By next year, the US will be producing more oil and gas than Saudi Arabia. And with the Middle East in turmoil, oil prices are set to move in only one direction. Samantha McClary travelled to the centre of America’s energy empire to investigate the impact on Global Real Estate
Has Houston ever really had a problem? In autumn 2008 the city was hit by Hurricane Ike. It was without electricity for two weeks. By the time the lights came back on, the rest of the country had been plunged into one of the worst global recessions in years.
And while the biggest city in the state of Texas was not immune from the job losses that swept the country, Houston was cushioned from the downturn by a booming energy sector. It was the last city in the US to submit to the recession and was the first to come out of it.
John Holland, executive managing director at CBRE Houston, says that while transactions in the city fell by 60% in 2009, “shale and fracking created jobs that enabled us to weather the recession”.
The city was never really hit by the sort of unsustainable value growth that was occurring in prime real estate markets all over the world. With no constraint on supply, values rise only very slowly in Houston. Jim Casey, managing director of development and investment at Trammell Crow, explains that when the recession hit, values fell by just 10-15%, compared with 20-30% in other parts of the country. Add that to the fact that energy demand does not fall off 30-40% during a downturn – perhaps just 10% – and you have a market that, seemingly, does not have a problem.
Fast forward a few years and with the energy sector booming (see box), Houston is set for yet more growth. Jobs are being created in massive numbers – some 82,000 were created in the city last year alone – with an annual growth of 2.5-3% expected over the coming years.
But while Houston has a reputation as a great place to work, it is perhaps not seen as the greatest of places to live – especially downtown. So, with more than 200 people moving to the area every day, the powers that be are turning their attention to rejuvenating the car-lot filled and largely deserted city centre. A host of plans are being worked on by the city council, developers and investors to make the downtown area more attractive for living as the battle for talent grows as fast as new oil and gas reserves being unlocked by fracking.
Limitless opportunities
Downtown Houston is a relatively young city. It was established 175 years ago but only really became a working metropolis with the invention of air conditioning 70 years ago. And it is only in the past 15-20 years that any real emphasis has been put on making sure that the central core of Houston remains healthy.
Houston is anything but a classic hub-and-spoke city, says Hal Sharp, principal at architecture practice Gensler. And how can it be? The sheer scale of the city is almost unfathomable. In the confines of the city limits, some 600 sq miles, you can fit the US cities of Baltimore, Chicago, Detroit and Philadelphia. Add the nine counties that make up the wider Houston area (they cover 10,000 sq miles) and you have a market that is larger than the entire state of New Jersey.
In addition, it is an area that has no physical barriers to its growth and, uniquely, no zoning laws. If you own the land, you build whatever you want, wherever you want. No hub and spoke.
However, that doesn’t mean that the city is not working on ways to keep and attract talent and visitors. The move of three of its major sports stadiums – plus a more gradual move of schools and retail – downtown and the investment of $5bn (£3bn) on transportation and civic enhancements, has led to more residential and mixed-use development appearing in a largely empty city core.
A recent and significant boost for downtown is the South’s version of Fame – the Houston High School of Performing and Visual Arts – moving from the suburbs to a new development in the city centre at 1,300 Capitol Street. The move, announced in 2012, will bring with it more people. And, says Gensler’s Sharp, more grocery stores. When they come, he says, we know the city is coming alive.
Downtown did not get its first grocery story until 15 years ago. The second opened five years ago and a third is expected to open at one of the city’s largest downtown residential projects – Market Square Tower, a 40-storey block, developed by BMS and set to complete in 2017.
Quest for “walkable urbanism”
Residential developments such as Market Square Tower are springing up all over downtown and will almost double the number of full-time residents in the district.
The boom has come following a Houston city council project, the Downtown Living Initiative, which gives tax breaks on residential units. Introduced in 2012, it gave developers tax breaks of $15,000 per multi-family unit built downtown. The initiative was originally capped at 2,500 homes. Earlier this year it was doubled to 5,000.
The oil boom and influx of people seeking many of the 80,000 new jobs on offer a year is a cause of housing need, but there is another reason more people are looking to the city centre for accommodation.
Dr Stephen Klineberg, professor of sociology at Rice University and co-director of the Kinder Institute for Urban Research, explains. He says Houston was built by – and on behalf of – the car. Houstonians drive everywhere. CBRE executive vice-president Sanford Criner agrees. He describes Houston as a series of communities linked by freeways (one of which is 24 lanes wide).
“The nature of Houston is that you have to drive somewhere – but not through anywhere – to get somewhere,” philosophises Criner.
This dependence on cars – and the city’s relatively poor public transport system (it has a very simple and very short tramline, meaning that those without cars have to rely on a bus service) – means that traffic is a major problem. Commuting is tiresome and slow at rush hour.
According to the Kinder Institute Houston Area Survey 2014, traffic congestion is the biggest problem facing people in the Houston area today. And with a further 1m residents due to be added to the Harris County (in which Houston sits) population over the next 20 years, and an extra 3.5m moving to the nine-county area as a whole, congestion is only going to get worse.
