2012 market update from Harris County

Valuation Outlook for 2012

Harris County Appraisal District March 22, 2012 Agent Meeting

Positive Economic Trends

Oil prices have stabilized; on shore drilling has returned to a robust pace, off shore drilling in the Gulf lags pre-BP oil spill numbers

Houston has regained 111% of jobs lost during recession

Increase in sales tax revenue

Job Growth in 2012

The Greater Houston Partnership (GHP) forecast calls for the region to add 84,600 private sector jobs in 2012, with private sector gains far more than offsetting public sector losses.

Public sector will continue to shed jobs, particularly for school districts and colleges as a result of fiscal constraints

Factors Affecting Job Growth A series of policy barriers to local growth remain in

place:

Cap and trade

EPA regulations on carbon sequestration

End of manned space flight

Slow return to Gulf of Mexico drilling

Possible business model changes related to the Health Care Reform Act and reduced State of Texas budget

The European Debt Crisis

Outlook for Real Estate Recovery

The housing sector will rebound slowly as it continues to clear out the current inventory of foreclosures

Local job growth and energy sector will increase housing starts in second half of 2012.

Most of the new growth will be in Ft. Bend and Montgomery Counties.

The northern portion of Harris county will benefit from the new Exxon campus beginning in 2013.

National Obstacles to Real Estate Rebound

Strict lending standards

Uncertainty of government support of home ownership Possible scaling back of mortgage-interest income tax

deduction

Proposal on how to revamp the Fannie Mae, Freddie Mac and the broader mortgage market

2012 “Best Case” Scenario According to Greater Houston Partnership market

analysts,

“Houston has completed the recovery and is now in expansion mode.”

This expansion will hopefully begin to impact the 2013 tax rolls

HOUSTON/HARRIS COUNTY RESIDENTIAL MARKET TRENDS

• Average price of single-family homes in December was $219,791, flat over last year

• Median price rose 1.6 percent from one year earlier to $160,000 - All time high for December in Houston

Single-family Home Price

Single-family Sales Volume Sales of single-family homes increased in December for the

seventh time this year with a 7.2 percent gain. On a year to date basis, sales are up 4.3 percent.

Up from December

2010

7.2%

Available Inventory of Existing Single-family Homes

Month-end pending December sales were up 3.0 percent from last year

Active listings declined 14.1 percent over December 2010

Available inventory was reduced to 5.8 months compared to 7.2 months one year earlier Still remains favorable compared to national

average inventory of 7.0 months Resale market appears to be nearing a balance of

supply and demand

Townhouses and Condominiums Sales volume rose 3.2 percent compared to one year

earlier

Average price climbed 2.5 percent to $173,675 from Dec. 2010 to Dec. 2011

Median price declined 4.9 percent to $131,750

New Home Market

Houston has 6.9 months of new home inventory

Still a buyers market

New home starts paced to reach 17,000 for 2012

Down from 18,048 starts last year

New Home Starts by Price Distribution

Price Range Segment

< $99,999 $100,000 $149,999

$150,000 $199,999

$200,000 $249,999

$250,000 $299,999

$300,000 $399,999

$400,000 $499,999 $500k >

184 4,107 4,075 2,830 2,111 2,612 998 1,499

Source: Metrostudy

Parcel Creations

19,762 21,301

25,023

35,329 34,429

41,872 40,340 41,965

29,732

17,109

7,359 5,802 5,643

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30,000

35,000

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45,000

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Tax Year NOTES:

1. Minimum parcels to be created per sum of Lots and Reserves shown on recorded plats and

number of Units to be created from condominium declarations.

2. Number does not reflect street and right-of-way dedication parcels.

3. Data information is current as of Jan. 17, 2012 for instruments recorded up to Dec. 30, 2011.

Subdivision/Condo Recordings

471 575

724

927

1,188 1,310

1,388

1,592

1,815 1,701

1,791 1,754

1,443

946 944 980

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NOTES:

1. Plat/Instrument totals for each year were filed and recorded the previous calendar year.

2. 2011 count reflects instruments recorded up to December 30, 2011.

