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Special Report:

Weitzman Group says Houston Shopping

Centers Outperforming the Nation

By Ian Pierce
Director of Corporate Communications
The Weitzman Group

Thanks in part to extremely strong job growth, the Houston-area economy continues to outperform much of the nation. The health of the overall economy is ensuring that Houston’s retail market remains vibrant and stable.

The retail market continues to see retailer expansions, well-leased new projects and an active restaurant market. As a result, the market at mid-year reported stable occupancy of 88.0 percent, in line with year-end 2007’s rate of 88.5 percent. The slight increase in vacancy is due to new projects coming online well leased but with some small-shop vacancy.
The occupancy rate is based on a retail market inventory of approximately 134.2 million square feet of retail space in shopping centers with 25,000 sf or more.

The Weitzman Group and Cencor Realty Services base the retail market report on a review of market conditions as of mid-year 2008.

Based on center openings through the first half of 2008, plus projects under way for estimated year-end completion, we estimate that 2008 construction will total 4.9 million sf. This construction level exceeds the strong activity seen in 2006 and 2007.
During the first half of 2008, Houston saw regional and community projects come online, as well as a new mall. A new mall is also set for the second half, making Houston’s one of the most active mall markets in the country.

Projects opening in the first half of 2008 totaled more than 1.5 million square feet and included:
• Houston Premium Outlets, a high-end outlet mall located at Highway 290 between Mason Road and Fairfield Place in Cypress. The center, which totals 427,000 sf, features Calvin Klein, Zales Outlet, Harry & David, Adidas, Nike Factory Store, Guess, Kenneth Cole, Gap Outlet and many more;
• Wal-Mart Supercenter, a 205,000-sf store that opened in May at N. Fry Road near West Little York in Katy;
• Wal-Mart Supercenter, which opened a 203,092-sf store in March on Sawdust Road in The Woodlands;
• Imperial Oaks Shopping Center, a community center anchored by Kroger Signature at Imperial Oaks Boulevard and Rayford Road in Spring;
• The second phase of Bay Colony, at the Gulf Freeway and FM 646. Kohl’s opened in April, joining existing Home Depot and Best Buy stores;
• Kohl’s, which also opened 80,000-square-foot-plus stores at 5550 W. Grand Parkway in Katy and on FM 1960 in Atascocita;
• H-E-B Cypress Market, an upscale H-E-B concept at the intersection of Barker Cypress and Highway 290. The store totals approximately 112,000 sf;
• Silverado IMAX, a 100,000-sf multi-screen theater and IMAX that opened on Highway 249 near Tomball;
The second half of the year will see a notable number of new projects open, adding millions of square feet to the market. These projects include:
• Pearland Town Center, an open-air mall at Highway 288 and FM 518 in Pearland, which holds its grand opening in July. The 937,000-sf lifestyle mall is anchored by Dillard’s, Macy’s and Barnes & Noble;
• The final phases of Atascocita Commons, located on FM 1960 in northeast Harris County. The project is adding the above-mentioned Kohl’s, plus a 177,000-sf SuperTarget, a 50,000-sf T.J.Maxx/HomeGoods combo store and a 30,000-square-foot Ross Dress for Less, in addition to smaller retailers and • restaurants. The first phases of the center, started in 2005, total just under 200,000 sf;
• Village Plaza at Bunker Hill, a 520,000-sf center anchored by a 127,000-sf H-E-B. Circuit City and PETsMART also anchor the center, located at the northwest corner of Bunker Hill and I-10;
• Market Square at Eldridge Parkway, a 220,000-sf center with an 180,000-sf SuperTarget as anchor, as well as T.J. Maxx. The center is located at the southwest corner of Westheimer and Eldridge Parkway and will open in the second half of 2008;
• Waterside Marketplace, a project now under construction at the northwest corner of Grand Parkway and Mason Road in Richmond. The approximately 148,000-square-foot project will be anchored by a 103,000-sf Kroger Signature and is set to open in the fourth quarter or in the first half of 2009;
• The expansion of Town & Country Village, one of Houston’s oldest and most popular upscale centers, which will complete a 100,000-sf expansion of the project this fall. The center, located between Memorial and I-10, includes new tenants Fleming’s Prime Steakhouse & Wine Bar and White House Black Market, among others;
• Houston Pavilions, a downtown entertainment-oriented project with as much as 700,000 sf of space. The urban project, set to open in October 2008, will feature House of Blues, Lucky Strike bowling alley, McCormick & Schmick’s and several other restaurants and clubs. Retailers include Books-A-Million, Journeys and Forever 21. The project is located at a site bordered by Dallas, Polk, Main and Caroline streets;
• Greenway Commons, an urban infill development set to open in the second half of 2008. A 164,000-sf Costco will open in September, and a 45,000-sf LA Fitness will open in November. The project is designed with additional multi-tenant retail and pad sites and is located at the northeast corner of Weslayan Road and Richmond Avenue, the former site of the Houston Independent School District’s headquarters;
