Situs - O\'Connor Land Forecast (Oct 2008)

1. O’Connor & Associates
Land Forecast Luncheon
October 22, 2008

2. Services Offered
Situs provides a wide range of commercial real estate
services, including the following brokerage services
• Represent individuals, institutions, and public companies buying,
selling, leasing and repositioning commercial properties
– Land Brokerage
– Investment Sales
– Project Leasing Rated as a Special and Primary
Rated as a Special and Primary
– Tenant Representation Servicer by
Servicer by
– Asset Repositioning / Dispositions
– Entitlement & Development
Approved by
Approved by
– Sealed Bid Sales
– Note Sales
– Highest & Best Use Analysis
– Asset Management
2

3. Desired Outcome of Today’s Discussion
• Review the dynamics of activity in Houston from
the 1980s through today
• Discuss role of land and land development in
Houston’s future
Note: This presentation has been modified slightly
from the version presented at the O’Connor
luncheon to include new text slides that provide
additional color on the charts
3

4. Flight to the Suburbs (1946 – 1980)
The suburban transformation began in 1946 when the
GIs returned home from World War II
• Prior to this time, people lived, worked and played in the inner
city
• First people, then retail, then jobs moved out of the city and
into new subdivisions, malls, and office parks in suburban
areas
• As families moved to the suburbs, they left behind out-of-
fashion real estate, a poorer residential base, and rising crime
• Once-thriving central-city retail districts were decimated by
the regional suburban malls
• By the mid-1970s, Houston newcomers generally had little
alternative but to locate in the suburbs for desirable
neighborhoods and quality public schools
4

5. Houston Population
Since 1950, Houston’s* population has increased an
average of 33% per decade, resulting in explosive
growth
2% growth
in 1980s 4
2,200
4
2,000
Population (1,000)
1,800 4
5
1,600
1,400 Rank among 6
1,200 largest US
7
1,000 cities
800 14
600 21
400 26
68 45
200 85
0
00
10
20
30
40
50
60
70
80
90
00
e
06
19
19
19
19
19
19
19
19
19
19
20
20
* Figures represent the City of Houston and not the MSA
Source: U.S. Census Bureau (2007) 5

6. A Tale of Two Cities (1980 – 1990)
The 1980s offered Houston the best and worst of
times – a boom and a bust
• Early-1980s saw a significant level of suburban
residential development
Boom • Suburban retail and office development followed
• A major catalyst was unrealistic optimism that the
oil boom would continue – oil bust began in 1982
• 1985 was the beginning of the S&L crisis that led
to creation of FADA & RTC
Bust
• Real estate industry was further exacerbated by
the Tax Reform Act of 1986 and national recession
in the early-1990s
6

7. Housing Starts
Relatively speaking, there was little new residential land
development in the early-to-mid 1990s
Peak reflected artificial
60 demand from
Number of Units (1,000)
subprime lending
Steep decline in
50 housing starts
began in 1984
40
30
Steepest drop
20 since 1985
10
Higher levels than 1980s or 1990s
0
83
85
87
89
91
93
95
97
99
01
03
05
07
19
19
19
19
19
19
19
19
19
20
20
20
20
Single Family Units Multifamily Units
Source: Texas RECenter (2008) 7

8. Distressed Land Sales (1990 - 1995)
Distressed asset sales by RTC, FDIC, etc. were the
catalyst for much of the activity during this time frame
• RTC, created in 1989, began mass liquidation of assets taken back
from failed thrifts through sealed bid sales and auctions
• Many properties, including commercial and residential land, were
acquired at distressed prices that were significantly below the cost
of developing new raw land
– Finished lots
– Partially developed subdivisions
– Commercial reserves
• Commercially, there was not a lot of significant construction as the
market was absorbing existing office and retail
• Many out of state buyers that were new to Houston
8