Local Obstacles to Housing Recovery

Greater restrictions on mortgage lending

Renting vs. Owning

Tightened capacity for construction lending

Land development

Demand vs. Availability

Most new development in Fort Bend and Montgomery Counties

Residential 2012 Valuation Overview

No Change Decrease Increase

Market Pct Chg

(with N/C)

Market Pct Chg

(minus N/C) Parcels w/ Caps

629,956 306,663 101,210 1.46% 1.10% 29,109

Total Res Parcels

Percent No Change

Percent Decrease

Percent Increase

Percent Capped

1,037,829 60.70% 29.55% 9.75% 2.80%

HOUSTON/HARRIS COUNTY APARTMENT MARKET TRENDS

Apartments Multi-family market near top of investor

demand

Considered least risky of major property sectors

Pronounced decline in new construction late 2010 and increase in renters created positive absorption during 2011

Apartments: Rental Rates and Absorption

Rental rate growth of 3.5 percent in 2011

Caused by failing home ownership and growing market of renters who previously opted to live with family

Positive absorption and higher occupancies have decreased concession offerings

In comparison to 2010, where 54 percent were given free rent, 45 percent of apartment communities are offering concessions as of December 2011

Apartments: Rental Rates/Occupancy/Concessions

Class # of

Properties Average

Rate Occupancy Concessions

A 358 131.7 92.6% -7.0%

B 1,021 88.9 91.1% -7.1%

C 1,043 68.6 83.9% -7.0%

D 488 47.9 77.4% -6.7%

Overall 2,910 86.1 87.6% -7.0%

Apartments: Capitalization Rates

Average cap rate by quarter has been erratic

Nationally, average overall cap rate for 2011 was 5.8 percent

Decline from 2010 rate of 6.51 percent

Locally, twelve-month rolling cap rate was 5.7 percent for 2011

Significant decrease from 2010 rate of 7.3 percent

Apartments: New Construction

Moderate increase over 2010

Twenty-six new complexes totaling 4,197 units opened for leasing activity

Ten of twenty six are senior housing

Proposed construction of 39 properties totaling 12,602 units

HOUSTON/HARRIS COUNTY COMMERCIAL MARKET TRENDS

Change in Office Valuation Model

Market trends indicate net rental rate should be used in place of full service rate

HCAD changed the office model for Class ‘A’ Office and Class ‘A’ and ‘B’ Medical-Offices

Commercial Real Property Office Buildings

Signs of market stabilization:

Increase in 2011 sales dollar volume and leasing activity

Decrease in vacancies

Increase in rental rates

Office New Construction Remained slow throughout the Houston area

2,484,237 square feet under construction during 2011

Pre-leasing remains prerequisite for construction

Slowing of construction buffered the office market from more dire predictions

Notable 2011 deliveries include:

BG Group Place with 972,474 square feet at 70 percent occupancy

Hess Tower with 844,763 square feet at 100 percent occupancy

Office Building Vacancy

2011 vs. End of 2010 Class ‘A’

12.7% down

from 13.3%

Class ‘B’

13.6% down

from 14.3%

Class ‘C’

10.8% down

from 11.1%

Overall office

vacancies

have

decreased to

12.8%

Office Building Rental Rates Slight decrease in

vacancy rate

4th quarter sales up over 3rd quarter

• Creating upward pressure on rental rates

• Reduction in concessions through 2011

All classes reflect increases in 2012 compared to 2011

Office Buildings: Absorption Preliminary reports indicate Houston absorbed 2.8

million square feet in 2011

Up from negative absorption of 320,000 square feet in 2010

Gravitation toward quality with tenants transitioning from Class ‘B’ to Class ‘A’ office space

Occupied by energy and related firms

Office Buildings: Capitalization Rates

Average cap rate for all Harris County office buildings in 2011 was 8.03 percent

Noticeably lower than the average of 9.39 percent for year-end 2010

Overall cap rates expected to decrease by 25 to 125 basis points

(The lower the cap rate, the higher the value)

Office Buildings: 2012 Valuation

Increase projected in all classes of office space County wide

Double digit increase in occupancy and rental rates have resulted in lower cap rates which translates to higher values

Medical Office Buildings/Condos

Medical real estate is faring better than other property types due to:

Aging baby boomers demand for health care services

Relocation of some medical procedures to outpatient settings, such as surgical centers, imaging and diagnostic centers, and free-standing 24-hour emergency care centers

