Houston Commercial Real Estate Faces Tough Times

This holiday season is full of cheer. In addition to jobless reports indicating a decrease of 46,000 jobs, there are reports of a spike in sublets of commercial realty spaces.

These are all signs that Houston’s economic conditions are continuing to worsen. Though experts predict that the lower interest rates and dropping prices could lead to a rebound in 2010.

If this is true, then potentially this could provide a bad time to be a construction company, as demand may drop. People have stated that this could lead to drops of of 10% to 20% in construction.

Additionally, investors in commercial real estate will be feeling the sting. The spike in sublets indicates that people are trying to get out of leases. This could be because they are cost cutting or even worse going out of business.

Investors in retail spaces will be dealing with tighter margins during this period. To handle these issues, investors will have to have supplemental cash reserves to help insure that they can survive.

Unfortunately, some of the issues that arise during these times puts owners in a awkward position. You would want to cut back expenses, but those expenses could be important to retain and draw good tenants.

Commercial real estate is determined by location and ability to draw traffic. This means that upkeep, maintenance, and landscaping have to be in good order. The visual curb appearance of a property could influence customers which ultimately drive the valuation of a property.

Tough times have tough decisions.

Another builder bites the dust

Today in the Houston area, another builder, Kimball Homes, has today stated its winding down operations. It will finish the full slate of projects and will sell of the inventory.   The company states that it has enough liquidity from the money in tow and from sales to pay off contractors (Chronicle Article).

This is another sign that even the Houston economy which was immune did not present a positive outlook.  The company was only able to obtain the financing as a part of post bankruptcy. This was to help it fulfill its old obligations.  They are settling with creditors so they may pay contractors, but it maybe settled amounts. They will pay post bankruptcy contractors to insure that they do finish the jobs, but older accounts they may or may not be settling with them.

However, this is just another sign that things are looking rough.  What strikes me as odd is that in this tough lending environment that they were able to lock down 35 million dollar financing.  There must be some generous terms and subjugation of other liens to have secured that kind of financing.

Another thing to think about is that this could be another sign that the inventory levels in Houston are just not going to come down anytime soon. This plus the amount of foreclosures that have not placed in the market could mean that this is not a situation that will be conducive to builders or sellers.  This is a buyer’s market.

How many other builders are going to be able to survive a prolonged slow down or high levels of inventory?