• Shops at Bella Terra, a regional project located between the Westpark Tollway, Grand Parkway and Bellaire Boulevard. Phase I opened Kohl’s opened in April, and Wal-Mart Supercenter will open in the second half of 2008. The project will total 600,000 sf upon completion of all phases;
• Tuscan Lakes, a 60,000-sf center anchored by LA Fitness, a 45,000-sf health club that opened in the first half of 2008. The center is located at the northwest corner of Highway 96 and FM 270 in League City;
• The newest phase of Brazos Town Center, which will add Conn’s and a 137,000-sf Kroger Marketplace, as well as Mattress Firm, Zales and others in late 2008 or in 2009. These will join Target, Home Depot, Best Buy, Academy and JCPenney. Brazos Town Center is located at Highway 59 and FM 762 in Richmond-Rosenberg;
• Fort Bend Town Center, located at Highway 6 and Fort Bend Parkway in Missouri City. The center’s anchor, Kroger Signature, is set to open in the second half of 2008;
• Northline Commons, the redevelopment of Northline Mall into an open-air center. The 500,000-square-foot property is opening in phases through 2009 with anchor spaces and small-shop and restaurant space. Existing retailers who remained open during the renovation include Palais Royal, Payless ShoeSource, Footlocker and others. Retailers set to open Marshalls, Conn’s and Office Depot. Northline Commons is located north of Loop 610 and I-45;
• CityCentre, at the site of the former Town & County mall, a massive mixed-use project now under way at I-10 and Beltway 8. City Centre is designed to have 400,000 sf of retail space, as well as office, residential and hotel uses. Concepts for the project include Life Time Fitness, with 140,000 sf, Studio Movie Grill and a Valencia Group hotel.
Active concepts in Houston include the anchors and stores mentioned above, as well as:
• JCPenney, which is under way with stores in Conroe and at Beltway 8 and Wallisville and FM 646 and I-45;
• Health club concepts, including the above-mentioned LA Fitness in League City and Life Time Fitness in CityCentre. Life Time Fitness also located at Will Clayton Parkway and Lake Houston Parkway in the Atascocita area, and VillaSport Athletic Club and Spa will open an 87,000-square-foot location in The Woodlands in the second half. 24 Hour Fitness will open in Bay Colony Town Center;
• Rooms to Go, which opened stores in The Woodlands, at Baybrook Mall and at FM 1960 and Highway 249 near Willowbrook Mall;
• Ashley Furniture, which opened a 50,000-sf store at FM 518 and Highway 288 in Pearland in March;
• Staples, which leased approximately 20,000-sf stores in Wallisville Shopping Center and Baybrook Passage shopping center;
• Lowe’s Home Improvement, which is set to open in the second half of 2009 at Murphy Road and Highway 6 in Missouri City. Lowe’s will anchor a center to be developed on a 20-acre site that previously housed hospital/medical office space;
• Whole Foods Market, a specialty grocer, which will anchor a retail development on West Dallas between Montrose and Waugh. The store is set for 2009;
• Finger Furniture, which will open an 85,000-sf store at I-45 and College Park Drive in mid-2009;
• Bed Bath & Beyond, which is set to anchor the planned 400,000-sf Grand Corners, a 2009 development at Grand Parkway and Westpark Tollway;
One sign of the strength of the Houston-area retail market is the continued backfilling of vacant retail boxes. These backfilled spaces illustrate retailer demand for existing spaces.
Retailers backfilling spaces included:
• Fiesta, which took part of an old Kmart at I-10 and Mason Road in Katy. Fiesta occupies approximately 67,000 sf of the 104,000-sf building, with retailers such as Dollar Tree taking the remainder;
• H Mart, a South Korean-owned supermarket chain, which took a 53,000-sf box that formerly housed a Randalls grocery store;
• Rooms to Go, whose store near Willowbrook Mall absorbed a former Mervyn’s.
Restaurants also remain extremely active in the Houston retail market. New and expanding restaurants include Extreme Pita, Avocado California Roll & Sushi, Corner Bakery, Yard House, Eddie V’s, Mimi’s Café, Red Robin, B.J.’s Brewhouse and others.
Houston’s retail market is also slated to see a number of new mixed-use projects in the near future. These include:
• BLVD Place, a mixed-use project under way at Post Oak Boulevard and San Felipe, the site of the former Saks Pavilion. The anchor tenant announced for the project is Whole Foods. The project will also include specialty retail, as well as existing concepts Americas restaurant and Hermes boutique;
• West Ave, an urban-style, high-density retail and residential project in the works at the intersection of Westheimer and Kirby;
• High Street, a central city project in the works at 4410 Westheimer, near the Galleria. High Street will have 100,000 sf of retail and a mix of other uses, set to open in the second half of 2009;
• Sonoma, a mixed-use project set to open in 2009 with retail space, as well as office and residential space. Sonoma is located within the 16-block Rice Village shopping, dining and entertainment district.

