A decade ago, the area just south of downtown Houston consisted of vacant land, boarded up buildings, some dumpy single-family residences and a handful of prosperous businesses. But today, Houston's Midtown is enjoying a real estate renaissance.

“Houston's Midtown is a zone of white-hot activity,” says Greg Lewis, president of Lewis Property Co., a developer active in the Inner Loop area inside Loop 610 that encircles downtown Houston, Greenway Plaza and the Galleria district.

Indeed, the Midtown area is benefiting from a surge of deals related to the light rail line that opened early in 2004. Sites near the rail stops are in high demand, and land prices for the prime parcels have surpassed $50 per sq. ft. “In the 1990s, land could be obtained in Midtown for less than $10 per sq. ft.,” recalls Lewis.

Houston-based Camden Property Trust, a multifamily real estate investment trust (REIT), is planning a 500-unit development on a 5.5-acre parcel in the center of the neighborhood. Developer Yancey Hausman, in partnership with Point Center Partners, has announced plans for a 100,000 sq. ft. mixed-use development that will include 27,000 sq. ft. of first-floor retail and 75,000 sq. ft. of commercial office space. Occupancy of Point Center Midtown is scheduled for the fourth quarter of 2005.

Midtown Condominiums, an affiliate of Fidelity Management Co., is building a 93-unit condo project in Midtown called The Edge. The seven-story project southwest of downtown will feature some of the lowest-priced residential units in the area with prices ranging from $143,000 to $400,000.

Job Growth Returns

Spurring development activity in Midtown and elsewhere in Space City are positive economic indicators. University of Houston economist Dr. Barton Smith says job growth in the Houston area began picking up last fall. Smith, director for the Institute of Regional Studies, anticipates about 25,000 new jobs to be created this year — and double that amount in 2005.

That's in contrast to the anemic job market of a few years ago when Enron and other energy trading firms were downsizing. The six-county Houston metro area reported a net loss of 8,700 jobs in 2003 and a lost of 13,300 in 2002, according to The Greater Houston Partnership, a non-profit advocate for the city's business community.

“This growth in the economic base is setting us up for much better economic times next year,” Smith says, noting that energy firms are reporting improved earnings with higher oil prices and should start hiring more workers and leasing additional office space. Other industries driving job growth locally include medical research, NASA and the metals fabrication and light manufacturing sectors, reports Smith.

With job growth on the rise, the outlook for Houston's commercial realty markets is bright, says Mark Sikes, a principal in Lewis Realty Advisors, a Houston-based consulting firm. “The city's Energy Corridor in West Houston remains a very popular choice for office relocations and the construction of retail projects. This is occurring in spite of the massive reconstruction of the Katy Freeway, which is the spine of the Energy Corridor district.”

Office Uptick

The Houston office market has begun to show signs of recovery, posting positive absorption for the first time in 10 quarters, says Richard Zigler, director of research at O'Connor & Associates, a Houston-based research and real estate services firm.

Grubb & Ellis-Houston reports 500,000 sq. ft. of positive net absorption in the second quarter of 2004. Although the vacancy rate registered an unhealthy 19.9% in the second quarter, it was 26 basis points lower than the same period in 2003 and the first descent in more than three years.

With the exception of the Energy Corridor, there is a lack of new construction. “All the action is out west,” says Sanford Criner, executive vice president of CBRE/Trione & Gordon, who expects the office sector to improve gradually. Petroleum manufacturer Citgo moved its headquarters from Tulsa to the Energy Corridor this year, taking nearly 250,000 sq. ft. of space. Foodservice distributor Sysco Corp. also plans to build more buildings on its West Houston campus.

Companies also are eyeing the downtown submarket, says Doug Little, senior vice president at PM Realty Group. “In the CBD, it's taking a while to fill the space left by Enron but downtown is seeing more activity.” Enron vacated nearly 2 million sq. ft. after filing for bankruptcy in 2001.

Atofina Petrochemicals, a French chemical firm, is planning to move 350 employees from its Bush Intercontinental location to 150,000 sq. ft. at Louisiana Place in the CBD. In another downtown deal, Chevron Texaco purchased the new 1.2 million sq. ft., 40-story Enron building at 1500 Louisiana for $128 million earlier this year, or more than $100 per sq. ft.

Office sales continue to be robust. Earlier this year, Crescent Real Estate Equities sold its 400,000 sq. ft. 1800 West Loop building in the Galleria area for $30 million, or $75 per sq. ft. That deal came not long after Crescent made a big purchase in the Westchase area, spending $75.4 million to acquire the 502,000 sq. ft. One Briarlake Plaza.