9. Distressed Land Sales (1990 - 1995)
[continued]
The sheer volume of land sold during this period had
an effect in subsequent years
• Many raw tracts of land acquired during the early-1990s were
later developed in the late-1990s and early-2000s
• As pressure increased on homebuilders to produce more lots
in the early 2000s, residential builders entered land
development business
• From 2001-2006, homebuilders drove up the price for
residential land
9

10. Houston MLS Residential Housing
Activity
As a result of the rising costs related to land,
infrastructure, and construction, the average home
sales price has continued to increase
First decline
90 $250
since 1992
80
Average Price ($1,000)
$200
70
60
Sales (1,000)
Declining $150
50 prices
40
$100
30 Minimal
growth
20 $50
10
0 $0
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
Sales Average Price
Source: Texas RECenter (2008) 10

11. The Inner City’s Comeback (1995 – 2007)
Residential Commercial
• Many residents – old and • Pent-up demand for urban
new Houstonians – have property is evident in
moved to the core pricing
• Reasons for moving • Inner loop commercial land
include traffic issues, has been selling for 6 to 10
proximity to work, and a times more per square foot
desire for diverse culture than similar suburban sites
• Tremendous price • Many older properties have
appreciation in “older” been purchased at land
neighborhoods value for redevelopment as
higher-density commercial
and residential
11

12. Still Moving to the Suburbs (1995 – 2007)
Residential Commercial
• Affordability enables • The residential growth in
people to buy bigger the suburbs has resulted in
homes on larger lots significant commercial
growth
• Many suburbanites prefer
to live in new homes in • Desire for suburban living
master-planned has increased due to the
communities existence of suburban
employment centers
• Desire for quality public
schools • Prevalent trend of locating
companies closer to
• Proximity to employment employees
centers
12

13. Surging Commercial Land Prices (2000 –
2007)
Commercial land prices were driven up over the past
several years
• Competition for prime corners and sites significantly drove up
prices
• Pricing was no longer based on comparables; rather, it was
based on planned use
• Flow of information (transparency) has impacted how
business is done
• Expectations among buyers and sellers have risen
13

14. Cost of Living Index for US Metro Areas
(Q2 2008)
Houston’s overall after-taxes cost of living is 11%
below the national average, largely due to housing
costs that are 23% below the average
Houston
Dallas
Atlanta
Phoenix
National Average of 318 urban areas
Denver
Miami
Boston
Washington
New York
San Francisco
15 0 15 30 45 60
Source: ACCRA (2008 Q2 ) 14

15. Houston MSA Residential Population
Growth (1996–2006)
Houston has experienced steady growth over the past
decade, with the largest one-year surge occurring in
2006
5,600
5,400
Annual Average Growth: 120,500 residents
Population (1,000)
5,200 Total Growth: 27.8% 259.9K
103.4K
5,000 102.5K
106.1K
4,800 5.54
123.0K
MM
4,600 129.7K
70.9K
109.6K
4,400
107.6K
4,200 4.33 93.4K
MM
4,000
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2006
Population Population
Source: U.S. Census Bureau (2007)
15

16. Houston MSA Employment Growth
(1996–2006)
Houston’s residential growth correlates directly to its
strong employment growth over the same period
2,500
Annual Average Growth: 46,400 jobs
Population (1,000)
2,400
Total Growth: 23.4%
2,300 95.8K
-5.1K -14.3K 15.6K 60.4K
39.0K
2,200 2.45
52.6K MM
34.5K
2,100
103.0K
2,000
1.98 82.7K
MM
1,900
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2006
Jobs Jobs
Source: Texas Workforce Commission and Real Estate Center at Texas A&M University (2007)
16

