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

O’Connor & AssociatesLand Forecast Luncheon

October 22, 2008

2

Situs provides a wide range of commercial real estateservices, including the following brokerage services

• Represent individuals, institutions, and public companies buying,selling, leasing and repositioning commercial properties– Land Brokerage

– Investment Sales

– Project Leasing

– Tenant Representation

– Asset Repositioning / Dispositions

– Entitlement & Development

– Sealed Bid Sales

– Note Sales

– Highest & Best Use Analysis

– Asset Management

Services Offered

Rated as a Special and PrimaryServicer by

Approved by

Rated as a Special and PrimaryServicer by

Approved by

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Desired Outcome of Today’s Discussion

• Review the dynamics of activity in Houston fromthe 1980s through today

• Discuss role of land and land development inHouston’s future

Note: This presentation has been modified slightlyfrom the version presented at the O’Connorluncheon to include new text slides that provideadditional color on the charts

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Flight to the Suburbs (1946 – 1980)

• Prior to this time, people lived, worked and played in the innercity

• First people, then retail, then jobs moved out of the city andinto new subdivisions, malls, and office parks in suburbanareas

• 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 bythe regional suburban malls

• By the mid-1970s, Houston newcomers generally had littlealternative but to locate in the suburbs for desirableneighborhoods and quality public schools

The suburban transformation began in 1946 when theGIs returned home from World War II

5

Houston Population

* Figures represent the City of Houston and not the MSASource: U.S. Census Bureau (2007)

Since 1950, Houston’s* population has increased anaverage of 33% per decade, resulting in explosivegrowth

Pop

ulat

ion

(1,0

00)

0200400600800

1,0001,2001,400

1,6001,8002,000

2,200

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

2006

e

4

4

45

6

7

14

2126

456885

Rank amonglargest US

cities

2% growthin 1980s

6

The 1980s offered Houston the best and worst oftimes – a boom and a bust

A Tale of Two Cities (1980 – 1990)

• Early-1980s saw a significant level of suburbanresidential development

• Suburban retail and office development followed

• A major catalyst was unrealistic optimism that theoil boom would continue – oil bust began in 1982

• 1985 was the beginning of the S&L crisis that ledto creation of FADA & RTC

• Real estate industry was further exacerbated bythe Tax Reform Act of 1986 and national recessionin the early-1990s

BoomBoom

BustBust

7

Housing Starts

Relatively speaking, there was little new residential landdevelopment in the early-to-mid 1990s

0

10

20

30

40

50

60

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Single Family Units Multifamily Units

Num

ber

ofU

nits

(1,0

00)

Steep decline inhousing startsbegan in 1984

Steepest dropsince 1985

Peak reflected artificialdemand fromsubprime lending

Source: Texas RECenter (2008)

Higher levels than 1980s or 1990s

8

• RTC, created in 1989, began mass liquidation of assets taken backfrom failed thrifts through sealed bid sales and auctions

• Many properties, including commercial and residential land, wereacquired at distressed prices that were significantly below the costof developing new raw land

– Finished lots

– Partially developed subdivisions

– Commercial reserves

• Commercially, there was not a lot of significant construction as themarket was absorbing existing office and retail

• Many out of state buyers that were new to Houston

Distressed asset sales by RTC, FDIC, etc. were thecatalyst for much of the activity during this time frame

Distressed Land Sales (1990 - 1995)

9

• Many raw tracts of land acquired during the early-1990s werelater developed in the late-1990s and early-2000s

• As pressure increased on homebuilders to produce more lotsin the early 2000s, residential builders entered landdevelopment business

• From 2001-2006, homebuilders drove up the price forresidential land

The sheer volume of land sold during this period hadan effect in subsequent years

Distressed Land Sales (1990 - 1995)[continued]

10

0

10

20

30

40

50

60

70

80

90

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

$0

$50

$100

$150

$200

$250

Sales Average Price

Sal

es(1

,000

)A

verageP

rice($1,000)

Houston MLS Residential HousingActivityAs a result of the rising costs related to land,infrastructure, and construction, the average homesales price has continued to increase

Minimalgrowth

Decliningprices

First declinesince 1992

Source: Texas RECenter (2008)

11

ResidentialResidential CommercialCommercial

• Many residents – old andnew Houstonians – havemoved to the core

• Reasons for movinginclude traffic issues,proximity to work, and adesire for diverse culture

• Tremendous priceappreciation in “older”neighborhoods

• Pent-up demand for urbanproperty is evident inpricing

• Inner loop commercial landhas been selling for 6 to 10times more per square footthan similar suburban sites

• Many older properties havebeen purchased at landvalue for redevelopment ashigher-density commercialand residential

The Inner City’s Comeback (1995 – 2007)

12

ResidentialResidential CommercialCommercial

• Affordability enablespeople to buy biggerhomes on larger lots

• Many suburbanites preferto live in new homes inmaster-plannedcommunities

• Desire for quality publicschools

• Proximity to employmentcenters

• The residential growth inthe suburbs has resulted insignificant commercialgrowth

