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REAL ESTATE 2013 State of the Industry
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BoyarMiller Real Estate eBook August 2013 State of the Industry

Aug 31, 2014

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Page 1: BoyarMiller Real Estate eBook August 2013 State of the Industry

REAL ESTATE

2013 State of the Industry

Page 2: BoyarMiller Real Estate eBook August 2013 State of the Industry

Chairman’s Letter

To Our Readers,

At BoyarMiller, when we partner with clients, we work as

a strategic part of their business team, and that means

we have to be experienced in more than just law. We also

need to understand their industry so that we are able to work

collaboratively with them and add value to their business.

That’s why we bring together the top insights into industry trends

and best practices, and deliver it to you. Not only has this infor-

mation been invaluable to us and to our clients, but we hope

it will be beneficial to you as well.

The information in this publication has been gathered from

industry-leading clients we have partnered with and from our

own energy team. If you find value in it and would like to hear

more, join us for our next BoyarMiller Breakfast Forum.

Sincerely,

Chris Hanslik

Firm Chairman

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Page 3: BoyarMiller Real Estate eBook August 2013 State of the Industry

TABLE OF CONTENTS

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Page 4: BoyarMiller Real Estate eBook August 2013 State of the Industry

Your strategic partner should be an expert in your industry, not just law.At BoyarMiller, we’re committed to providing insightful, versatile expertise to organizations

of all sizes as we guide them through complex business issues. We know that in order

to understand how best to collaborate with you, we need to know your industry and

your business.

To this end, we gathered the best insights into industry trends and best practices from

industry-leading clients we have partnered with and from our own real estate team. It’s our

hope that the information we’ve accumulated through years of collaborative work in the

real estate industry will be beneficial for you.

INTRODUCTION

Your strategic partner requires knowledge of trends, industry and law.

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Page 5: BoyarMiller Real Estate eBook August 2013 State of the Industry

Houston – A National AnomalyJOB GROWTHAs the nation’s economy continues its slug-

gish recovery, Houston continues to reap

the benefits of being a center of industry

and a gateway city for international trade.

Houston added 86,600 jobs over the past

year, leading the state. The city’s job growth

represented 5% of the nation’s, which

totaled 1.7 million new jobs nationwide.

Houston’s 5.8% unemployment rate at the

end of 2012 puts the city significantly ahead of the national average of 7.4%. In addition,

Houston’s job growth rate rose to 4% over the year, outpacing the state and the nation.

POPULATION GROWTHIn the wake of the recession, population growth has coincided with job availability across

the nation, and Houston has been no exception. Houston’s population has increased by

roughly 125,000 per year over the last decade, and the city is expected to lead population

growth for decades to come.

STATE OF THE INDUSTRY

86,600 NEW JOBS

6.08M people in the Greater Houston area

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Page 6: BoyarMiller Real Estate eBook August 2013 State of the Industry

TOP INDUSTRIESEnergy – In January 2012, employment in oil and gas extraction grew at an 8.7% annual

rate and peaked at 11.1% in May, but by November the rate settled in at 3.6%. While those

rates remain above the 3.2 percent overall employment growth rate for the region, the

slower pace suggests energy will not be as strong of an economic driver in 2013 as it

was in 2012.

Healthcare – Over the last five years, healthcare job growth has outpaced employment

trends overall. Healthcare jobs accounted for one out of every six jobs created in 2012.

Nearly 300,000 news jobs were created in the healthcare industry last year.

Foreign Trade – More than $231.6 billion in foreign trade passed through the Houston-

Galveston Customs District in the first 10 months of 2012, a 4.8% increase from the same

period in 2011.

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Houston – A National Anomaly, continued

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Residential MarketWHAT SETS HOUSTON APART?Houston’s residential real estate market is uniquely flexible. Without strict zoning laws and

bureaucratic control over land development, the city is allowed to grow according to

human intuition, evolving naturally according to the needs of the population. Because of

the flexible free market, Houston experienced neither the bubble nor the bust that the rest

of the nation experienced in the mid-2000s.

