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April 2007

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Texas' Commercial Real Estate In Line With Housing Market

Families and businesses are moving to Texas, and construction crews are racing to keep up.

Residential construction reached a 22-year high-more than 212,000 units built-according to the Comptroller's Biennial Revenue Estimate for 2008-2009. In turn, non-residential construction increased by more than 13 percent in fiscal 2006, proof the state enjoyed a construction boom in 2005 and 2006.

While the BRE forecasts a slowdown over the next three years, Texas' commercial real estate market continues to thrive, according to Harold Hunt, a research economist with Texas A&M's Real Estate Center.

"Texas is doing well," Hunt said. "Occupancy is increasing, rents are increasing, and the environment for commercial real estate is good, certainly."

Riding on the Metro

The metropolitan areas of Texas carry the load of the state's employment, about 71 percent, according to Grubb & Ellis' (G&E) 2007 Real Estate Forecast. Grubb & Ellis is a leading commercial real estate organization that provides a range of transaction, management and consulting services.

Employment grew by 2.8 percent statewide from December 2005 to December 2006, according to the Texas Workforce Commission. And the performance of the state's metro areas is generally a good indication of how things are around the state, Hunt said.

Companies like Samsung in Austin, Sanyo Energy and an expansion of operations by Home Depot in Dallas, as well as San Antonio's new Toyota Tundra production facility are a few of the additions and expansions to the growing Texas business roster, according to Ariel Guerrero with G&E's Houston office.

"In the last couple of years, they're going bonkers down in San Antonio," Guerrero said. "Toyota has helped put San Antonio back on the development radar and now Lack's Furniture is looking at doing a distribution warehouse on the outskirts of San Antonio. Another big project in that area is a Lowe's regional distribution center that's a planned 1.4 million square feet. That's huge for that market."

More than 1.8 million square feet of office and industrial space in San Antonio was under construction at the end of 2006, according to G&E, signs that the Texas employment climate is still gaining strength, Guerrero said.

"Texas is outpacing the national economy right now in job growth," he said. "Our cost of living and the cost of doing business in Texas are low. It's just a very business-friendly economic climate right now."

And as businesses continue to move in, asking prices on rent led to a good year in 2006, according to Robert Kramp, vice president and director of National Client Services for G&E.

"Last year was a very good year for landlords in the industrial and office real estate market," Kramp said. "In terms of the office market, Houston alone had its best year since 1997. We had a large spike last year in asking rents, and we expect that to continue in 2007, maybe not as high, but continue."

Where the People Are

As Texas' population expands, commercial real estate development is following, Kramp said.

"As large tracts of land are traded for residential development, the 'big box' type of commercial developments are following along right behind them," Kramp said.

Other developers are offering "mixed use" projects, containing a little bit of everything for the nearby populace, Guerrero said.

"We've seen a lot of lifestyle center development, a lot of mixed use development," he said. "Like a shopping center but with a little bit of everything, like some office space and even some apartment units included."

Whether it's big box retailers in Houston, mixed use projects in Austin or revitalization efforts in downtown Dallas, it looks like the building will continue.

A lot of speculative projects are being built, Guerrero said.

"A lot of developers will move right ahead, knowing that the demand will be there when it's ready," he said.

Clint Shields

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