Experts are cautiously optimistic that the coming year may bring the beginning of the recovery for Texas commercial real estate.
By Coleman Wood

While 2008 was seen as the year that the commercial real estate bubble finally burst, 2009 has been harder to characterize. The market may not have gotten too much worse, but it also did not get any better. Texas seemed to be able to escape the worst of it, but activity this year was still below normal. Predictions for 2010 are looking no more certain, with many painting a cloudy picture for the coming year and an eventual recovery in 2011. Are these predictions accurate, or is there reason to hold onto cautious optimism for an early recovery? This month, Texas Real Estate Business spoke with brokers across the state in all sectors of commercial real estate to shed some light on what the coming year will hold.

San Antonio Office

Brian Harris

In spite of a number of corporate relocations from multi-tenant office buildings to owned, single-tenant properties, absorption has been flat to even positive, which, given market conditions, is a positive sign for the strength of the San Antonio market. San Antonio has had a number of new companies and existing companies expanding in our market such as Medtronics, Whataburger and Nationwide Insurance, to mention just a few.

In addition, we have seen a jump in both private, for-profit universities and trade schools entering our market and taking down several blocks of multi-tenant office space from 35,000 to 45,000 square feet each. The recession has impacted both vacancy rates and sublease availability. While rental face rates are holding, incentives offered by landlords have increased, shifting the advantage in lease negotiations to the tenant.

We feel 2010 will continue to be flat for the first 6 months, with companies feeling that the cutbacks made in late 2008 and 2009 have been effective to the point where these companies will make some forward decisions to commit to either longer term or expanded lease commitments. The governmental sector in San Antonio continues to be a mainstay in our market with the NSA, Cyber Command and military medical training facilities all making significant commitments in our city.

— Brian D. Harris, CCIM, CPM, is a senior vice president and partner with San Antonio-based NAI REOC Partners.


Construction has started for a new 88-bed patient tower at San Antonio Military Medical Center (SAMMC) at Fort Sam Houston in San Antonio. The tower is part of Phase I of the $556 million SAMMC project, which will consolidate Brooke Army Medical Center at Fort Sam Houston and Wilford Hall Medical Center at Lackland Air Force Base, also located in San Antonio. SAMMC, which will have North and South campuses, will consist of renovations to the existing Brooke Army Medical Center, a new parking structure and a new central energy plant. The project, which was designed by RTKL to LEED-Silver specifications, will total 1.1 million square feet upon completion. The general contractor is a partnership between Clark Construction Group and Hunt Construction Group. Phase I completion is slated for fall 2011.

Austin, Houston and San Antonio Multifamily

Tarantino’s multifamily brokerage division, from left to right: Matt Phillips, Kristin Higueros, William Smith, Forrest Bass.

In 2009, multifamily had more transactions throughout all three cities than any other sector because of available financing through the GSEs and regional banks. However, while there was a fair amount of sales activity during the first 8 to 9 months of 2009, the fourth quarter appears to be slowing, as financing becomes more restricted.

Sales values are off anywhere from 20 to 45 percent. Contributing to the decline in values is the increase in both receivership and foreclosure sales of primarily Class C and D properties, and the recession as the flood of out-of-state investors coming into Texas dried up, primarily due to the lack of financing for first-time investors.

We believe there will be more multifamily transactions in 2010 as lender REO sales as well as sales out of receiverships continue to increase. There appears to be a significant pent-up demand to purchase distressed/high leverage assets, as many experienced investors have been on the sidelines over the past year focusing on raising capital to take advantage of opportunistic pricing.

We will see more cash transactions on smaller assets and financing will be a challenge on the larger transactions, thus causing more stress on valuations. Therefore, lenders will look to appoint receivers to preserve and modify the existing financing in order to maximize value.

We do anticipate that the latter part of 2010 will show some recovery from an apartment fundamentals standpoint, but we are very concerned that the overall multifamily sales/refinance market will continue to struggle over the next 2 to 3 years due to the high volume of CMBS loans maturing during this time period.

— Kristin Higueros is a vice president of investment sales, Matt Phillips and Forest Bass are senior associates of multifamily brokerage, and William Smith is a broker of investment sales with Houston-based Tarantino Properties.

San Antonio Retail

B. Keith McRee

Retail in San Antonio faired okay in 2009 but was definitely off from previous years. Due to the downturn in the national and global economy, fewer and fewer national retailers have been adding new stores; because of this, most of the new deals signed in the last year have been more regional and/or local tenants. This, combined with failing businesses vacating space and others downsizing or cutting back on the number of their stores, have all led to increased vacancy in the market. However, new construction has slowed and that has helped keep vacancy from getting out of control.