As of mid-year, asking rental rates for Houston-area retail projects remained steady, with no significant increases or decreases. Rates for small-shop multi-tenant space were highest in Class A, well-anchored space inside of Loop 610, where rates could go as high as the $50-per-sf range.

Marketwide, rates for Class A in-line space at year-end were ranging from the mid-$20s-per-sf range to the high $20-per-square-foot range, plus triple nets. Endcaps, outparcels and specialty projects saw in-line rates go to the high $20s-high $30s or even higher.

For Class B space, rates typically were in the $18-22-per-square-foot range. Class C space typically ranged from $12-18 per square foot. Rates for the remainder of 2008 and into 2009 are expected to remain stable.

Rates for premium malls like the Galleria can be much higher than the Class A rates stated above.

The retail market outlook remains good due to the continued signs of strength in the Houston economy. Job growth in particular is a bright spot. Houston ranked as the top job market in the country in 2007 with more than 100,000 net new jobs, according to the U.S. Bureau of Labor Statistics. Job growth from May 2007 to May 2008, the latest 12-month statistics available, are showing a 2.3 percent growth rate.

The housing market, one of the most watched areas of the economy due to the problems being experienced nationwide, remains flat in Houston but much healthier than many other major markets. During 2007, Houston was the country’s top market for single-family homes, with 44,000 starts, according to the U.S. Census Bureau. For 2008, starts have been significantly down, with a 33 percent drop in the first quarter. The market is on track to see around 34,000 starts this year. Entry-level housing experienced the majority of the decline.

For the first half of the year, sales of single-family homes declined, although some areas are seeing both price and sales increases. The market is expected to remain flat or show slight declines through the end of the year due to the credit crunch.

The outlook is for continued health and balance in the Houston-area retail market through the remainder of 2008, based on continued strength in the economy and steady retailer demand.

About the author: Ian Pierce is a veteran communicator specialzing in Texas commercial real estate news. He is director of corporate communications for The Weitzman Group, a Dallas-based firm.

Special Report: Price & Privacy

The Public's Right to Know?

By Matt Hudgins

RNR Contributing Editor

AUSTIN -- Buyers can continue to keep the prices they pay for homes, buildings and other real property in Texas a secret – until next year, at least.

The State Legislature’s special session ended May 15 before lawmakers could consider measures that would have compelled buyers to disclose real estate acquisition prices, but proponents say it’s only a matter of time before such a provision becomes law.

“It’s ludicrous to think you can do an appraisal and not have sales information,” says Ken Nolan, executive director of the Dallas Central Appraisal District. “That information should be readily available up front so we can do the job the Legislature told us to do back in 1979 (when it adopted the property tax code).”

