In keeping with the general consensus, the year 2001 should prove to be as good or better than 2000 for land in the Houston real estate market. This is reflected in the rapidly increasing price of land for all product types, some of which have increased 20 – 35% over the past year.

The year 2000 proved a record year for Houston real estate. The total amount of acreage platted and replatted within Houston and it’s extra-territorial jurisdiction (ETJ) increased from 11,933 acres in 1999 to 16,571 in 2000, an increase of 39%. Replatting represents around 10-20% of this activity.

Representing 62% of this platting activity, the amount of net residential acreage platted increased from 6,718 acres in 1999 to 10,297 acres in 2000, an increase of 53%. Of this increase, the ETJ experienced the most growth, platting 5,696 acres in 1999 and rising to 9,187 acres in 2000, a 61% increase. The City of Houston went from 1,022 net residential acres platted in 1999 to 1,109 acres in 2000, an 8.6% increase.

On the commercial side, land within the city limits did better, platting 1,846 acres in 1999 and increasing 33% to 2,457 acres in 2000. Platting of commercial land outside the city limits but within Houston’s ETJ only increased 14%, increasing from 3,141 acres in 1999 to 3,581 acres in 2000.

The value of all commercial development within Houston’s city limits, as measured by building permits, increased from $1,421M in 1999 to $1,876M in 2000, a 32% increase. However, this increase is deceiving. If you eliminate Institutional/Public construction, which had a 107% increase from $399M to $824M, there was actually an overall decrease in commercial construction permits.

The value of office and industrial construction permits inside the Loop decreased 85% and 94% respectively. Office construction outside the Loop within Houston’s city limits actually increased 71% to $119M, as measured by building permit values. The amount of office square footage permitted outside the Loop increased 59%, from 1,587,000 SF in 1999 to 2,517,000 SF in 2000.

In the year 2000, the amount of industrial construction within the City decreased by 31% from 1999, to 2,984,300 SF, which includes an 87% decrease inside the Loop (112,000 SF). 2,872,200 SF of industrial square footage was built outside the Loop within the city limits.

Most prime industrial activity is occurring along and just off of Beltway 8, beginning around Intercontinental Airport and clustering where the Beltway intersects another major thoroughfare. This is demonstrated by the World Houston/Interwood area (Hardy; US 59),

the Greens Crossing area (I-45), the US 290 area, the West Road area, the Clay/Tanner Road area (I-10), the Beechnut/Bissonnet area (Southwest Freeway) and the Airport/Gessner Road area (US 90).

A recent trend has been emerging along the West Belt because of its location and superior ingress and egress. Land that was once considered potential industrial land is now office/office park land, and priced accordingly. This is occurring in the Clay Road area as well as areas south of I-10 and will work its way around the Belt. Land prices are in the $1.75 - $2.75/SF range. These prices are moving to $4.00 - $6.00/SF and will eventually squeeze out the industrial user. There is still some user ready land in good secondary locations that can be purchased below $1.00/SF.

There was a decrease of 86% in building permits issued inside the Loop, from $157M to $23M, while increasing 71% outside the Loop, from $70M to $119M. The amount of permitted square footage for the City of Houston increased 49% from 1999 to 2,802,800 SF, of which only 285,700 SF were inside the Loop. The year 2001 should see a continuing trend upward outside the Loop, although substantially below the year 2000 rate of increase. Inside the Loop numbers will be skewed upward when one or more of the planned downtown Class A buildings are permitted, with a single project potentially adding $100 - $150M of value and 400,000 to 1,000,000 SF. Downtown land values are exceeding $100/SF to as much as $340/SF for certain tracts. Lesser quality tracts can still be purchased substantially below these numbers. The level of activity is low for these large Class A buildings and there will only be one or two permitted in 2001.

There has been a flurry of Class B/B- office building construction along the West Belt and North Belt in 1999 and 2000. These tracts are currently priced in the $4.00 - $6.00/SF range as is office land along the I-10/Energy Corridor. There will be a 10 –20% increase in office building activity in 2001 in these same areas along the Beltway and other major freeways such as the Katy and Southwest Freeways. The Woodlands will continue to accelerate the construction of suburban Class A and B office space and rival the total office space growth of the entire suburban Houston MSA.

Commercial/Retail building permits increased 13.5% inside the Loop but by 27% outside the Loop. Within the city limits of Houston, the amount of commercial/retail square footage permitted in 2000 was 6,752,600 SF, a 31% increase over 1999. As the population grows, so does the demand for retail. Land prices have escalated in this category, perhaps more so than in others. Prime retail land of 8+/- acres in northwest Houston that was selling for $6/SF is now selling for $8.50/SF. Inner City prices are even higher, with location specific tracts going as high as $35/SF. Prices for 4-5 acres in the $20 - 25/SF range are not uncommon. We should continue to see firm prices but price increases should slow.

Compared to 1999, new multi-family (MF) construction value decreased by 5% and new MF starts decreased by 1.1% within the City of Houston in the year 2000. Of the approximately 7,600 MF starts in 2000 for the Houston MSA, 4,899 were permitted within the City of Houston and of that amount, 2,682 units were inside the Loop. Although there was a relative dearth of MF construction activity in 2000, over 14,000 units were absorbed. This bodes well for the apartment industry and we should see construction starts rising, although not to the 19,000 starts we saw in 1998. The availability of finished new homes now offer those needing shelter an alternative to apartments or higher priced used homes and this will provide somewhat of a restraint on the amount of new apartment construction for the next year or so. Sales of higher priced used homes will also see a softening in 2001 for the same reason. However, when interest rates and home prices rise to unaffordable levels, possibly in 2002 or 2003, apartment construction could again accelerate, perhaps to the level seen in 1998 or higher.