Houstonians want “walkable urbanism”, says Klineberg. His Kinder Institute study has consistently found over the past seven years that about half of those surveyed would rather live in smaller homes in urbanised areas that are in walking distance of shops and offices. Half still adhere to the Texan norm of wanting land, which is why the sprawling residential estates of white-picketed fences and perfectly manicured lawns continue to grow on the outskirts of the city.
“The challenge today is not in finding people who want to live in more compact, urbanised communities, but in building places across the region that can accommodate them,” concludes the Kinder Institute study.
And with the dozens of residential and mixed-use schemes popping up all over town, Houston is definitely rising to that challenge. The city set an all-time record in April for construction permits, with a 12-month total valued at $6.8bn – a 28.2% increase on the previous 12-month period. A run of 34 consecutive months of year-on-year house sale growth came to an end, however, as a low 2.6-month inventory of product curbed sales.
Down on the bayous
Coupled with this investment in developing places to live downtown to create the “walkable urbanism” wanted by the new influx of job-seekers is the city’s makeover of the bayous that run through the region.
Proposals for the bayous, which help feed water from this flat area of the US down to the Gulf, have been around for more than 100 years, when urban planner Arthur Comey laid out a masterplan for the city with its park system organised around them.
And there are a lot of bayous around which to create space: some 2,500 miles, according to the Bayou Preservation Association, although much of the land was concreted over during the oil boom as a flood precaution. But now, with Houston trying to change its focus from being all about the money (and who cares what it looks like) to being all about the people (and attracting and retaining the talent – and thereby making the money), substantial funds have been forthcoming.
The city council has raised $150m, which is being added to with $100m from the private sector. It will build 150 miles of trails linking the bayous and creating a new leisure sector for the people of downtown. An alternative to the route to work than the automobile the city was originally built for.
The work already under way in Houston will turn the city from an area seemingly populated by open-air car parking lots and mammoth office blocks (comment, pgs 47 & 49) into a city in line with other major investment hubs. A place where people work, live and play.
And Tramell Crow’s Casey is confident about the transformation. “Houston is a city of opportunity,” he says. “People are drawn here for the opportunity. It’s a can-do, will-get-it-done kind of city.”
Success story: From oil and a storm to fracking and shale
Houston has oil to thank for its success. Oil and a devastating storm. The first oil field on the Gulf Coast was discovered at Spindletop in Beaumont, less than 100 miles outside Houston, in 1901. It soon became the most productive oil field in the world, delivering 100,000 barrels a day. Around the same time, people were leaving Galverston, the Wall Street of the South in their droves. It had been all but destroyed by a massive storm, so people were travelling to Houston to look for work. The combination of natural disaster and natural resource changed Houston’s future.
The latest boom began in mid-2010 with the growth of fracking. Fracking and shale has unlocked a new supply of energy in the US, more than 100 years’ worth. Energy now accounts for 50% of the city’s base economy and the businesses involved in this sector are no longer confined to oil exploration, they include logistics, construction, plastics and – now more than ever – technology.
CBRE’s Sanford Criner says the industry is going through “the big shift change”, with the transfer of knowledge from the older generation to the new talent. That, in turn, is leading to an upgrade of many of the energy companies’ offices, with 2m sq ft of new lettings being completed in the second quarter alone. In a bid to capture talent and allow the exchange of information, new schemes are being developed that provide a high level of amenities and collaborative space.
And the sector is set for more growth as neighbouring Mexico opens up its doors to foreign companies. Until December 2013, only the state-owned Pemex could own oil in Mexico. But president Enrique Pena Nieto has opened the sector up to private investment. Mexico oil reserves are estimated to be more than 45bn barrels; natural gas, more than 500trn cubic feet. And nearby Houston has the technical expertise to get it all out of the ground. McDermott International, Baker Hughes, Halliburton and Schlumberger, in partnership with Aberdeen-based Petrofac, have already formed joint ventures there.
International investment propels city up global ranks
Houston was ranked fourth in a global ranking of top picks for overseas investors in real estate last year – the first time it had ever been anywhere near the top of the table. It was beaten only by London, New York and San Francisco. A look at the city’s real estate credentials explains why it is now on the radar of many overseas investors.
According to the Census Bureau, Houston is the second-fastest-growing city in the country and has the highest number of Fortune 500 companies headquartered in its confines after New York and Chicago. Development in the region is continuing, with more than 16m sq ft of property under construction in the second quarter and rents across most of its office markets showing double-digit growth. The central business district led the way in terms of rents, at $42.22 per sq ft, but at 6.4% showed the slowest growth.
The Westchase district, to the west of the city, is one of the fastest-growing submarkets, with rents rising by 18.5% in Q2 to $38.11 per sq ft. CBRE says sovereign wealth funds, pension funds and high-net-worth individuals from all over the world – particularly Canada and Korea – are turning their attention to Houston.
The Chinese have also started to invest heavily. They are becoming more comfortable with Houston owing to Sinopec, part of China Petrochemical Corporation, setting up operations there in 2013 after spending $3.1bn buying a 33% stake in Apache Corporation. Earlier this year Beijing-based Grand China Fund took an 80% stake in a 286-flat scheme in the city.
Samantha.McClary@estatesgazette.com
Houston special: see also
• 56 Thinking big• 58 Ryan McCord interview