Investment sales have been well off. Most transactions have been completed with cash buyers, as conventional financing has been tough to come by or lenders have wanted significant amount of equity in deals. This has continued to lead to a large spread between what buyers are willing to pay and what sellers are willing to take. Some opportunities have existed with foreclosed properties, but those opportunities have been limited in our market. Other opportunities have been for investors to acquire partnership interests in struggling or failing partnerships.

Overall, things could have been worse in 2009. I think we have finally seen the bottom, but it will be another 6 to 12 months before we will see any real improvement in the market. I think in 2010 we will continue to see a lot of the same trends taking place. Landlords will need to be aggressive when tenants are looking at their projects. With fewer and fewer new tenants signing leases, landlords need to not miss an opportunity due to not wanting to concede a couple months of free rent, as it may be even longer before a suitable replacement comes along. I think rental rates overall will continue to fall through the first and second quarters of 2010 and will not start to stabilize or increase until we can absorb existing vacancy. Some submarkets, however, will continue to see strong demand and rental rates will not be affected as much. I see 2010 not as much as a year of recovery but as a repeat of the second half of 2009, with recovery occurring in 2011. On the investment side I don’t think much will change in the next year.

— B. Keith McRee, CCIM, is a vice president of retail services with San Antonio-based NAI REOC Partners.

Dallas 2009: Significant Deals and Projects Under Way or Completed

• CBREI sold Providence Tower, a 550,000 RSF, Class A asset along the Tollway to KBS for $130.00 per RSF

• Wyly Theater and Winspear Opera House (Arts District) recently completed in October

• City Performance Hall under construction and projected to be completed in late 2011

• Work in progress on Woodall Rogers Deck Park – projected to be completed in late 2011

• Arts Apartments (developed by Jefferson) under construction and projected to be completed in 2010

• Omni Dallas Convention Center Hotel – projected to be complete in 2Q 2011

• International Business Park Phase 15, Delivered 1Q 2009, Class A, 3 floors, 173,382 SF, 1% leased

• Parkway Centre V, delivered 1Q 2009, Class A, 6 floors, 200,800 SF, 169,165 SF available, 16% leased

• Tennyson Place – 5600 Tennyson Pkwy., delivered 2Q 2009, Class A, 3 floors, 99,450 SF, 80,443 SF available, 19% leased

• Two Addison Circle – 15725 N. Dallas Pkwy., delivered 2Q 2009, Class A, 6 floors, 197,184 SF, 197,184 SF available, 0% leased

Source: PM Realty Group

Dallas Office

Duane Henley

The suburban Class A and B markets have had year-to-date positive absorption of 447,619 square feet, which is a strong sign that the Dallas Suburban market will weather the storm in 2009. Part of this is due to Dallas’ centralized location, inexpensive housing and Fortune 1000 existing company base. The Dallas central business district Class A and B market had year-to-date negative absorption of 155,152 square feet, which is primarily due to large law and financial firms moving to Uptown Dallas. The recession has also caused rental rates to drop and concessions to increase.

The Dallas market will see significant office foreclosures in 2010, which will mean three things: new, stable ownership; a further reduction in rental rates; and an increase in capital improvements to Class B and Class A buildings.

Nathan Durham

In addition, brokerage companies will target landlords in 2010 for aggressive concession packages, because the market will begin to recover between the fourth quarter of 2010 and the end of the first quarter of 2011.

— Nathan Durham and Duane Henley are senior vice presidents with the Dallas office of PM Realty Group.




Dallas Industrial/Office

Mark Hull

The Addison/Carrollton/Farmers Branch/North Dallas markets were slow to the effects of the recession; fortunately, these areas were not as impacted as others in the Dallas-Fort Worth metroplex. That being said, there are numerous 50,000- to 300,000-square-foot buildings having to compete with newer product for the first time in many years.

A significant new development is the new Methodist Hospital for Special Surgery center being developed south of Trinity Mills along North Dallas Parkway in Addison, Texas. This medical center development adds value to the existing surrounding properties and changes the face for an area that is long overdue for redevelopment

I am an optimistic person, and I still feel 2010 will bear fruit. The trick is being able to realize that the glass is half full and have the ability to see the opportunities that lie in both halves.

— Mark Hull is a vice president with the office/industrial division of Henry S. Miller Brokerage.

A rendering of the new Methodist Hospital for Special Surgery in Addison, Texas. The 105,000-square-foot project broke ground in June and is scheduled for completion in fall 2010.


Austin, Dallas, Houston and San Antonio Retail


Bob Young

Helped in part by backfilled vacancies, Austin as of the third quarter enjoys an occupancy rate of nearly 92 percent, down a little over 1 percent since the beginning of the year. That stable occupancy performance means Austin remains one of the healthiest retail markets in Texas and the nation.

