Fort Bend County - Beauty in the Beast

by Kelly Ferguson, CCIM

The Strengths of Houston and Fort Bend County Amid National Malaise

There was a time in 2008 when we thought the Houston area might avoid the national economic slow-down. However, the failure of the financial system, the resulting credit crunch and the plummeting of energy prices have punctured our heretofore resilient local economy. While we have proven not to be immune to general economic conditions, the Houston-area housing and commercial real estate markets should fare far better than the vast majority of other areas in the nation. Upon stabilization in the financial markets, we are well-positioned for recovery. There are a number of fundamental strengths specific to the Houston area—and to Fort Bend County, in particular—that have resulted in current investment opportunities and that will enable our area to be one of the first nationally to rebound.

Fundamentals of Our Local Housing Market

One national condition that we certainly avoided is the housing-price bubble that formed between 2003 and 2007. Houston-area home prices never escalated dramatically and we have maintained stability in values through the credit crunch. We did experience a dramatic increase in transaction volume in recent years, however, which was induced by low interest rates and easy credit. According the Multiple Listing Service, home sales declined 12% from 2007 to 2008. As uncertainty persists and credit continues to tighten, the number of local transactions could continue to fall off in 2009, although the home-buying provisions in the stimulus package might somewhat offset a decline.

The exceptionally good news is that while the number of transactions has declined—and may continue to decline in 2009—home prices should remain stable and even continue to increase, albeit at a moderate pace. In 2008 the median home price in the Houston area rose 1.7%. A reliable indicator of future price trends is months of inventory of unsold homes. According to Metrostudy, Houston has approximately 6.1 months of inventory. The Real Estate Center at Texas A&M University defines 6.5 months of inventory as the level of a “balanced” market. (Compare this to the current national level of 10 to 12 months of inventory.) According to the Real Estate Center, past data indicate that homes in Texas should continue to increase in price. Current inventory levels state-wide are similar to those experienced between 1994 and 1997, when prices rose 2% to 3% per year. The current environment of fear and uncertainty may keep price escalation lower than in the 1994 to 1997 period. However, given that there is not an oversupply of homes, price escalation should pick up speed as homeowners regain confidence in the economy—namely their job security. Like most corporations and individuals nation-wide, local homeowners are taking a “wait and see” approach to economic conditions before making further financial commitments. The fact is that our local population is still expanding due to job growth and a reasonable cost of living. Furthermore, mortgage rates are likely to drop to astounding lows in 2009—to levels that we most likely will not see again for decades. With a healthy supply of homes on the market and strong employment, low mortgage rates create tremendous current opportunities for homeowners and investors.

Fundamentals of Our Local Commercial Real Estate Market

As of October 2008, the Houston area had the highest rate of year-over-year job growth among major metropolitan areas in the country. We experienced an increase in nonfarm payrolls of 2.2% compared to a decline of 0.4% nationally. Our recent growth and prosperity have been tied largely to the energy industry; however, we have performed exceptionally well due to our diversification in other industries such as health care and trade. The Urban Land Institute/Pricewaterhouse Coopers Emerging Trends 2009 interviewees named Houston as one of the top ten places for real estate investment. This makes sense, given that they highlighted energy and health care as two of the few projected growth engines for commercial real estate in the current national environment.

With the price of crude tumbling from its peak of $147 a barrel in 2008, the buffer protecting the Houston-area economy and commercial real estate market from national conditions has certainly diminished. Many analysts predict oil to stay in a tight trading range in the near term and demand is likely to contract further this year due to the global economic crisis. Yet the International Energy Agency expects demand to resume growth by 2010. While we have seen—and will continue to see—oil-related companies pare back after experiencing recent accelerated, prodigious growth, they should continue to profit, create jobs and ultimately absorb more square feet of commercial real estate.

The Houston area’s strength and expansion in health care has also cushioned the blow of national malaise and should continue to do so. We have world-class facilities that now expand beyond the Texas Medical Center and into our own Fort Bend County. As baby boomers continue to age they will spend more time in medical office buildings. They will also create demand for medical-supply distributors and research and development groups, thereby creating more demand for industrial space in addition to medical office space.

Emerging Trends 2009 interviewees also highlighted the Houston area’s strength in trade as a generator for local job growth. The Fort Bend industrial market will certainly benefit from the burgeoning Port of Houston, and we look forward to benefiting from the Kansas City Southern project, which is expected to bring more than $1 billion in economic impact to west Fort Bend.

Competitive Advantage

There are clearly fundamental strengths that set the Houston area apart from most other areas of the country. The even better news is that Fort Bend County, in particular, holds a competitive advantage when it come to attracting growth within the Houston area. Even in this declining market, businesses will continue to operate and there will be a handful of new requirements entering our local market. Fort Bend County has promise to attract these businesses to “our side” of the Houston area. We have proactive local governments, powerful and innovative economic development initiatives, and boast two cities, Sugar Land and Missouri City, whose strengths and amenities have won them recognition as Money Magazine’s “Best Cities”. Houston has already grabbed the attention of outside real estate investors and users. When these investors and users search the local marketplace for opportunities, there are many elements that will point them toward Fort Bend County as the choice within the Houston area for investment.

Looking Forward

Until the credit freeze begins to thaw, the Houston area will offer more investment opportunities than the vast majority of other areas across the country. Nevertheless, with so many homeowners, investors and commercial real estate users taking the “wait and see” approach, transaction velocity will remain slow until the financial markets lead the way to a national recovery.

As for real estate users, most corporations have also been sitting on the fence, waiting to see how they will be affected by economic and governmental changes taking place. By April 2009, after the President’s “100-day honeymoon” to initiate major legislative changes, businesses will have a better idea of how their futures will be affected. Many are thus likely to begin making moves after April 2009.