• Desire for suburban livinghas increased due to theexistence of suburbanemployment centers

• Prevalent trend of locatingcompanies closer toemployees

Still Moving to the Suburbs (1995 – 2007)

13

• Competition for prime corners and sites significantly drove upprices

• Pricing was no longer based on comparables; rather, it wasbased on planned use

• Flow of information (transparency) has impacted howbusiness is done

• Expectations among buyers and sellers have risen

Commercial land prices were driven up over the pastseveral years

Surging Commercial Land Prices (2000 –2007)

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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 housingcosts that are 23% below the average

Source: ACCRA (2008 Q2 )

15 0 15 30 45 60

San Francisco

New York

Washington

Boston

Miami

Denver

National

Phoenix

HoustonDallasAtlanta

Average of 318 urban areas

15Source: U.S. Census Bureau (2007)

4,000

4,200

4,400

4,600

4,800

5,000

5,200

5,400

5,600

4.33MM

5.54MM

Pop

ulat

ion

(1,0

00)

1996Population

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2006Population

Annual Average Growth: 120,500 residents

Total Growth: 27.8%

93.4K107.6K

109.6K70.9K

129.7K123.0K

106.1K102.5K

103.4K259.9K

Houston MSA Residential PopulationGrowth (1996–2006)Houston has experienced steady growth over the pastdecade, with the largest one-year surge occurring in2006

16Source: Texas Workforce Commission and Real Estate Center at Texas A&M University (2007)

1,900

2,000

2,100

2,200

2,300

2,400

2,500

1.98MM

2.45MM

Pop

ulat

ion

(1,0

00)

1996Jobs

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2006Jobs

Annual Average Growth: 46,400 jobs

Total Growth: 23.4%

82.7K

103.0K

34.5K52.6K

39.0K-5.1K -14.3K 15.6K 60.4K

95.8K

Houston MSA Employment Growth(1996–2006)Houston’s residential growth correlates directly to itsstrong employment growth over the same period

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TrendsTrends ImpactImpact

• Risk being re-priced

• Cap rates increasing

• "Easy" financing no longeravailable

• Financing only available for strongand experienced borrowers

• Retailers slowing growth withsome closing stores

• Banks and drug stores pullingback

• Housing starts slowing

• Foreclosures / REO propertiesincreasing

• Land prices decreasing

• Contract terms softening

• Sales activity slowing

• Development activity decelerating

• Transactions being re-traded

• Owner financing on horizon

• Investors with cash on sidelines,waiting to see how far prices drop

We expect some commercial real estate trends tocontinue for an unknown period of time

How Long Will This Last? (2008 – ?)

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Reasons for Optimism

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Over the past year, Texas has led the nation in highestjob growth among states

Job Growth by State

-0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5%

Massachussetts

New York

North Carolina

Utah

Washington

Maryland

Louisiana

Colorado

Oklahoma

Texas

% Growth

Texasaccounted for52.6% of allnew jobscreatednationally

National Average

Source: Texas State Data Center (2007)

TexasStrongenergy

industryemployment

20

Over the past year, Houston was among 4 Texas citiesto rank in the top 10 nationally in job growth and tomake Forbe’s list of the 10 Best Cities to Buy a Home

Job Growth by MSA & Best Cities to Buya Home (2007)

Source: Texas State Data Center (2007)

Number of Jobs Added170,000 130,000 90,000 50,000 10,000 30,000 70,000

Raleigh

Austin

San Antonio

Charlotte

Atlanta

New York City

Washington, D.C.

Seattle

Houston

Dallas-Fort Worth 6

1075

2

Forbe’s 10 Best Cities toBuy a Home (Rank)USA Total

1Houston

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Growth is expected to continue with solid populationincreases forecasted

Source: Texas State Data Center (2007)

5,000

5,200

5,400

5,600

5,800

6,000

6,200

6,400

5.54MM

Annual Average Growth: 92,800 residents

Pop

ulat

ion

(1,0

00)

2006Population

Total Growth: 15.1%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2015Population

6.38MM

88.6K90.1K

91.5K93.0K

91.5K92.9K

94.4K95.8K

97.3K

Houston MSA Projected ResidentialPopulation Growth (2006–2015)

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Diversification

• 10th in the world in total tonnage

• 60 million people live within 700 miles

• Intermodal transportation - ample truck, rail and airconnections

• Weak dollar has bolstered exports

Port ofHouston

• Grown to encompass:

– 73,600 employees

– 37 million sq. ft. of physical space (includingconstruction)

– $2 billion of construction underway

TexasMedicalCenter

• Since 1981, the percentage of local economy tiedto energy has dropped from 84% to 48%Energy

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• World center of oil & gas industry• World’s largest medical center• One of world’s largest ports

