier. Quote rates in the Central Business District increased 3.4% to $31.09.

 

Retail

 

Houston's retail market continues to improve with positive net absorption and lower vacancies. The citywide average vacancy rate stands at 7.2%, according to Colliers International.

 

Approximately 625,000 square feet of new retail space was delivered last year. There are several large projects in the planning stages and 617,000 square feet currently in the construction pipeline.

 

According to numbers released by the U.S. Bureau of Labor Statistics, Houston added 5,900 retail jobs last year. A major boon to the retail industry is the fact that Houston's population is growing faster than any other U.S. city. Also, Houstonians' total personal income grew at the highest rate seen in the nation's 75 major metro areas during the past decade.

 

Industrial

 

Houston's industrial market is also experiencing strong fundamentals. The industrial sector is made up of 91% warehouses operating at 5.3% vacancy and 9% of flex space operating at 10.6% vacancy. Colliers reports the average quoted industrial rental rate increased to $5.45 per square foot, triple net.

 

For several years, developers have shown restraint due to the economic downturn. However, industrial construction activity increased last year and 1.7 million square feet of space was delivered in Houston. There is currently 2.9 million square feet under construction with a significant increase in spec development.

 

What This Means to Property Values

 

Appraisal districts are well aware of the good-news reports on Houston commercial real estate. That's why proposed values for 2012 are likely to reflect major value increases.

 

Even though the overall trends may be encouraging, the market remains weak for many lower-grade properties and for those with deferred maintenance and reduced occupancy. Additionally, several submarkets have unique issues that continue to depress the market even for quality real estate.

 

Sales prices reflect leased fee value. Significant adjustments may be required to establish the fee simple valuation required for property tax purposes. To avoid overpaying property taxes, it will be crucial to appeal any valuation that doesn't take all these factors into account. The appeal deadline is May 31st.