“From 1981 to 1984, we lost 210,000 people who moved away from the city of Houston,” said Marvy Finger, president and CEO of the Finger Companies, the developer responsible for the construction of nearly 60 apartment complexes and rental communities in Houston since 1958. “It’s indelible in my mind, because my occupancy went from 95 percent to 65 overnight, and it wasn’t because of rent price,” he recalled, sitting just to our left. “We were giving them away—we just didn’t have anybody to give it to. There just weren’t any people.”
“Those were disaster times,” intoned a man sitting to our right, part of a coterie of real estate experts who had met for lunch at a Galleria-area restaurant. He was Robert Bland, founder of Pelican Builders, which has developed some of Houston’s most sought-after high-rises, mid-rises, and single-family home communities over the last four decades.
As Finger spoke, slowly and deliberately, the other guests at the table—all leaders in their own right—sat and carefully considered the pronouncements of this éminence grise. “I’m the neophyte here,” chuckled Bland at one point.
Sitting adjacent to him was Martha Turner, immediately recognizable from her television commercials. “We’ve seen lots of changes, haven’t we?” she said, looking around the table of old chums whose homes and condos she’s sold for over 30 years. The men present were no small part of the reason that her real estate firm was acquired by Sotheby’s in early 2014, after a banner year in which she sold $2 billion worth of properties in Houston alone.
“There’s still a lot of uncertainty,” Finger continued. Then Bland cut to the chase, asking the question that’s on every Houstonian’s mind these days: “Is this going to be the 1980s again?”
The table looked again to Finger, who sat quietly for a moment. “I’m not comparing this to the Confederacy just before the opening volley,” he said, as the table erupted in laughter. “Everything’s gonna be okay.”
If there was a theme for the afternoon, it was this: everything is gonna be okay.
In making this prediction in late February, Finger was aware that his was a minority view. Most everyone else at the time was forecasting doom and gloom for Houston’s real estate market in the face of crashing oil values that saw the price per barrel drop 40 percent last year. By early 2015, that price had dwindled even further, to below $50 per barrel, and Houston—the nation’s energy capital—began to see its unbridled growth reined in. Across the city, layoffs began: ConocoPhilips, BP, Halliburton, Apache, Tenaris, companies big and small across the energy sector.
The daily barrage of negative news has left the public rattled and skittish about entering the real estate market, especially in a city where oil prices have so often presaged housing booms and busts. Still, there are signs that things might be different this time. For one thing, Houston is far from the one-industry town it once was. The latest study from the Greater Houston Partnership reports that Houston created over 120,000 jobs last year in sectors as diverse as health care, education, engineering, construction, and manufacturing—not to mention the retail and service-industry jobs that have sprung up to support all of this new growth. And even with slumping oil prices, the GHP notes that Houston should expect to see an additional 60,000 to 70,000 jobs created each year for the next five years, in what it calls “an affirmation of Houston's resilience after nearly three decades of diversification.”
Turner mentioned a second reason for hope: the impending expansion of the Panama Canal. Once the $5.3 billion project is completed in early 2016, Texas is looking forward to exporting liquefied natural gas (LNG tankers previously couldn’t fit through the Panama Canal’s locks) to Asian markets via the newly widened waterway, as well as cotton, pecans, corn, and other crops—and all through the Port of Houston. The port, which is already the busiest in the US when it comes to foreign tonnage, could also see additional traffic from Midwestern markets as more shippers divert Pacific-bound goods to closer ports than those in California and Canada.
For the present, Finger seemed content to play the waiting game. “First, we really do have to reach a bottom to get a balance in the supply and demand of fossil fuel,” he explained. “Once that is in balance, that would be the beginning of a recovery. But if [finding the bottom of the oil market] takes an extended period, anything over 18 months, that’d be a very long and difficult recovery.”
Across the table, Tom Anderson, Turner’s longtime business partner, chimed in with his opinion on the price that oil needs to reach again in order to trigger a recovery. “I’ve been told it’s $65 a barrel. That’s the turning point.” And data would seem to back Anderson up. A recent Metrostudy report tracking oil prices and real estate trends since 1980 shows a “sweet spot” between $55 and $90 per barrel that “produces the highest demand for housing in the Houston market.” And though the US Energy Information Administration predicts that oil will remain at around $57 for the duration of 2015, the agency expects the price to rise the following year to $75, which would be good news for the Houston economy—if bad news for gas buyers—as long as it didn’t go much higher than that. Anything above $90 a barrel tends to hurt the real estate market, even here.
“We’ve all had our ups and downs,” said Bland, smiling. “The last up has been real fun.” As the table laughed in agreement, he continued. “But realistically—and we’re all positive thinkers, or else we wouldn’t be in this business—it’s time to tighten your belt a little bit.”