Multifamily: A Mixed Bag

While Houston's office market is well on its way to recovery, Space City's multifamily sector has experienced too much building for too few tenants. Houston builders have developed almost 30,000 multifamily units over the last three years, notes Bill Forrest, senior realty advisor at Sperry Van Ness. That's way too many, in his opinion.

“Although some Inner Loop apartments are leasing because of high demand, apartment residents have been buying single-family homes in droves because of low mortgage rates. That hurts the multifamily market.” The rate for a 30-year, fixed-rate mortgage was 5.75% as of Sept. 16, according to Freddie Mac.

An estimated 6,350 multifamily units will be completed this year, down from 11,468 in 2003, reports O'Connor & Associates. Still, the vacancy rate has climbed from 10.9% in the second quarter of 2003 to 13.4% in the second quarter of 2004, according to CB Richard Ellis.

Although there is softness in the west and northwest suburbs, the Inner Loop apartment market maintains a steady base, “but competition is always at your heels,” says Matthew Dilick, president of Commerce Equities Inc., a Houston development firm. The company is developing the 242-unit Bayou on the Bend, a six-story project on Memorial Drive.

A number of new high-rise residential towers are popping up on Houston's skyline. “The popularity of high-rise living in Houston is on the rise,” says Ted C. Jones, chairman of the Houston Association of Realtors, which reports high-rise condo unit sales in 2004 are running about 45% ahead of last year's pace.

Houston-based Interfin is building the upscale Montebello, a 30-story high-rise project on Uptown Park Boulevard, which is generating tremendous interest from buyers. The 112 units, which range in size from 2,100 sq. ft. to 5,000 sq. ft., are priced between $500,000 and $1.8 million.

On the sales side, multifamily investors are becoming more selective, notes Robert Su, senior investment associate with Marcus & Millichap. “Investors are waiting for prices to come down,” Su says. Typically, investors have been paying $70,000 to $80,000 per unit for a Class-A property this year, unchanged from 2003. Prime projects can fetch higher prices.

Case in point: Denver-based real estate investor Pauls Real Estate Partners LP recently purchased the Estates at Memorial Heights, a three-year-old, 437-unit apartment complex. The seller was the Amstar Group. Real estate sources estimate the complex — which was 94% occupied — sold for more than $100,000 per unit.

More Rooftops, More Retail

New home construction also is having a positive impact on Houston's retail sector. “Moderately priced, single-family residential real estate activity, which is important to the retail sector, continues to show substantial growth with low interest rates being the driving force,” says E. D. Wulfe, president of commercial real estate firm Wulfe & Co.

Fast-paced homebuilding in distant suburbs also has spawned the need for more suburban retail in areas such as Pearland, Katy and The Woodlands, Wulfe adds. A recent study by Wulfe & Co. found that 3.2 million sq. ft. of new retail space is scheduled to be completed in 2004, compared with 4.35 million sq. ft. last year.

“This is still a significant amount, even though it represents almost a 27% decrease, and is the lowest total amount since 1998 when 2.14 million sq. ft. was completed and opened,” says Wulfe. “This downward trend is very healthy and will allow us time to better absorb the extraordinary growth of the past few years.”

Community centers with big-box retailers account for much of the construction activity, along with a few grocery-anchored centers. There are no new regional malls under construction, but suburban land brokers say developers have been scouting sites in untapped markets, such as Pearland, a southern suburb.

Retail vacancy is at its lowest point in over two years, but the market continues to digest the withdrawal of Albertsons, K-Mart and Service Merchandise from Houston. The vacancy rate dropped from 13.8% to 13.5% between the second quarter of 2003 and the second quarter of 2004, according to CB Richard Ellis. Monthly rental rates averaged $1.62, virtually unchanged from the same period a year ago, reports O'Connor & Associates.

Growth has shifted to the southeast side of town as closer-in sites become scarce and scores of new housing communities open in untapped Galveston County, says developer Jerry Crawford of Houston-based Crawford Interests. Crawford is developing a mixed-use and medical/professional project in Friendswood, a Galveston County community that has been overlooked by retailers and restaurant chains.

Pace Quickens for Industrial Market

As the city's economy stabilizes, Houston's industrial market is gaining strength Absorption has jumped from 358,650 sq. ft. in the second quarter of 2003 to a whopping 1.6 million sq. ft. in the second quarter of 2004, reports CB Richard Ellis.