Key Employment Centers

• Enabled by relatively short landentitlement process

• Key driver of population growth• Housing affordability is attractive

to major employers

Affordability

• Home to second largest numberof Fortune 500 companies

• Taxes are relatively low to otherparts of country

• International & domesticrelocation destination

Great Place for Business

• Proximity to oil & gas wells andrefineries

• Access to water• Texas' electricity grid has limited

interconnection with other states

Resources

Houston’s Glass is Half Full

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Thank You

4665 Southwest Freeway

Houston, Texas 77027

713-328-4400

[email protected]

www.situscompanies.com

Maury Bronstein

Martin Bronstein

Randall Tuller

Trusted InSight into Global Real Estate

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Appendix

26Source: U.S. Census Bureau (2007)

Cit

y(P

opu

lati

onR

ank)

6,150

9,191

17,212

19,761

33,505

44,280

46,722

56,514

60,987

71,719

5,000 20,000 35,000 50,000 65,000 80,000

San Jose (10)

San Diego (8)

Philadelphia (5)

San Antonio (7)

Los Angeles (2)

Phoenix (6)

Chicago (3)

Dallas (9)

New York (1)

Houston (4)

Average: 32,702(excludes Houston)

Residential Construction Permits for Top10 US Metro Areas (2006)In 2006, Houston issued over twice as manyconstruction permits than the average issued by theother top 10 US metro areas

Houston (4)

27Source: U.S. Census Bureau (2007)

City

(Po

pula

tion

Ran

k)

$142

$149

$150

$230

$268

$274

$469

$585

$602

$775

$100 $200 $300 $400 $500 $600 $700 $800

San Antonio (7)

Houston (4)

Dallas (9)

Philadelphia (5)

Phoenix (6)

Chicago (3)

New York (1)

Los Angeles (2)

San Diego (8)

San Jose (10)

Average: $388(excludes Houston)

Median home prices in Houston are less than half ofthe average median cost for homes in other large USmetro areas

Median Home Prices for Top 10 US MetroAreas ($1,000)

Houston (4)

28

Cost of Living Index for Top US MetroAreas (2005)Low home prices are a key factor in Houston’sfavorable Cost of Living Index

Source: ACCOR (2006)

88

94

95

98

119

129

141

153

177

213

80 100 120 140 160 180 200 220

Houston (4)

San Antonio (7)

Dallas (9)

Phoenix (6)

Philadelphia (5)

Chicago (3)

San Diego (8)

Los Angeles (2)

San Francisco (14)

New York (1)

Average of Top Metro Areas:136 (excludes Houston)

US Average: 100

Cit

y(P

opul

atio

nR

ank)

Houston (4)

29

MLS – Number of Listings & MonthsInventory

0

5

10

15

20

25

30

35

40

45

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

0

2

4

6

8

10

12

Total Listings Months Inventory

Tota

lLis

tings

(1,0

00) M

onth

sInventory

Source: Texas RECenter (2008)

Highestinventory

Housing inventory was at its highest level during theearly-1990s

30

In 1981, percentage of local economy tied to energy84

Number of the nation’s top 20 oil pipelines that have corporate ordivisional headquarters or ownership interests in Houston12

Number of publicly traded oil and gas E&P firms (out of 144 total) with apresence in Houston, including 10 of the top 2543

Percentage of the nation’s jobs in crude petroleum and natural gasextraction29

Number of the nation's top 20 natural gas transmission companies withcorporate or divisional headquarters in Houston15

Number of energy-related establishments that are located within theHouston MSA, including more than 500 E&P firms and 150 pipelinetransportation companies

3,000+

Today, percentage of local economy that is related to energy48

Energy Industry

While Houston’s dependence on energy has decreasedsince the 1980s, the city’s prospects are still closelytied to the industry’s health

31

Collection of hospitals (14), research centers, and medical schools (2)comprising Texas Medical Center46

Number of employees73,600

Number of existing parking spaces and those under construction52,500+

Approximate cost of buildings under active construction$2 billion

Number of square feet of existing, under construction, and programmedphysical plant space37 million

Number of acres in the South Main area plus other locations throughoutHouston and internationally1,000

Number of full-time (33,150) and part-time (75,000) students108,150

Number of volunteers13,500

Number of RNs, LVNs, clinical caregivers, technicians, and medical supportstaff26,000+

Number of MDs, PhDs and other doctorates10,000+

Number of beds6,500

Number of international patients10,000+

Approximate patient visits per year5.5 million

Texas Medical Center

The Texas Medical Center is a hub of activity

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Port of Houston

The Port of Houston is ranked tenth in the world intotal tonnage, and is growing at a strong pace

• Among U.S. ports, ranked first in foreign waterborne tonnage and second intotal tonnage

• During 2007, it had the second highest growth rate among U.S. portsrelative to the previous year

• Centrally located on the Gulf Coast, Houston is a strategic gateway forcargo originating in or destined for the U.S. West and Midwest.

– More than 17 million people live within 300 miles of the city, and approximately60 million live within 700 miles

• Fuel prices have increased the importance of intermodal transportation

– Ample truck, rail and air connections allow shippers to economically transporttheir goods between Houston and inland points

• Houston stands to benefit from the Panama Canal expansion