In addition, many of Austin’s submarkets, particularly within city limits, have occupancy rates that exceed the marketwide average.

The Austin-area retail market continues to attract new projects opening in 2009, although the outlook for construction in 2010 will be considerably lower. For this year, construction is limited largely to a handful of regional-draw projects in the submarkets surrounding Austin. 

We expect the year to end with approximately 1.2 million square feet of new retail space, down significantly from the 2.8 million square feet that was added to the market in 2008.

In the current economic climate, when national retail chains are slowing or even halting expansion plans as they seek to stabilize their operations, Austin has been fortunate to see an active leasing market from local and regional concepts. These are retailers and restaurants that understand the market and its trade areas and that have garnered loyal followings.

Austin’s retail market benefits from an economy that is slower but still much more stable than many major metro economies across the United States.

Dallas-Fort Worth

Dallas-Fort Worth’s (DFW) retail market is fortunate that it entered the current economic downturn during a time of its lowest retail construction this decade. The noticeable slowdown in construction this year, along with slower but still active leasing, is one of the factors that has enabled to market to remain relatively stable.

Retail vacancies in DFW are being backfilled, just at a slower pace than in previous years prior to the economic slump

DFW’s retail construction in 2009 represents a handful of regional draw and community projects located in areas of good residential density and established trade areas, which helps ensure the long-term success of these projects. All told, approximately 2.9 million square feet of new space will be recorded for 2009, which represents the lowest level of construction so far this decade. For example, in 2008, DFW added 4.7 million square feet of new space.

The DFW retail market’s stability can be attributed in part to the metro area’s diverse economy, which has slowed but still remains healthier than the national average.


Demand-based construction since the early 1990s is one key factor in the Houston market’s ability to maintain balance in the midst of one of the most challenging retail markets in years. Since the early 1990s, the major construction in the Houston retail market has been based on pre-leasing and tenant demand. For the most part, by avoiding speculative construction on a wide scale, the market entered the current downtown with a healthy inventory of well-leased quality retail projects.

The occupancy rate is a function of a retail market inventory of approximately 137 million square feet of retail space in projects with 25,000 square feet or more.

In terms of new construction, new centers are going up at a much slower pace than in 2008. For 2009, Houston is on track to add approximately 2.5 million square feet of retail space, compared to 4.9 million square feet in 2008.

Fortunately, the new projects are well anchored, at strong intersections and in areas of residential density.

Houston’s retail market continues to benefit from an economy that has slowed but still outperforms the nation as a whole.

San Antonio

San Antonio’s retail market continues to post a healthy occupancy rate above 90 percent, but the rate has declined by nearly 2 percent this year due to some high-profile closings by failed national retailers. As a result, San Antonio saw its retail occupancy rate drop from approximately 92 percent at year-end 2008 to slightly more than 90 percent currently.

Fortunately, some of the vacated boxes are being backfilled. For example, Spec’s recently leased the former Circuit City at The Village at Forum Parkway.

The occupancy rates are a function of a retail market inventory of approximately 36 million square feet in retail projects with 25,000 square feet or more.

Fortunately, high-profile store closings were far outpaced by new openings. Several of the new anchors opening this year represent backfilled space or the expansion of existing centers.

San Antonio is seeing new retail projects opening in 2009, though at a far slower pace than in recent years. For example, in 2008, the market added 3.5 million square feet, a near repeat of the level of construction seen in 2007. For 2009, the market is on track to add less than 1 million square feet.

The construction slowdown in 2009, combined with a forecast for little new construction in 2010, will allow the San Antonio retail market to remain stable. For 2010, only a handful of projects are expected to open.

— Bob Young is the managing director of The Weitzman Group.

Austin Retail

Bryan Dabbs

The Austin retail sector fared better than the balance of the region and, according to Capitol Market Research’s June 2009 retail survey, reflected positive absorption of 278,130 square feet primarily due to pre-leasing from Stonehill Town Center in Pflugerville, which is in the northeast quadrant of the market. The balance of the market reflected negative absorption. The national recession and lack of transactions from the larger retail chains has contributed to these numbers. Capitol Market Research also reflects that overall occupancy levels declined to 89.6 percent and average rents for vacant space decreased to $20.00 per square foot, which reflects the first time that the market has seen such a decline in rent since 1988.