A large contributor to the spike in absorption was Masonite International Corp., which moved into 214,831 sq. ft. at 5401 Lawndale Street on the east side of the city. Also planned for the east side is a 1 million sq. ft. Wal-Mart distribution facility that will be built in the Cedar Crossing business park in Chambers County in 2005.

The speculative construction pipeline is nearly empty: Only 492,885 sq. ft. is under construction in the metro area, primarily in the northwest quadrant of the city, reports CB Richard Ellis. Monthly rental rates held steady at $0.44 per sq. ft. in the second quarter of 2004, unchanged from the same period in 2003. The vacancy rate has shown more improvement, decreasing from 10.1% in the second quarter of 2003 to 9.9% in the second quarter of 2004.

Heavy industrial buildings with accouterments for manufacturing are in demand. Jim Stark, vice president for CB Richard Ellis, is working with a steel fabrication firm from Mexico that is searching for a suitable site in Houston, one of several manufacturing deals under way. Brokers also report that buyers are showing interest in land that can be used for build-to-suit projects.

Sporting Events Give Hoteliers a Lift

Thanks to the Super Bowl and All-Star game, Houston hotels have enjoyed a spike in occupancy rates in 2004. Additionally, the 1,200-room Hilton Americas, located downtown next to the George R. Brown Convention Center, is helping the city attract larger conventions.

The hotel sector posted an occupancy rate of 58.2% in the second quarter, up from 57.9% in 2003, according to Jan D. Freitag, director of Smith Travel Research. With the national pick-up in economic activity and the return of the business traveler, the hotel markets will continue to improve in 2005, Freitag predicts.

Still, the downtown market is feeling the effects of Enron's massive layoffs. The firm's Houston workforce has dwindled to 1,000 people from more than 7,000 in 2001.

The opening of several new boutique hotels — including the Sam Houston, The Magnolia, Inn at the Ballpark and Hotel Icon — has increased competition in the CBD. The expansion of the downtown convention center provides hope for hoteliers who want to see bigger and more frequent conventions booked in Houston.

Hotel construction has been sluggish in other parts of Houston, although developer Steve Hsu, president of Allied Hospitality in Houston, is building a 120-room Hilton Garden Inn in the Chinatown area near Bellaire Boulevard and Beltway 8. The $20 million hotel will feature more than 5,000 sq. ft. of meeting space, Hsu adds, which is in high demand in the Asian community.

Ralph Bivins is a Houston-based writer.

HOUSTON - BY THE NUMBERS

POPULATION OF METRO AREA: 5.1 million

Source: Greater Houston Partnership

UNEMPLOYMENT RATE:

6.6%

LARGEST EMPLOYERS:

  1. Houston Independent School District, 27,000 employees
  2. City of Houston, 22,000 employees
  3. Administaff, 18,211 employees


METRO AREA STATS

Office:

16.6% vacancy, 2Q 2004

16.8% vacancy, 2Q 2003

Rent per sq. ft. (monthly): $17.53, 2Q 2004

Source: CoStar, CB Richard Ellis

Multifamily:

13.4% vacancy, 2Q 2004

10.9% vacancy, 2Q 2003

Average rent per unit: $666, 2Q 2004

Source: O'Connor & Associates, CB Richard Ellis

Retail:

13.5% vacancy, 2Q 2004

13.8% vacancy, 2Q 2003

Rent per sq. ft. (monthly): $1.62, 2Q 2004

Source: O'Connor & Associates, CB Richard Ellis

Industrial:

9.9% vacancy, 2Q 2004

10.1% vacancy, 2Q 2003

Rent per sq. ft. (monthly): $0.44, 2Q 2004

Source: CB Richard Ellis

Hotel:

58.2% occupancy, 2Q 2004

57.9% occupancy, 2Q 2003

Average Daily Rate: $73.74, 2Q 2004

Source: Smith Travel Research

MAJOR PROJECTS
UNDER CONSTRUCTION:

Federal Reserve Bank, a 300,000 sq. ft. office and vault facility on Allen Parkway, just west of downtown

Cost: $90 million

Completion: Spring 2005

Woodlands Market Street, a 450,000 sq. ft. specialty retail center

Cost: $100 million

Developer: Trademark Property Co., Kimco Developers

Completion: Phase I in November 2004; Phase II in June 2005

The Crossing at 518, a 400,000 sq. ft. retail center in suburban Pearland

Cost: $35 million

Developer: Crossing at 288 Shopping Center Ltd.

Completion: Fall 2005