17. How Long Will This Last? (2008 – ?)
We expect some commercial real estate trends to
continue for an unknown period of time
Trends Impact
• Risk being re-priced • Land prices decreasing
• Cap rates increasing • Contract terms softening
• "Easy" financing no longer • Sales activity slowing
available
• Development activity decelerating
• Financing only available for strong
and experienced borrowers • Transactions being re-traded
• Retailers slowing growth with • Owner financing on horizon
some closing stores • Investors with cash on sidelines,
• Banks and drug stores pulling waiting to see how far prices drop
back
• Housing starts slowing
• Foreclosures / REO properties
increasing
17

18. Reasons for Optimism
18

19. Job Growth by State
Over the past year, Texas has led the nation in highest
job growth among states
Texas
Texas
Strong Oklahoma
energy
industry Colorado
employment
Louisiana Texas
Maryland accounted for
Washington 52.6% of all
Utah new jobs
North Carolina created
New York nationally
Massachussetts
National Average
-0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5%
% Growth
Source: Texas State Data Center (2007)
19

20. Job Growth by MSA & Best Cities to Buy
a Home (2007)
Over the past year, Houston was among 4 Texas cities
to rank in the top 10 nationally in job growth and to
make Forbe’s list of the 10 Best Cities to Buy a Home
Forbe’s 10 Best Cities to
USA Total Buy a Home (Rank)
Dallas-Fort Worth 6
Houston
Houston 1
Seattle
Washington, D.C.
New York City
Atlanta 10
Charlotte 7
San Antonio 5
Austin 2
Raleigh
170,000 130,000 90,000 50,000 10,000 30,000 70,000
Number of Jobs Added
Source: Texas State Data Center (2007)
20

21. Houston MSA Projected Residential
Population Growth (2006–2015)
Growth is expected to continue with solid population
increases forecasted
6,400
Annual Average Growth: 92,800 residents
6,200 97.3K
Population (1,000)
Total Growth: 15.1% 95.8K
6,000 94.4K
92.9K
5,800 91.5K
93.0K 6.38
91.5K
5,600 MM
90.1K
88.6K
5,400
5.54
5,200 MM
5,000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2015
Population Population
Source: Texas State Data Center (2007)
21

22. Diversification
• Since 1981, the percentage of local economy tied
Energy to energy has dropped from 84% to 48%
• Grown to encompass:
Texas – 73,600 employees
Medical – 37 million sq. ft. of physical space (including
Center construction)
– $2 billion of construction underway
• 10th in the world in total tonnage
• 60 million people live within 700 miles
Port of
Houston • Intermodal transportation - ample truck, rail and air
connections
• Weak dollar has bolstered exports
22

23. Houston’s Glass is Half Full
Key Employment Centers Affordability
• Enabled by relatively short land
• World center of oil & gas industry entitlement process
• World’s largest medical center • Key driver of population growth
• One of world’s largest ports • Housing affordability is attractive
to major employers
Great Place for Business Resources
• Home to second largest number
of Fortune 500 companies • Proximity to oil & gas wells and
refineries
• Taxes are relatively low to other
• Access to water
parts of country
• International & domestic • Texas' electricity grid has limited
interconnection with other states
relocation destination
23

24. Thank You
Trusted InSight into Global Real Estate
4665 Southwest Freeway
Maury Bronstein Houston, Texas 77027
Martin Bronstein 713-328-4400
Randall Tuller brokerage@situscompanies.com
www.situscompanies.com
24

25. Appendix
25

26. Residential Construction Permits for Top
10 US Metro Areas (2006)
In 2006, Houston issued over twice as many
construction permits than the average issued by the
other top 10 US metro areas
Houston (4)
Houston (4) 71,719
New York (1) 60,987
City (Population Rank)
Dallas (9) 56,514
Chicago (3) 46,722
Phoenix (6) 44,280
Los Angeles (2) 33,505
San Antonio (7) 19,761
Philadelphia (5) 17,212
Average: 32,702
San Diego (8) 9,191
(excludes Houston)
San Jose (10) 6,150
5,000 20,000 35,000 50,000 65,000 80,000
Source: U.S. Census Bureau (2007)
26