The market appears to be continuing the trend that began in 2008 with no new construction starts in 2009 and none anticipated in 2010. Retailers are reporting flat sales at best with some positive sales numbers in the traditional discount retail segment. Concessions from landlords are in the form of increased tenant improvement allowances and this concession should continue in the short term. Currently there are four projects listed for sale in the market: Westbank Market; Mueller Retail Center; Boardwalk Shopping Center; and Hill Country Galleria.

The recession will have an impact on the retail sector until the consumer reflects confidence in spending.

— Bryan Dabbs is the director of retail for the Austin office of Stream Realty Partners.

Austin Office

J. Michael Watson

Transaction volume slowed in 2009. During the past year, a large number of property owners re-evaluated their portfolio acquisition strategies and looked for guidance in gauging the market’s direction. Since the end of the summer, we have seen a new willingness on the part of property owners to be realistic in current valuations and then taking appropriate action, should there be a specific need to reposition their portfolio. We are also seeing a crescendo in the amount of truly distressed situations, not necessarily from operational challenges as much as from debt problems.

The upcoming year is a recovery year from the standpoint of an increase in transaction volume. Distressed situations will continue to increase as concerns in the capital markets place further strain on market valuations. Regarding the overall health of the investment sales market, we are much further away from a true recovery.

— J. Michael Watson is the regional manager of the Austin office of Marcus & Millichap Real Estate Investment Services.

Houston Office

Chip Colvill

This year was a year of definition for the Houston office market. Houston was able to define itself as one of the more stable office markets in the country, despite the sharp national economic downturn.

Houston has seen rents decline at a modest 10 percent to 15 percent in 2009 and the question that tenants are asking is: will there be a further decline in the months ahead? If the national economy continues to show improvement, Houston may experience only limited rent decline, if any. Most existing, better-located, Class A buildings remain well leased, and, therefore, the owners of these properties are continuing to keep rents at or close to 2008 levels. Some experts predict only a slight increase in Houston’s vacancy for 2010 to approximately 15 percent, which bodes well for the Houston market. Large office users will continue to have limited options for big blocks of space.

In a beneficial way, the lack of available credit that triggered the recession will also serve as a brake on further development, thus ensuring Houston will not become overbuilt. Although there is almost 2.4 million square feet of Class A space coming onto the market in 2010 and 2011, this is not in excess of Houston’s average absorption over the past 25 years. These new developments are high-quality projects that, over time, will see success. As an example, projects slated to deliver in 2011 including Hines’ Main Place and Trammell Crow’s Hess Tower in the CBD, which are already a combined 47 percent leased.

Once the economy begins to consistently show recovery, look for the Houston market to become active. Small tenants that signed short-term leases in 2009 and the large tenants that put off decisions in 2009 will all hit the market when their tenant representatives say it is time to make a move. Increased office leasing activity is anticipated beginning in 2010, when our national economy is predicted to show consistent signs it is headed for recovery. Accordingly, 2010 could prove to be a year where Houston experiences significant office leasing activity.

— Chip Colvill is the president of Houston-based Colvill Office Properties.

Houston Retail

Randi Smith

After several years of remaining somewhat unaffected by the declining economy, 2009 has shown a significant softening of the retail sector in the Houston market. Not only have rates and vacancy been negatively impacted, overall development projects have either been postponed or in some cases cancelled. However, a select few outlying Houston submarkets with strong demographic pulls — Channelview, Rosenberg, Katy (Cinco Ranch) — have shown some promise in new development and tenant draw.

It will be interesting to see how the retail sector performs in 2010. The drop in energy prices continues to affect job growth, which, in turn, has a direct negative impact on retail. Although energy prices are up from early 2009, overall retail success will remain in limbo until energy prices are stabilized. Overall, 2010 will hopefully prove to be a year of recovery with evidence of this trend likely in the later quarters.

— Randi Smith is leasing manager with the Houston office of PM Realty Group.

Houston Industrial

Travis Land

In 2009, the economy played a major role in the slowdown of the Houston industrial market. Industrial users seemed to have a lack of confidence from the uncertainty in the U.S. and local economies. Companies began to hone in on reducing their facility costs in an attempt to maintain profitability. This led to many companies downsizing the size and quality of space they occupied. The drop in demand for space has led to rental rates decreasing and rental concessions increasing. The leverage pendulum definitely swung back to being a tenant’s market during 2009.    

I predict that 2010 will be a slow but steady year for industrial leasing and sales transactions in Houston. Hopefully, the majority of excess supply of shell distribution space will be absorbed by the end of 2010. The above activity, along with decreased construction costs, should spur build-to-suit and design construct activity. However, in my opinion, industrial end-users will continue to maintain the upper hand throughout 2010.

— Travis W. Land, SIOR, is a senior vice president with the Industrial Brokerage Services division of NAI Houston

©2009 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.

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