Currently, a large majority of all new households created choose a single family dwelling over an apartment. The year 2000 was an anomaly as we absorbed 14,000 apartment units in addition to starting 26,300 single-family residential (SFR) homes, for a total market absorption of around 40,000 dwelling units. As a rule of thumb, for every 1.5 to 2 jobs created, one household is formed, of which around 80% choose single-family homes. Because of the lag between job growth and home purchases, we are still seeing the effects of the huge increase in employment that occurred in 1998.

Inner city land for Class A apartments will be in the $20 – 25/SF range while suburban sites will go for anywhere from $1.50/SF for tax credit apartments to $3.75/SF for Class A. The highest price paid for a tract of land outside of downtown was $50/SF for a 60,000 SF site for a mid-rise residential use.

Approximately 60% of the 485,000 housing units inside the City limits are multi-family. The City of Houston has a high population of low to moderate-income households. The median household income for a family of four is $42.5K. Over 50% of Houston is Community Development Block Grant eligible. By Federal standards, Houston is considered a poor city, an entitlement city. Although this may be shocking for some, it is important to remember that Houston extends east beyond Main St.

While this is changing with the increase of single-family construction, more affordable single family housing stock is needed. Market forces will provide for housing on the west side of Houston but much more assistance is needed from the public sector to facilitate the housing needs east of Main St. The recent City of Houston ordinance providing 70% reimbursement to developers for water and sewer lines will help but a fundamental change in the bureaucracy must occur before significant development can occur.

Single Family

In the year 2000, of the 26,157 SFR lots which received final plat approval in Houston and its ETJ, 5,400 or 21% were within the City of Houston. Building permits reflected this platting activity as there were 4,666 single family permits issued within the City, of which 1,804 were inside the Loop.

There were five communities within Houston’s city limits that had over 100 starts in 2000 - Royal Oaks, Bridgegate, Greenpark, Corinthian Point and Mills Creek Village (actually 95 starts). New city wide SFR construction value increased by 18% while new SFR starts increased by 14% from 1999 to 2000, indicating a trend to more expensive housing with an increasing velocity of sales/market size.

This trend should taper off as the price of land in more established areas is pushing home prices above the level necessary to sustain this pace. The proliferation of three story town homes in so many locations suggests slight overbuilding in some of these areas. Increasing land prices have now driven town home starting prices well above the $300K range in most areas. 60’ lots in St. George Place that were selling for $130K a year ago and $70K three years ago are now selling for $180K ($27/SF). The lowest priced new town homes in Rice Military were selling for $269K-$289K two years ago. They now start at $329K and go to the $600’s. The area east of Westcott still offers product just under $300K although this land is also rapidly escalating in price. Higher densities are being developed in an attempt to temper the increase in home prices being caused by the rapid increase in land prices. Perry Homes offers a 1,200 SF, 2 bedroom, 1 bath, 1 car garage product for $170K inside the Loop.

This is leading developers and homebuyers to consider fringe areas and areas that have traditionally been overlooked but still offer a great inside the loop location. One case in point would be the area around TC Jester and 18^th Street, where land might still be found under $3/SF. This location offers great access to both the Galleria as well as Memorial Park. Look for small 4 – 6 acre tracts being developed into 7 – 10 / acre densities for homes priced below $250K. Midtown still offers product in the lower price range and has done considerably well and will continue to do so as long as homes are available below $250K. Availability of reasonably priced land will determine how long the strong sales continue in Midtown. Tracts in Midtown that were $5- 8/SF 3 or 4 years ago are now trading in the $15- 16/SF range, with many asking $25/SF. Look for a slowdown in price increases or a trend away from single family to higher densities.

Housing should continue to be robust, especially suburban housing, with 62,500 jobs created in 2000 and 80,000 predicted for 2001. This should lead to a 6-8% increase in SFR starts. However, the mix of price range will go lower, as this is where the demand is especially strong with a relative lack of lots because developers have focused on upper end housing.

As with the inner city, look for increases in densities, with 40’ & 45’ wide lots becoming more prevalent to keep home prices down. Land prices continue to rise rapidly. What was selling for $20-$25K per acre is now selling for $30K per acre. A 1,000-acre tract of land around a golf course that might have sold for under $12K/acre 2-3 years ago recently sold for $17K/acre. Land can still be obtained for under $10,000 per acre, but it usually has development constraints that make it uneconomical to develop, with lack of outfall drainage as one of the main constraints.

Developers and investors are starting to realize that they are better off paying more for the land and getting better development conditions. Primarily, land within an existing MUD district or adjacent to one which can be annexed is highly sought after, especially those Districts with excess capacity in their water and sewer plants and having additional authorized bonding capacity. Even more desirable are Districts that reimburse 100% rather than the standard 70% of water, sewer and drainage costs. This can add as much as $5,000 - $7,500 per acre of value to the land.

With the increase in development costs from additional regulatory and environmental burdens as well as increases in land prices and hard costs, the consumer will be the loser, as home prices will continue their rapid increase.