2013 PREDICTIONSWill Holder, President, Trendmaker Homes

• POPULATION WILL DOUBLE IN THE NEXT 25–30 YEARS Projections by the Texas State Data Center put Houston at nearly double its current size in

2040 as a result of continued job growth and immigration.

• BUILDING WILL EXPAND TO MEET NEEDS Home building is at two-thirds the level it needs to reach to meet the growing demand.

With continued job and population growth and MLS listings lower than they were a

decade ago, building will have to increase over the next several years.

• REAL ESTATE PRICES WILL RISE The industry was stripped of much of its production capacity during a recession that

slowed building and forced the closing of plants nationwide. This, combined with the

scarcity of high-quality lots as lot absorption continues to double lot delivery will mean

higher prices in the near future.

• RESIDENTIAL MARKET WILL BE STRONG Rental costs are at a premium, demand will continue to grow and prices can only be

expected to rise. All signs point toward a seller’s market and real opportunities for home-

builders in coming years.

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Will Holder has worked in the homebuilding and residential land develop-ment industry for more than 30 years in Houston and in several other U.S. metro markets. He joined Trendmaker homes in 1993, and has led the company to become the leader in luxury production homebuilding and MPC development. Will is the 2012 president of The Greater Houston Homebuilders Association and a guest expert on Real Estate forecasts and homebuilding trends for local and national news, radio, TV, magazines and newspapers, including Fox Business Report and USA Today.

Page 8: BoyarMiller Real Estate eBook August 2013 State of the Industry

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Retail MarketWHAT SETS HOUSTON APART?The retail market is dependent on the job market, and Houston has a matchlessly vibrant

job market. Markets with explosive population growth like Katy are seeing sales up by

20–30%. Even in longer-established areas in the east side of Houston, centers have low

vacancy and stores report high sales. Houston is a stable market with stable housing

and stable retail performance.

2013 PREDICTIONSJay K. Sears, Managing Partner, NewQuest Properties

• CONSUMER SPENDING WILL CONTINUE TO IMPROVE For retail to do well, consumers have to feel confident that there is money in their pocket,

and the consumer sentiment index is on an upward swing. Texas and Houston outpaced

the nation in retail sales in 2012 and will continue to improve.

• INTERNET SALES WILL NOT KILL BRICK-AND-MORTAR STORES Although Internet sales continue to grow at about 15% per year, they still represent just

over 5% of the overall retail sales. Good retailers see the Internet not as a growing threat,

but as a chance to enhance their own online platforms and deliver a more meaningful

experience to shoppers in the store and on the Web.

• HOUSTON WILL LEAD RENT GROWTH In well-anchored centers, Houston leads the nation in rent growth and is projected to

lead it over the next five years. Competition is high for Class A anchored space. Not a lot

of new product is being built; significant numbers of big box centers will not be built any

time soon.

• GROCERS WILL BE INNOVATIVE Well-established grocers like Kroger that continue to reinvent themselves are posting pos-

itive sales. In Houston, there is also a growing market for dynamic, niche grocers like

Trader Joe’s and Fresh Market.

Jay Sears is a 27-year veteran of the retail/commercial brokerage and development industry. As a co-founder and managing partner of New-Quest Properties, Jay focuses on new development opportunities, on the leasing activities of NewQuest’s development pipeline and on managing key client relationships with retailers and clients. Jay is a member of the International Council of Shopping Centers (ICSC), a member of the Urban Land Institute, a member of the Rice Design Alliance, and is also involved extensively with KIPP-Houston, serving on their Board of Trustees.

Page 9: BoyarMiller Real Estate eBook August 2013 State of the Industry

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Office MarketWHAT SETS HOUSTON APART?Obviously, Houston is a large city, with almost 200 million square feet of office space in the

Greater Houston area. Growth in the office market is driven by a strong economy and job

growth, two things Houston has delivered throughout the recession and as the nation

recovers. Houston is perceived as a business-friendly climate, and that is a driver for the

office real estate market.

