Comment of the Day: Houston’s Real Estate Boom Is Over

COMMENT OF THE DAY: HOUSTON’S REAL ESTATE BOOM IS OVER Closing Curtain“I’d like to see newer articles start noting that the jobs boom is already over and at this point it’s just the construction industry finishing off contractual commitments before we wrap it up and call the show over. past this it’s only retail & service sectors jobs growing which have a negligible impact on the overall economy anyhow due to the large supply of non-workers in the population and readily available labor. i’m not calling a downturn or anything here, but with drilling activity in the gulf starting to ease up (see hercules note [yesterday] morning about cutting personnel) and falling oil prices barring new onshore fields from starting up i’m not seeing any way for current growth trends to continue. fed pulling out of buying bonds will start hitting mortgage rates and drying up the cash closings that have helped stoked the fire as well so will be interesting to see if any slack appears in the market in the coming year.” [joel, commenting on AmREIT Takeover Approved; Bringing Gino’s East to Houston] Illustration: Lulu

26 Comment

  • We’ve been running in overdrive for a couple years, the numbers merely indicate we’re reaching an equilibrium and settling into a more long term and steady growth at a slightly lower, yet proper, pace.

  • This comment really irked me yesterday. And now its the comment of the day.. great.

    Anyway – Gulf drilling has never been what was driving Houston. It was onshore drilling. And onshore drilling will level off a bit now, but that by no means will stop many companies from growing. I am in the industry, and we are still hiring like mad. So first hand experience, THERE IS NO DOOM HERE. And if you look at other major cities, there is always construction opportunities. Big developers see Houston investment in a long term, big scope lense. They will not run away because oil prices are 80 bucks or less. Houston will continue to thrive. We are on a different level than we were before. It is a stair step, not a peak and valley. The craziness in Houston is bound to continue for a very, very long time.

  • Just another short seller.

  • Houston doesn’t live and die with the Gulf anymore. Houston is, however, THE corporate hub for US hydrocarbons – their extraction, transportation, refining and processing and everything else in between. The unprecedented inflow of capital into every part of the industry, which has sustained Houston’s boom for the last 5 years, is slowing with falling production, slumping prices, and rising cost of capital. You have super-majors speaking publicly that they need to de-lever and get smaller (see Shell last week). So is it a speed bump or a major correction?

  • @Andoni-
    I don’t think the piece is calling for a radical drop, merely opines that he/she sees no way to continue at the fervor we have had. I know that you are in “the industry” and oil/gas is quite comparable to my field of commercial real estate and you and I are from fields that can be easily compared to crack addicts when it comes to the good times. I have many friends in “the industry,” all very smart folks but I have heard so many people over the last 2 years say, “…it’s different this time and prices can not and will not fall significantly below $80,” I pity the fools. Just ride the wave while you can. The crazy growth of the past few years is not possible over the long term, we can al setlle into a ore level headed growth. Remember that if we can’t learn from history, it is sure to repeat itself.

  • This comment is 100% right on the nose. I have been calling this for about 6 months now. The unsold supply of $1MM spec houses in Montrose continues to rise.

  • I work in both the real estate and the energy business. My employer is continuing to grow in Houston but that is only because we are moving employees here from elsewhere. Neither I nor the commentator are saying we are falling off a cliff, but the boom of the last 5 years is over for now.

  • @ Andoni: Nice double entendre right there, with “The craziness in Houston is bound to continue for a very, very long time.” Agreed. I also love it when people proclaim a new normal. Makes me chuckle a bit at their expense. Can anybody say “irrational exuberance”?

  • Ick. I agree with commonsense. Houston’s real estate boom has primarily been the result of supply struggling mightily to catch up with demand. Tight lending, chronic underbuilding in the past and reaching the limits of sprawl have crunched the supply of single and multi-family housing in Houston. A let up in demand would actually be good for the market to give supply a chance to catch up with demand and keep housing in Houston from becoming too expensive. But supply has a long, long way to go before it catches up to demand.
    Also, the current drop in oil prices is not any reason for gloom and doom. The drop has been primarily caused by strong growth in production meeting weakened growth in demand. But demand for oil is still growing and is still strong. The disparity between supply and demand is not that big. And unlike in past gluts, producers are going to scale back instead of pumping away to try to trigger the downfall of the Soviet Union.

