Houston, Texas
“Space City” Real Estate Still Reaching for the Stars
By Carole VanSickle Ellis
After setting record after record for home sales volumes and prices in 2021, the Houston, Texas, housing market barreled into 2022 at top speed.
While home prices in many of the country’s hottest markets “fell” to single-digit appreciation in early 2022, Space City real estate kicked off the New Year with 19.1% year-over-year gains in value.
While many analysts predict price gains will slow dramatically over the remainder of the year and possibly reach an annual rate of about 3.8% by the start of 2023, an influx of buyers flush with cash from the sale of homes in places like Silicon Valley could delay that relative cooling. Local agent and chair of the Houston Association of Realtors (HAR) Jennifer Wauhob described the situation, saying, “There simply are not enough homes out there for consumers to buy right now, and the steady rise in home prices plus increasing mortgage rates create a perfect storm in terms of affordability.”
Tightening Inventory Across the Board
Inventory is particularly tight in the lower and middle ranges of the market, making first-home purchases particularly difficult for would-be buyers. Sales volumes of homes priced between $150,000 and $249,000 fell by 34% between January 2021 and January 2022; sales volumes on homes priced $150,000 and lower fell by more than 40%. Local buyers have reacted by shifting purchasing to condominium units and townhomes, which sold more than 130,000 units in 2021. Sales in this asset class have exceeded 100,000 units annually just three times.
“Consumers’ demand for housing [in Houston] has never waned, and they have paid more for it as the supply of housing has shrunk,” said Norada Real Estate Investments CEO Marco Santarelli, citing low mortgage rates for the ongoing boom in the city. Santarelli recommended investors considering buying properties in Houston keep a close watch on oil prices, since the city’s property values tend to rise with the cost of oil. However, he added, the city’s “extremely diversified economy” makes it “one of the country’s top job creators…and lets you stretch a paycheck farther than anywhere else in the country.”
For real estate investors ready to acquire property, the biggest concern will be how close to market value they should pay. For several years now, many investors have been willing to pay market value or even slightly over market value in order to acquire properties that will cash flow over the long term either as short-term vacation rentals or long-term residential properties. With inflation showing every sign of shooting skyward in the near future, many high-volume investors say they are willing to forego the classic “buy low, sell high” mentality in favor of acquisition.
“When you acquire a property at a fixed rate and hold it, you continue to pay that rate until the property is paid off,” explained Mike McMullen, CEO of Global Real Estate Services, one of the earliest pioneers of build-to-rent development in the industry. He continued, “On the other hand, your rents go up with inflation, so you are essentially getting a raise each year. Right now, hard assets are the quickest way to wealth.”
Houston’s Diversified Economy is Well on Its Way to Recovery
One of the most powerful arguments for investing in Houston is the local economy, which has proved highly resilient to the global pandemic. In fact, the Greater Houston Partnership (GHP), the largest chamber of commerce in the Houston area, reported in January of this year that the city had recovered “roughly 70% of the jobs lost in the pandemic by fall 2021.” The GHP estimated the region would net 75,500 new jobs in 2022, which will place Houston “extremely close to a full recovery.”
Houston’s economy has long been oil- and gas-driven, with Phillips 66, ConocoPhillips, Occidental Petroleum, Halliburton, and ExxonMobil all choosing to locate their headquarters in the area. While the economy still benefits from the presence of these companies, they are just one component of the bigger economic picture in 2022.
Today, Houston boasts thriving energy, life science, manufacturing, and aerospace industries. It received its official nickname, “Space City,” in 1967, thanks to the opening of NASA’s Manned Spacecraft Center, and has continued to lead the country in this sector. Today, Houston is home to more than 500 space, aviation, and aerospace-related businesses as well as the NASA Lyndon B. Johnson Space Center (JSC) and the Houston Spaceport, which offers laboratory office space, technology incubator space, and large-scale production facilities in addition to being an FAA-licensed, urban commercial spaceport.
In addition to aerospace-related industry, Houston’s digital technology sector extends throughout a variety of subsectors including software development, programming, and database management. With more than 8,200 tech-related firms and 500 venture-backed startups, the city is certainly contributing to speculation that it could be the “new Silicon Valley.”
Yang Tang, a former Silicon Valley resident and current chief technology officer at digital supply chain and data analytics company GoExpedi, a former Silicon Valley company now headquartered in Houston, explained his company’s decision to leave California for the Houston area. “It’s cheaper to operate a business; there is no state income tax; there is an abundance of land, pro-business policies, lower cost of living, significant talent pool for hiring; and the list goes on and on,” he wrote in an op-ed column for Insider in August 2021. Tang continued, “Like many other tech executives, I think Texas is positioned to outpace California due to its proximity to the world’s top companies in energy, healthcare, and aerospace, to name a few, and its willingness to innovate with technology in those industries.” He concluded, “I chose Houston as my new hometown for its diversity of people and thought…the city’s major port, healthcare systems, and energy sector…. If folks looking still don’t see Houston and Texas as the next technology mecca, they soon will.”
Houston is not just a tech mecca, however; it boasts a thriving medical community as well. The Texas Medical Center (TMC) is one of the largest medical complexes in the world and boasts 61 member institutions. Not surprisingly, Houston’s short-term rental opportunities are varied and vast thanks to the many patients and families that travel to the area for specialized and sometimes groundbreaking care provided by local institutes and even incubator programs.