27. Median Home Prices for Top 10 US Metro
Areas ($1,000)
Median home prices in Houston are less than half of
the average median cost for homes in other large US
metro areas
San Jose (10) $775
City (Population Rank)
San Diego (8) $602
Los Angeles (2) $585
New York (1) $469
Chicago (3) $274
Phoenix (6) $268
Philadelphia (5) $230
Average: $388
Dallas (9) $150 (excludes Houston)
Houston (4)
Houston (4) $149
San Antonio (7) $142
$100 $200 $300 $400 $500 $600 $700 $800
Source: U.S. Census Bureau (2007)
27

28. Cost of Living Index for Top US Metro
Areas (2005)
Low home prices are a key factor in Houston’s
favorable Cost of Living Index
New York (1) 213
San Francisco (14) 177
City (Population Rank)
Los Angeles (2) 153
San Diego (8) 141
Chicago (3) 129
Average of Top Metro Areas:
Philadelphia (5) 119 136 (excludes Houston)
Phoenix (6) 98
Dallas (9) 95
US Average: 100
San Antonio (7) 94
Houston (4)
Houston (4) 88
80 100 120 140 160 180 200 220
Source: ACCOR (2006) 28

29. MLS – Number of Listings & Months
Inventory
Housing inventory was at its highest level during the
early-1990s
Highest
inventory
45 12
40
10
Total Listings (1,000)
35
Months Inventory
30 8
25
6
20
15 4
10
2
5
0 0
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
20
20
20
Total Listings Months Inventory
Source: Texas RECenter (2008) 29

30. Energy Industry
While Houston’s dependence on energy has decreased
since the 1980s, the city’s prospects are still closely
tied to the industry’s health
84 In 1981, percentage of local economy tied to energy
48 Today, percentage of local economy that is related to energy
Number of energy-related establishments that are located within the
3,000+ Houston MSA, including more than 500 E&P firms and 150 pipeline
transportation companies
Number of publicly traded oil and gas E&P firms (out of 144 total) with a
43 presence in Houston, including 10 of the top 25
Percentage of the nation’s jobs in crude petroleum and natural gas
29 extraction
Number of the nation's top 20 natural gas transmission companies with
15 corporate or divisional headquarters in Houston
Number of the nation’s top 20 oil pipelines that have corporate or
12 divisional headquarters or ownership interests in Houston
30

31. Texas Medical Center
The Texas Medical Center is a hub of activity
5.5 million Approximate patient visits per year
10,000+ Number of international patients
6,500 Number of beds
10,000+ Number of MDs, PhDs and other doctorates
Number of RNs, LVNs, clinical caregivers, technicians, and medical support
26,000+ staff
73,600 Number of employees
13,500 Number of volunteers
108,150 Number of full-time (33,150) and part-time (75,000) students
Number of acres in the South Main area plus other locations throughout
1,000 Houston and internationally
Collection of hospitals (14), research centers, and medical schools (2)
46 comprising Texas Medical Center
Number of square feet of existing, under construction, and programmed
37 million physical plant space
$2 billion Approximate cost of buildings under active construction
52,500+ Number of existing parking spaces and those under construction
31

32. Port of Houston
The Port of Houston is ranked tenth in the world in
total tonnage, and is growing at a strong pace
• Among U.S. ports, ranked first in foreign waterborne tonnage and second in
total tonnage
• During 2007, it had the second highest growth rate among U.S. ports
relative to the previous year
• Centrally located on the Gulf Coast, Houston is a strategic gateway for
cargo originating in or destined for the U.S. West and Midwest.
– More than 17 million people live within 300 miles of the city, and approximately
60 million live within 700 miles
• Fuel prices have increased the importance of intermodal transportation
– Ample truck, rail and air connections allow shippers to economically transport
their goods between Houston and inland points
• Houston stands to benefit from the Panama Canal expansion
32