2013 PREDICTIONSRobert S. Parsley, Co-Chairman/Principal, Colliers International

• DOWNTOWN’S ALLEN CENTER WILL BRING BIG BUSINESS Because of relocations by current tenants, more than one million square feet of space

are available in Allen Center. This is a huge opportunity for a large company or compa-

nies who want a Central Business District location in this city.

• HOUSTON WILL REMAIN A MAGNET FOR BUSINESS The energy industry is a huge part of Houston’s economy and energy companies con-

tinue to be attracted to the Energy Corridor and Westchase, where they can take

advantage of proximity to residential and recreational amenities in the area. Even as

economic concerns continue, office leasing activity will be robust.

• GREATEST GROWTH WILL BE IN SUBURBAN SUBMARKETS There will be continued growth in The Woodlands, Westchase and the Energy Corridor.

The Woodlands in particular is exploding; when Colliers began a new building project in

the area, it was 96% leased as they broke ground.

• COMPANIES WILL LEAVE GREENSPOINT Greenspoint saw negative absorption in 2012 and will likely see a mass exodus of compa-

nies looking to move because of concerns about security, perceptions and attracting

the youngest generation of workers.

Bob Parsley has been involved in and responsible for all phases of commer-cial real estate brokerage activity for the past 29 years. A native Houstonian, he combines real estate experience with an understanding of the legal issues involved in real estate transactions. Bob became Colliers International Co-Chairman in 2004. He has served as director of numerous organizations, including Strake Jesuit College Preparatory, Development Board of the Univer-sity of Texas – Houston Health Science Center, Houston Area Urban League, Houston Office Leasing Brokers Association and Leadership Houston.

Page 10: BoyarMiller Real Estate eBook August 2013 State of the Industry

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Industrial MarketWHAT SETS HOUSTON APART?Houston has been called the energy capital of the world and city of opportunity because

industry is booming here. The Houston industrial real estate market totals about 834 million

square feet, and there are two million square feet under construction – a supply that signif-

icantly trails demand. Houston’s industrial vacancy rate is 4.8%, in stark contrast to the

nation’s average of just under 10%.

2013 PREDICTIONSWelcome W. Wilson, Jr., President & CEO, GSL Welcome Group

• DEMAND FOR CRANE-READY BUILDINGS WILL GROW A growing demand in the industrial market is for crane-ready buildings, and builders are

already responding. Warehouse and distribution centers will need to be able to accom-

modate the large parts and equipment for the oil and gas industry as they restaff and

restage the oil and gas activity around the world.

• HOUSTON WILL GROW EVERYWHERE – NOT JUST THE NORTHWEST CORNER Job stability is giving everyone in the industrial sector the confidence for more spec

products to meet the demand for warehousing. This is not restricted to the northwest and

north submarkets, although those are the most active, with 603,000 square feet and

284,000 square feet of absorption in 2012, respectively.

• PORT OF HOUSTON WILL SEE INCREASED ACTIVITY The Panama Canal expansion is target to open in late 2014, which will mean a boost for

the petrochemical companies located on the Gulf Coast, as the canal will be able to

support bigger LNG tankers with more cargo. Houston will be making the long-term

investment to deepen the Houston ship channel to handle this bigger product.

• CAP RATES WILL BE DRIVEN DOWN Institutional buyers and investors are under allocated in industrial, meaning a push to get

more space. There will be twice as many bidders for every Class A industrial project, and

there is very little product scheduled to come on the market in 2013.

As President & CEO of GSL Welcome Group, Welcome oversees the devel-opment, leasing, construction and purchase of single tenant office, lab, manufacturing and industrial facilities in Texas. A real estate developer for more than 35 years, he has extensive experience in industrial develop-ment, residential subdividing, retail centers and office buildings. He also serves as principal of Kingham • Dalton • Wilson Ltd., a Design/Build affili-ate of GSL Welcome and is Director of River Oaks Financial Group, Inc.

