Commercial real estate owners unwilling to slash prices (2024)

Fewer top-tier Houston commercial real estate properties changed hands in 2016 as investors shied away from the energy capital and owners were in no rush to sell at discount prices.

Sales of Houston-area properties such as apartments, offices, industrial buildings, shopping centers and hotels totaled $7.9 billion through November, according to Real Capital Analytics, a real estate research firm.

By comparison, such sales totaled $13.4 billion in 2015. The sales volume through November was anywhere from 30 percent to 38 percent lower than the comparable 11-month periods from 2013 to 2015.

The drop is still less than half of the 60 percent decline in local commercial real estate investments seen in both 2008 and 2009 after reaching $14.3 billion in 2007.

Overbuilding in the office and apartment sectors has translated into high levels of vacancy and, in many cases, offers of free rent to get tenants. That makes those types of buildings less profitable to operate, so buyers want a deal to make the numbers work.

"The only buyers that are really out there are opportunistic buyers, and they want a deal. They want a steal," said Rudy Hubbard, a managing director at JLL who brokers office buildings.

"And there are no steals out there."

Sales of office buildings in 2016 totaled only 10 to 12 percent of the more than $2 billion worth of buildings that changed hands across the Houston region in 2015, according to Hubbard.

Most of the owners are well-capitalized and not overly leveraged, typically with 60 or 65 percent debt, Hubbard said. Their properties are generating enough rent to pay the note, so they're holding onto them until conditions improve.

On the apartment side, the focus has shifted away from the newest and nicest so-called Class A properties traditionally sought by institutional investors.

"Our group's sales are going to look very similar to last year's totals," said Todd Marix, senior managing director of HFF who deals in multifamily properties. "It's less A, and more B and C for us."

Hines, a global real estate firm based in Houston, pulled its flagship WaterWall Place apartments near the Galleria off the market after failing to draw a high enough offer, Marix said.

The 322-unit, seven-story complex, which launched the developer's entry into the multifamily market four years ago, had been singled out from a multibillion-dollar package of properties being liquidated in the Hines Global REIT.

"This is not the kind of building that you want to give away in a thin market," said Marix, who was marketing the building.

One of the top multifamily sales of the year, Marix said, was Mid-America Apartment Communities' purchase of Alexan Heights, a 352-unit complex at 655 Yale, from Trammell Crow Residential and the Carlyle Group.

Many developers, which might otherwise sell the project once it is completed and 90 percent or more leased, are keeping them. Two months free rent is common in new communities.

"It really limits the value the buyer would have been able to pay, had that free rent not been there," Marix said. "These guys know these buildings are worth more if there's less free rent in the market."

Marix speculated it will be a year or two for Class A apartment sales to pick up.

The biggest deal of 2016 was JPMorgan Asset Management's $550 million purchase of a stake in the River Oaks District mixed-use project from developer OliverMcMillan and Baupost Group, according to Real Capital Analytics.

The retail sector outshined others as consumers continued to spend and developers added shopping centers at a rapid pace.

"There is still significant demand for retail space and, despite the overall downturn in the economy, purchasing power is still up in Houston," said Mark Sikes, a principal at Deal Sikes & Associates, a real estate valuation firm.

Shopping center values are generally up slightly over the previous year, Sikes said.

Among the larger retail sales, Hines sold the Champions Village shopping center as part of an eight-property portfolio spanning several states to New Market Properties.

The investment slowdown comes on the heels of some record-setting deals in 2015, many to foreign investors, who seek the safest places to invest. Those 2015 deals included: 22-story BBVA Compass Plaza at 2200 Post Oak Blvd. to a Spain-based private investor; the 36-story 1000 Main building downtown to German realty fund Union Investment; and Broadstone Post Oak apartments to Chinese real estate conglomerate CSCEC.

In the office sector, Hubbard of JLL is seeing more optimism among investors as oil has passed the $50 mark.

"When it gets to $60 and stays there six to eight months, you'll see a dramatic increase in investor activity in Houston," he said.

Sales could be spurred when it comes time to refinance buildings with significant vacant space or sublease space.

"When their loans come due, they're going to have difficulty refinancing," Hubbard said. "The buildings are either going to sell or go back to the lender."