  • Im in the engineering contracting service and we are turning down $300 million to $3 billion dollar projects due to lack of resources. Engineers and laborers are needed like crazy still and will be as the NGL glut still hasnt made its way to the Chemical Refining side of the industry.

  • @Andoni- Nothing sells like Gloom and Doom. Let it be. No sense trying to explain current events when the same ole same ole is still playing.

  • I agree with Andoni… and furthermore there’s a place in this city called the Texas Medical Center which is growing like crazy… not to mention all the other businesses growing in this city.

  • Thanks for all the comments on this. I can’t claim to see the future, but I have listened to many of the big developers’ leadership speak. They are on board with Houston. Urbanism has set in for the first time here, and now we have a solid range of development opportunities. Our past of demolishing the old / clearing the land / and remaining fairly un-dense, has made Houston ultra-prime for development. How much easier is it now that a developer can just walk in and buy land instead of demoing or remodeling. Eastern downtown is an example of this, but it is truly all around Houston. We have all the key factors for continued strong growth. 1) Industry 2)Population 3)A Transportation Plan (finally, although too slow), and 4) An urban frame of mind. The preservation voices are getting louder and more clear. I often lament many of the items on this site’s demo report, but I try and remember that its replacement could be architecutually significant. In fact, there are many awesome projects going on around the city. Houston has come a long way. I find it particularly exciting to watch this town grow, almost like a spectator watching an artist paint a masterpiece. Cheers.

  • People are always proclaiming doom and gloom – they must be real downers to be around thinking the glass is always half empty….you have probably been proclaiming the “end is near” for months and months now….just keep saying it and eventually it will come true right ? Then you can proclaim “I told you so”……so sad….

  • Oh yes it’s so grand that we bulldozed the city and now developers have unfettered ability to develope all the baron empty lots into more crap that in 20 years will again be baron empty lots! Oh the joy. This is an assine thread, nobody can really predict what all these indicators actually mean, it just endless blather from the “informed”

  • I don’t believe that sub $80 bbl oil is here to stay long term. There are currently some geopolitical facotrs going on led by the US to keep supply high and prices depressed in order to put the hurt on both Russia and Iran in order to squeeze their budgets. When and if Putin cries uncle, and when and if Iran signs a nuclear disarmament deal, you will see oil prices rise a bit.
    As to the Houston real estate marketplace, as Old School said, there is an overhang of supply shortage in housing here. Back in 2009-2010, no one got loans to build, so construction was at a standstill. Yet Houston did not suffer the same downturn that Florida, Arizona, California, etc., faced. Until the imbalance in housing supply and demand is corrected, we will continue to see new homes get snapped up at a torrid pace.

  • I have to agree with Commonsense here. The local economy might be cooling off a bit, but only because it had gotten overheated n the past few years. We’re reaching some sort of equilibrium – not headed to rough times.

  • Hercules is a jackup rig driller working in shallow water, most of that oil has been found. The big finds are in deepwater.

  • commonsense:

    Are you talking about the king-size baron lot down the street from the Marquis II bar? That’ll probably go for a song after the earl business collapses in Houston (Duke Energy is about to declare bankruptcy). At a minimum, it should sell at a substantial viscount.

  • Sorry, my comment was aimed at Shannon.

  • @ ShadyHeightster: In the long term, you and I and everybody else will die. In the short term, the price is what it is. The near-term forward price curve on oil is what is important if you want to finance a new well today, especially if it is a shale oil play (because their depletion rate is faster than other types of wells), and that’s the contingency based on which you will hire tomorrow. Having a functional market for corporate credit is also important, and although doubts about its future persist, it is functional for right now.