Page 11: BoyarMiller Real Estate eBook August 2013 State of the Industry

ARTICLE FOR LANDLORDS

Negotiating Alignment, Not Agreement: A Guide to Effective TenantBy Bill Boyar

A well-prepared negotiator can be manipulation proof, avoid the second-guessing and

achieve valuable results. This article provides an approach that can better prepare you for

negotiating with tenants and help produce valuable results.

MOST NEGOTIATORS TRADITIONALLY FALL INTO ONE OF THREE CATEGORIES:

• Position-Driven, negotiators driven by leverage and a desire to win.

• Affinity-Driven, your classic “win-win” people.

• Criteria-Driven, negotiators who use objective criteria to assure fair market outcomes.

All three of these styles leave room for being manipulated and second-guessed. So, is there

a different and more valuable approach? We say it’s Alignment-Driven negotiations. Align-

ment-driven negotiations have five cycles: Research, Align, Design, Confer and Close.

RESEARCHTruly effective negotiators prepare, and this starts with extensive Research. In the context

of negotiating with a tenant, you should understand everything you can about the tenant

— its business, industry, financial condition, market share, growth prospects, senior manage-

ment team, other offices in other locations, leasing history, etc. In addition to research

about the tenant, your research should include in-depth analysis of your lease space, your

building, market alternatives, competitive properties, trends, absorptions and vacancy, etc.

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ALIGNInternal alignment starts with a clear understanding of your organization’s senior purpose

and the outcome that you are trying to achieve. External alignment involves taking into

account the tenant’s issues, purposes and concerns. Your objective is to attempt to find

the critical intersection of: 1) the facts, 2) your organization’s issues, purposes and con-

cerns, and 3) the tenant’s issues, purposes and concerns.

DESIGNIn the Design phase, you are encouraged to work on the actual design of the negotiation

conference. Where will the meeting be held? Who will be present? Who will be doing the

talking on which subjects and issues? Who will control the agenda, timing and flow? Once

these questions are answered, the next step is to practice. Yes, practice. Even the most

skilled negotiators practice, and so should you.

CONFERThe Confer cycle involves the management of the actual conference. When conferring,

the most effective negotiators clarify an essential purpose and reveal intersections for

actions. They have genuine appreciation for various views and factors and research where

they intersect to identify new insight and opportunity.

CLOSEOnce the negotiations session ends and an agreement is made, the real work begins —

the deployment of time, money and talent. It is up to you to make sure that the agreement

is executed (put in writing) and that resources are effectively deployed. Finally, you should

debrief your organization on the negotiations, including all five cycles.

LEARN MORE ABOUT EFFECTIVE NEGOTIATING IN THE FULL ARTICLE.

Article for Landlords, continued

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Page 13: BoyarMiller Real Estate eBook August 2013 State of the Industry

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ARTICLE FOR INVESTORS/BORROWERS

Borrowers BewareBy Timothy J. Heinrich

Over the past seven to eight years, many real estate investors-borrowers have been

enticed by lenders and mortgage brokers to eschew the more traditional forms of real

estate financings in favor of “securitized” loans. Securitized loans are commercial real

estate loans that are pooled with other similar loans and sold as securities. They are

sometimes referred to as “commercial mortgage-backed securities.”

Lenders and mortgage brokers often promote securitized loans to real estate investors

as a cheaper and safer form of financing. Of course, many real estate investors and their

attorneys long ago caught on to the fact that any cost-savings associated with lower

interest rates are quickly eaten up by the lenders’ fees, the mortgage brokers’ fees, the

lenders’ attorneys’ fees and due-diligence expenses.