Medical Office Buildings/Condos

Outperforms traditional office space

Stabilized occupancy and rental rates

Long-term leases

Creditworthy tenants

Steady income streams

Considered safer investment

REIT’s actively seeking Class “A” medical office buildings located in compounds

Medical Office Buildings/Condos: Rental Rates

Class

Texas Medical Center

PSF Rate Type Suburban Markets

PSF Rate Type

A $15.00 - $23.00 NET $12.00 - $21.00 NET

B $12.00 - $18.50 NET $8.00 - $18.50 NET

C $16.00 - $19.00 FULL

SERVICE $13.00 - $17.50

FULL SERVICE

D $14.00 - $16.00 FULL

SERVICE $10.00 - $13.00

FULL SERVICE

Medical Office Buildings/Condos: New Construction

New construction slows due to uncertainty of how health care reform will impact industry

Developers cautious on speculating

However, demand for medical care from growing population will require additional space

According to the U S Census Bureau, Harris County’s general population has been growing at an average of 2.3 percent per year

Retail Increased occupancy

Overall vacancy rate decreased to 6.7 percent in 2011 from 8.2 percent in 2010

Positive absorption of 979,791 square feet in the 4th quarter of 2011 Exceeded positive absorption from 2010

Rental rates slightly down from 2010 Reduced amount of new construction

Expected that positive absorption will correct supply and demand in overbuilt markets causing upward pressure on rents

Retail: Vacancy Highs and Lows

Highest vacancy rates are in the Far North and Lake Houston areas

about 12 percent

Lowest rates are in the Galleria and Uptown areas just outside the CBD

Less than 2 percent

Retail: Rental Rate Highs and Lows

Highest rental rates were in Downtown, Galleria, and areas inside the West Loop, such as Greenway Plaza and River Oaks

Rents ranged from $25 - $36 per square foot

Lowest rates were in Pasadena, Galena Park and Channelview school districts

Rents ranged from $10 - $12 per square foot

Hospitals

Expansion and renovation projects continue

Hospital Corporation of America’s West Houston Medical Center

The Women’s Hospital of Texas West Houston

Clear Lake Regional Hospital

Values likely to increase slightly

Malls Positive net absorption in 2011

Vacancy rate remained at 7.0 percent in 2011

Rental rates increased from $22.90 per square foot to $23.76 per square foot

General Growth, which owns Baybrook, Deerbrook and Willowbrook malls has received $500 million in pledges to help it emerge from bankruptcy and grow the value of its malls

These properties are in litigation for 2011

Department Stores Of the 59 stores in Harris County only 44

remain open Sears reported decreased sales in 2011 and

announced the closing of some stores in region Dillard’s Houston sales remained flat while JC

Penney reported sales were up Macy’s reported eight stores with increases,

some double digit and two stores with decreases

Nordstrom and Neiman’s project increased sales of 4-10 percent and 3-5 percent, respectively

Hotels-Motels Average daily rates have increased by 2.8 percent in

2011

Overall, Revenue Per Available Room (RevPar) increased an average of 6.2 percent in the Houston area

Area-wide occupancy rose to 57.7 percent in 2011, and is expected to be about 63.2 percent in 2012

Values will be increasing slightly

Warehouses Fourth quarter reports indicate that industrial

warehouse market has started to stabilize Net absorption was positive and overall vacancy rate

decreased to 5.0 percent New speculative construction activity has picked up Most new construction pre-leased Demand for new projects will continue as amount of

available space shrinks

Rental rates have experienced slight increases and capitalization rates have declined slightly

Economic drivers pointing to recovery in this property type and they will see a slight increase in values for 2012

Vacant Land Land sales through fourth quarter were 844 in

2011 compared to 588 in 2010 Only 62 were foreclosure and 130 were auction sales

Sustained demand for land near CBD, Texas Medical Center, West Houston, and inside the loop

Lenders slowly financing new projects, but more selective

Investors still concerned with uncertainty in the economy

Vacant Land: 2012 Valuation

Amendments to the restrictions on development in City of Houston floodways

Flattening of appraised land values

Despite slight increases or decreases, the market is showing signs of improvement

Similar to the national market, local market participants are waiting for further developments

During construction of the light rail project, properties along the rail line will decrease 15 to 20 percent in appraised value

HOUSTON/HARRIS COUNTY INDUSTRIAL MARKET TRENDS

Refineries Total U.S. refined product consumption

currently for 2011 has been less that 2010, but greater than 2009

Inventories of crude expected to be consistent with 2011, but per barrel pricing will be higher

Increased product margins for refiners in U.S. Healthy global demand Natural gas prices remain relatively low

Gulf Coast refiners impacted by crude price differences

Refineries: 2012 Valuation

It is expected that refinery values and inventories will be higher (double digit) in 2012 relative to 2011.