Across the city, it would seem that the belt-tightening is already underway: 50 multi-family developments have been postponed indefinitely or killed altogether since January. But Finger doesn’t consider that a worrisome trend. The market was already overbuilt, he said. This is part of the correction. What’s not overbuilt? Single-family homes. Houston currently has just a 2.6-month supply of inventory—that is, it would take 2.6 months to completely sell the current number of homes on the market—which is exactly the same amount we had in January 2014. Compare that to January 2007, just before the financial crash, when the inventory was 5.1 months, or January 2011, when it rose to a 10-year high of 7.3 months.
After last year, in which million-dollar home prices became the norm and sales rose nearly 13 percent, the luxury real estate market will also be cooling its heels in 2015. And before you ask, no, this doesn’t concern the legends of real estate either.
“The bread and butter [of our industry] is $300,000 to $500,000 houses,” said Anderson. “It’s the bread and butter.”
Will the market correction mean lower home prices down the road, we wondered? Nope.
“I don’t think you’re going to see prices go down,” Anderson said, as the table nodded in agreement. “I think they’ll stabilize.” What’s also definitely not going down is the price of land, which is the chief reason—along with a booming job market that brought in lots of out-of-towners with big paychecks—that real estate became so pricey over the last several years.
But developers like Bland and Finger have a solution to that problem, too—urban density. “Migration back to the city” is the wave of the future, said Turner, and Bland agreed. “Every old apartment project between here and downtown is going to be torn down,” he said.
“There’s always going to be the special niche like The Woodlands, which is a true destination, for those who can afford it and want an opportunity to live in that environment,” added Finger. The same is true for Memorial and its Spring Branch school district, or Bellaire and its eponymous high school.
“Most people move to Memorial because they want that school district,” said Turner, “because if they have five children, they’re spending $25,000 a year minimum just to send them to private schools.”
“But when families don’t need that school system,” Anderson followed, “they’ll go back to the city.”
And when they do, they’ll be greeted by a bevy of tall buildings erupting from the rubble of all those old apartment projects. “We will take a high land price and divide by a whole bunch of units like a rental or a condominium,” Bland said. “The land price is still significant, but it’s not the crucial factor. That’s going to be another thing that will push higher-density development inside the Loop. It’s a fact of life. We can’t build townhomes anymore.”
Anderson saw echoes of this mindset in the single-family home market as well, where homebuilders are realizing that “the 6,000-, 7,000-square-foot mansion is just not what people are looking for.” Instead, “what we’ll find is a lot of custom homes on very expensive lots that are scaled-down houses.” That’s because homebuyers are increasingly asking themselves whether they really need those big, grassy lawns they never use. And for good reason.
“The cost of water over the next 20 years is going to drastically increase, maybe more than electricity,” Anderson said. “I think there’s just an overall feeling of homeowners to be a little more conservative.”
Condos are proving to be a terrific investment if you don’t need that lawn, said Turner, or that school district. The low housing inventory has driven condo sales through the roof, making it the fastest-growing segment of the real estate market, though Turner admitted that it still represents only about 10 percent of her firm’s sales. As for those not quite ready to jump into a 30-year mortgage, Finger is betting heavily that they’ll want to live downtown. His game-changing One Park Place high-rise and its in-house grocery store, Phoenicia, singlehandedly revitalized the central business district as a residential area. But is there a coming glut in downtown housing?
“You explain to me how there are nine committed tall buildings for rent in downtown Houston,” Finger asked the table, all of whom seemed incredulous at this latest round of interest in the downtown district. “There is no reason to live downtown,” he chuckled. It seemed an odd remark for a developer to make, especially one in the midst of building a luxury mid-rise near Minute Maid Park. Finger’s 500 Crawford is slated to have one- and two-bedroom rentals, plus an eighth-floor deck with a view straight into the Astros’ ballpark.
Then again, such is the happy life of a Houston developer, who knows that people will eventually live where there’s no reason to live, because, well, what choice will they have?
“We’re all very optimistic about the future,” said Finger as lunch came to a close, in case anyone still doubted it. The rest of the party murmured their agreement. And even if being bullish is their job—after all, building and selling homes is how they make their livelihood—perhaps we should all be optimistic. After all, even if inventory is low right now (read: prepare for a bidding war), at least prices have plateaued—for the moment.
“We’re all very positive about Houston,” Bland said, driving the point home. “It might moderate a little bit, but we’re not headed for disaster.” What we are headed for is still a bit fuzzy, but expect a future of—at a minimum—more mid-rises and shiny new residential towers, all of them changing Houston’s landscape as indelibly as the oil boom did in the 1970s.
“I think Houston could be the next Los Angeles or New York City,” smiled Bland, an optimist to the end.