Despite the additional fees and costs associated with securitized loans, many real estate

investors believe these higher fees and costs are worth the price of obtaining a nonre-

course loan. However, in our practice, we are beginning to see first-hand what appears

to be a disturbing trend as lenders and their attorneys try to strip away the nonrecourse

security blanket and leave the borrower — and most importantly its individual principal(s)

— exposed to full recourse liability for the repayment of the loan.

The best way to describe how lenders and their attorneys attempt to turn nonrecourse,

securitized loans into full recourse loans is classic bait-and-switch marketing. The lender

or mortgage broker convinces the borrower to enter into a securitized loan with promises

of low rates, long terms and no personal liability — except, of course, for the “standard

carve-outs.” The loan application simply describes these standard recourse carve-outs

as fraud, misapplication of funds and “other customary items. “

The principal’s “limited recourse” obligations subsequently are expanded in the loan com-

mitment, and the phrase “other customary items” mushrooms into a laundry list of items

that, if triggered, will result in personal liability for the borrower’s principal. Although most

of these triggering events are limited to “bad-boy” events (fraud, misapplication of funds,

failure to pay taxes, etc.), sometimes hidden in this lengthy list is an unassuming reference

that the borrower will continue to maintain its status as a single-purpose entity.

How does this potentially result in personal liability for the borrower’s principal? Assume

that the borrower owns a 75,000-square-foot shopping center anchored by a large dis-

count retailer occupying 50,000 square feet. Suppose this large discount retailer files for

bankruptcy, rejects the lease and the borrower is unable to find a replacement tenant.

The borrower, lacking the cash flow to make the payments required under the loan, offers

to deliver and convey the property to the lender. The lender, instead of accepting its

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collateral, counters by asserting that the borrower’s principal is personally liable under

the loan. The lender reasons that if the borrower cannot pay its debts as they become

due, the borrower must be insolvent. If so, the borrower violated its single-purpose status

and triggered the principal’s personal liability.

In short, with maintaining solvency and adequate capital as single-purpose entity

requirements, lenders may attempt to use these requirements as a sword and a shield

when faced with the possibility of taking back an underperforming property. Borrowers

and their counsel must be steadfast in their resolve to remove such single-purpose require-

ments or be prepared to walk away from these “cheap and safe” loans.

LEARN MORE ABOUT WHAT TO LOOK FOR IN A COMMERCIAL LEASE IN THE FULL ARTICLE.

Article for Investors/Borrowers, continued

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Page 15: BoyarMiller Real Estate eBook August 2013 State of the Industry

Bill Boyar Shareholder, Business Group

Represents the various parties involved in the acquisition, disposition,

capitalization and financing of national and international busi-

nesses. Served as lead counsel for numerous complex, multi-party

acquisitions and project financings with significant experience in

corporate finance, mergers and acquisitions, private equity and

structured finance.

Cassie B. Stinson Counsel, Business Group

My practice focuses on commercial real estate and finance,

public/private projects, business transactions and public law,

with a particular emphasis on complex projects and multi-party

transactions. I have significant experience with office, heavy

industrial and manufacturing, multi-family, hospitality and

restaurants, institutional facilities and governmental infrastructure.

REAL ESTATE PRACTICE LEADERS

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Stephen L. Johnson Shareholder, Business Group

My practice has been primarily devoted to commercial real estate

law, transactional law, commercial transactions and general

corporate representation. My real estate practice includes the

financing, acquisition, development and disposition of commer-

cial real estate, with an emphasis on hospitality and commercial

office and retail.

Timothy J. Heinrich Shareholder, Business Group

My focus is on real estate law and commercial transactions.

My real estate practice is devoted primarily to the acquisition,

development, financing and disposition of all product types

of commercial real estate.

Lee A. Collins Shareholder, Litigation Group

A significant focus of my practice relates to the representation

of developers, owners and managers of commercial real estate

in state and federal court, including tenant disputes, easement

and restrictive covenant enforcement, condemnation, adverse

possession, construction litigation, lien enforcement and creditor

bankruptcy representation.

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