Chemicals Chemical-related inventory volumes should be

near the levels they were on January 1 of 2011

Value changes for most chemical facilities look to be flat or down coming into 2012, but up for olefin plants due to lower natural gas prices

Chevron Phillips closing operations of their Pasadena Polypropylene plant

Utilities: Electric

Values are expected to increase in 2012 compared to 2011

CenterPoint Transmission and Distribution operating income was up 7.9 percent for the first half of 2011 compared to the first half of 2010

Since income is a major factor in the unit valuation for CenterPoint, the increase in income will be reflected in the total value for 2012

Utilities: Gas

Companies in the Natural Gas Utility industry have continued to struggle

Softness in the housing market, a persistently high unemployment rate, and a lukewarm pace of the GDP growth rate have all weighed on this sector

Public’s concern over lingering recession has increased conservation and stunted revenue growth for this industry

Utilities: Gas Storage

Facilities will have little change in the infrastructure and will result in a flat value of the plant and equipment for 2012

Gas volumes are expected to remain stable for 2012. However, natural gas pricing was up 4.3 percent in 2011 from the previous year

Recent court rulings have indicated that large volumes of stored gas are in interstate commerce therefore exempt(1st court) or that they are taxable(2nd court)

Utilities: Telephone

Telephone Utilities’ overall should continue to decline

The continued competition from customers relying solely on cell phones and Voice Over Internet Protocol (VOIP) offered by cable companies will continue to have a negative effect on values

Utilities: Cable Cable companies are looking at a decrease in value

due to limited investment, depreciation of their current assets, and the poor economy

The futures of cable and telephone companies are unstable due to intense competition in their market

Ability for these industries to provide phone, television, and Internet has led to a very challenging economic environment for both industries

Telecommunications will continue to get less expensive as technology advances

HOUSTON/HARRIS COUNTY BUSINESS PERSONAL PROPERTY MARKET TRENDS

Dealer Inventory Total value of Dealer Inventory increased 9.58

percent in year 2011

Increase of 34.6 percent in vehicle sales for 2011 over 2010

Since the value of the inventory is directly tied to the prior year vehicle sales, an increase in value for 2012 is anticipated

Business Personal Property

Overall, personal property tax base declined approximately 1.72 percent for tax year 2011

Value for this sector is expected to stabilize for 2012 as economic optimism gains momentum

2011- January 2012

Taxable Value Pct. Difference 2010- January 2012

Category Parcel Tax Val Parcel Tax Val

Residential 1,029,694 117,665,396,564 0.91% 1,020,708 116,605,524,436

Apartments 13,960 18,430,270,405 4.15% 14,014 17,696,281,106

Commercial 57,048 63,403,439,123 5.98% 56,752 59,825,142,062

Vacant Land 164,163 9,519,480,473 -2.71% 170,133 9,784,732,334

Industrial 2,037 15,439,813,61 6.29% 2,047 14,525,916,034

Utilities 7,517 4,215,369,028 -1.82% 7,370 4,293,672,578

Commercial Personal 163,721 23,691,823,055 -0.55% 164,449 23,823,978,598

Industrial Personal 10,202 24,172,943,559 2.34% 10,336 23,619,484,610,

Other 104,160 569,922,805 -21.11% 104,097 722,423,422

Totals 1,552,502 277,108,461,773 2.29% 1,549,906 270,897,155,180

Harris County 2011 vs. 2010 Taxable Value Comparison

($$$ BILLIONS $$$)

Overall % Change

Property Category 2011 Tax Base

2012 Tax Base

Residential & Rural Improved $117. 665 $117.869 0.0017

Apartments $18.430 $20.410 0.1074

Commercial $63.404 $67.645 0.0669

Vacant Land $9.520 $9.893 0.0392

Industrial Real $15.439 $16.348 0.0588

Utility $4.215 $4,160 -0.0132

Commercial Personal $23.692 $23.604 -0.0037

Industrial Personal $24.173 $22.722 -0.0600

Other $0.570 $0.634 0.1124

2011 Roll: January, 2012

Harris County – Preliminary Estimate of 2012 Taxable Value

2011 Roll Value 2012

Net Total Net

Pct. Chg

$277.108 $283.285 2.23%

Changes in the Value Base and 2012 Estimated Taxable Value

$175 $184 $193 $205

$225 $253

$279 $281 $271 $277 $283

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