“Houston has all the factors that are required for explosive growth in the [life sciences and biotechnology] space,” said Steve Purpura, president of life science at Beacon Capital Partners, shortly after his company announced it would partner with TMC on a “medical city” dubbed TMC3. Beacon Capital Partners and life sciences-focused investment firm Braidwell developed the plan for the first phase of TMC3, a 950,000-square-foot translational research campus. Local economists predict the facility, when completed, will bring in an ongoing $5.4 billion annually, create 23,000 permanent new jobs, and add 19,000 construction jobs in the area throughout the building process.
The Future is Uncertain, but Houston Doesn’t Have to Be
Back in the 1980s, Houston’s economy was almost wholly dependent on the petroleum industry. This was bad news for the city when oil prices fell in 1982 and resulted in the loss of about 211,000 jobs over the next five years. In fact, one in eight residents were unemployed during this time and the real estate market collapsed. This taught the city a lesson: Never put all your eggs in one basket again. Three decades later, when oil prices hit 25-year lows during the COVID-19 pandemic, analysts warned that the Houston housing market was still more exposed to oil market fluctuations than most other markets. However, Houston’s energy “exposure” is about 70% less today than it was in the 1980s, meaning, wrote local broker Paige Martin at the time, “Houston’s real estate market is so strong now that [a] 20-35% dip would create a ‘balanced market’” thanks to growth in other industries.
By March of this year, oil prices were rising and volatile thanks to conflict between Russian and Ukraine. The Real Deal analysts Harrison Connery and Maddy Sperling predicted oil prices and, by extension, Houston housing prices would “likely stay hot” until the conflict was resolved. However, they warned, “This time, the spike in crude oil could be more of a hazard than a spur to growth.” They noted that a “decade-long trend away from oil jobs” means that rising prices will no longer trigger hiring or home-buying sprees, but that a scarcity-fueled transition to renewable energy might happen more quickly than most in the industry expected if U.S. sanctions against Russia continue unabated. That would further separate the housing market in Houston from the oil market. This means housing will still be tough to come by and a solid hedge against inflation.
Ted Jones, economic forecaster for the HAR, explained, “It’s still a sellers’ market. Until we build more, your only hope right now to decrease demand is you either have a major recession or you price people out of the market. We are kind of seeing people priced out of the market, [but] it is just starting.”
Taking a lesson from the 1980s, Houston is preparing to diversify even further in both its economy and its housing options. In fact, the city reacted to the COVID-19 lockdowns with a burst of new construction projects, including the Texas Tower, which is billed as a “high-tech, futuristic place to work,” and large volumes of multifamily housing and mixed-use development. Many of these projects opened their doors in late 2021 and early 2022 — just in time to attract crowds of locals ready to leave their houses and begin enjoying being out and about once again. Existing spaces in the commercial sector kept up with the diversification process as well, adding “flex space” to the office-space sector in volumes higher than any other U.S. market (by percentage).
Investors seeking to make multifamily developments or commercial developments more attractive to tenants will benefit from incorporating this trend into their own projects. Rich Pancioli, executive vice president for the Houston branch of CBRE, explained, “During the pandemic, flexible space has become more important…in Houston as companies respond to employee desires for flexibility in how they work.” He added that this type of space is currently a “key tool to test new strategies in a fast-changing environment.” With an ongoing influx of new residents and a hot market that appears unlikely to cool any time soon, Houston investors should leverage every tool at their disposal to make the most of the opportunities in this region.
SIDEBAR
Houston’s 10 Biggest Employers
Wal-Mart
» 37,000 employees
Memorial Hermann Health System
» 24,108 employees
H-E-B Grocery Company, LP
» 23,732 employees
The University of Texas MD Anderson Cancer Center
» 21,806 employees
McDonald’s Corp.
» 20,918 employees
Houston Methodist Hospital
» 20,000 employees
Kroger
» 16,000 employees
United Airlines
» 14,941 employees
Schlumberger Limited (oilfield services company)
» 12,069 employees
Shell Oil Company
» 11,507 employees
SIDEBAR
A Closer Look at Houston with Richard Ray
Richard Ray has been investing in Houston for nearly two decades, which is probably one of the reasons he is such a prolific agent at Douglas Elliman in Houston, Texas. “Right now, the 2022 real estate market in Houston is really strong – and I believe it’s only going to get better,” he told REI-INK.
Ray cited the city’s dramatic population growth, rising rental rates, and an extremely strong set of employers as the underpinnings of the solid real estate market in the southern Texas city. He also reported that both retail homebuyers and investors are finding the metro market is expanding, with not only the “inner loop” of the city gaining in value but also the suburbs. “Things are spreading out fast. You do not have to be right in the center of town to make money anymore,” Ray said. He made particular note of The Woodlands, home to Exxon Mobil, and Sugar Land, southwest of Houston. Sugar Land, like many Houston suburbs, boasts an aggressive, successful economic development program that has lured multiple high-value employers to the area.
“With our medical community, our tech communities, our oil and gas industry, and our pro-business environment, we have tons of upside,” Ray said. “With no personal state income tax and our many educational institutions like Rice University and the University of Houston, this is a great place to come and hire a workforce.”