    So here’s the deal. Let’s say that there isn’t any impetus for further economic growth from fracking and that it levels out or declines somewhat, for now. (I have reason to believe that upstream could hurt quite a bit more, but let’s just say that this is an inflection point so that you won’t totally blow me off.) Downstream is still fairly strong because there are plenty of opportunities for capex that present themselves with such low natural gas prices and if lower oil prices lead to buoyed demand for hydrocarbons. Let’s say upstream and downstream effectively offset one another for a period of time so that there’s no growth of primary employment. Let’s say the scenario lasts for two or three years. What happens to all of those parts of the economy that exist to facilitate economic expansion and household growth? What happens to wages when the margins are thinner and the labor market for experienced personnel isn’t so tight. And then what happens to consumer spending?

    Think about this seriously because it’s not Houston’s first rodeo with oil price shocks. If this period of time is accompanied by a national recession, which seems like a possibility, then yeah it’s going to hurt real bad. That could even put a crimp on the downstream energy sector. The global economy is already weak, and if dollar strength continues to be a thing, that’ll hurt exports of refined products.

    Don’t get me wrong, I’m not forecasting an 80’s-magnitude oil bust. But nearly all of the leading indicators are flashing red or come with some fairly serious-minded footnotes. To ignore them is…well, I want to say that it’s insane, but its actually just human nature.

    @ HoustonNative: The first time I discussed my current bearishness on Swamplot earned me a co-Comment-of-the-Day. People accused me of being some kind of perma-bear, a pessimist in general. Nope. Its only been a few months now since I turned bearish.

    @ Andoni: Your understanding of industry and population dynamics is superficial, and everything else you mentioned is of mere peripheral importance to real estate as a business.

  • When you start to capitalize, I’ll listen.

  • If the economy slows down here perhaps I won’t have to wait so long for a table at Fleming’s on a Thursday night. Last week was ridiculous.

  • Every major O&G operator is talking about how to reduce their development costs. The industry imposes a lot of cost on itself, and operators are starting to wake up to this fact. At the same time, E&P spending is looking to be at best flat, if not lower year-on-year.

    The result is that the supply base is going to have to become a lot leaner, which means either lay-offs or, at the very least, much less new hiring in the oil and gas sector. We’ve seen a few layoffs already, but more will come, and most won’t be publicized very much.

  • Wow y’all really don’t have a clue. This is maybe the third inning of the shale revolution. There is conservatively $100 billion of planned petrochemical investment/construction on the Texas Gulf Coast. That figure is only going to rise with sustained lower nat gas prices. Add to that the tidal wave of condensate exports we are about to see come 2015. Hmm and what about Mexico’s energy reform (offshore and midstream investment is going to skyrocket) Moving to Upstream.. Most shale plays still economical at $65-70. The PE capital from new yoik (primarily in the Permian) and the drillers who came late to the party will be squeezed. Kinda disappointing to hear “experts” not bring this stuff up

  • $80 oil is the price that was prescribed by the NYMEX strip as early as three years ago, so this isn’t a surprising development for anyone who’s been paying attention.

    It’s kind of considered the “equilibrium” world-is-pretty-stable oil price at which demand growth continues apace, North American producers can still make money, and at which the Saudis can maintain their generous welfare state for their rapidly growing population without a revolution.

    It’s being caused largely by a supply glut here in the US and recovering production in Libya. Compare this to the 1980s price drop, which was caused by a supply glut from Saudi Arabia and the North Sea.

    So you’ll continue to see plenty of domestic production–even domestic production growth–that you’ve been seeing for the last five years. What you won’t see is oil-focused operators attracting outsized returns for their equity holders, and you won’t see the development of the more marginal oil wells (see Hercules shallow gulf layoffs)

    This means plenty of jobs here in Houston going forward but not the truly crazy levels of wealth appreciation that you’ve seen recently. Furthermore, I think the Saudis will announce a cut come Thanksgiving, but that’s just me.