That’s why Rep. Mike Villarreal (D-San Antonio) and Sen. Jeff Wentworth (R-San Antonio) submitted bills this year that would require disclosure of sales information. Wentworth introduced a similar measure in 2005, and seeks to make property prices public, while Villarreal’s bill would only require confiding that information to appraisal districts.

Wentworth plans to resubmit his proposal when the next session begins in January. Villarreal hasn’t yet announced his agenda for that session.

Nolan and other appraisers, as well as a growing number of legislators, contend non-disclosure results in undervalued properties and lost tax dollars. Nolan points to the difference between total property values reported by the state’s appraisal and school districts, and the much larger values the State Comptroller’s office estimates for all properties each year. Applying the average property tax rate of $2.40 cents per $100 valuation to those un-captured values would have garnered another $2.45 billion over the past three years, he says.

Moreover, the current practice may shift the property tax burden unfairly from owners of commercial properties and high-dollar residence onto the backs of owners with more typically priced homes valued at $150,000 to $250,000. That’s because appraisers have less trouble obtaining price comparables on lower-priced homes, thanks to multiple listing services. Higher priced homes and commercial properties must be appraised based on newspaper reports and other methods.

“As a result, the tax burden has shifted to owners of moderately priced residential property,” Sen. Wentworth stated in a written release outlining his proposal.

But real estate experts say purchase price comparables are only one part of an appraisal and won’t necessarily improve accuracy, particularly for commercial properties and luxury homes with unique features affecting the price.

“There’s so much more to determining the value of a property, other than just the sales price,” said appraiser David M. Lewis, MAI, CRE, of Lewis Realty Advisors in Houston. “You must also know about the rental income, the physical condition of the property and the terms of the sale. It is not cut-and-dried, not simplistic.You must know the story behind the price.”

Lewis was the managing consultant for the massive reappraisal of all taxable property in Houston in the 1970s. And he was a founding board member of the Harris County Appraisal District (HCAD) in the late 1970s.

“I have reached the conclusion that disclosing the sales prices to the appraisal districts would be detrimental to all parties. Without knowing the particulars of a commercial property, having the sales price is almost meaningless information,” Lewis said.

“Intangibles are exempt from taxation, and there are a lot of intangibles that are part of commercial real estate deals,” says Charles Gilliland, a research economist in the Real Estate Center at Texas A&M University. A high price paid for a warehouse may reflect the buyer’s determination to locate next to a key supplier, for example; the price paid for a farm may reflect the added value of a crop in the field. Neither should be rolled into the property value.

Gilliland says disclosure would lower appraisal districts’ costs of collecting information, however, and might improve the accuracy of residential appraisals.

Gilliland says most of the property owners with whom he has discussed disclosure consider the matter a privacy issue rather than a tax dodge.

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Cost Segregation:

Why are 90% of Real Estate Investors

Overpaying Federal Income Taxes?

By Patrick O'Connor, MAI

O'Connor & Associates

By ignoring generous IRS guidelines when establishing depreciation schedules, over 90% of real estate investors are unintentionally overpaying federal income taxes. In addition they are paying federal income taxes earlier than necessary, typically years or decades earlier than necessary. Although these IRS guidelines are relatively new, they provide substantial benefits. Since this is a relatively new issue, many accountants have not integrated the new IRS depreciation guidelines into their practice. Savings for real estate investors are meaningful- exceeding $50,000 to $1,000,000 in the first year. Cost segregation converts income taxed at 35% (ordinary income) to income taxed at 15% (capital gains). Cost segregation also defers payment of income taxes, often for 5 to 10 years.

Effects of higher depreciation

Most real estate investors do not understand the benefits of increasing real estate depreciation. They often ask, "doesn't increasing my depreciation just mean that I will be shifting taxes from now until when I sell the property?"

This is a popular misconception and the answer is a resounding "no". There are two benefits of increasing depreciation:

1. Converting ordinary income into capital gains income
2. Deferring income until a gain on the sale of the property is realized.

The conversion of ordinary income into capital gains income has to do with the technical nature of the allocation of the gain on the sale. Many, if not most, accountants initially believe it is simply a timing issue. However, when the mechanics of recognizing gain on sale are discussed, accountants quickly realize increasing depreciation leads to paying taxes at the capital gains rate as opposed to the ordinary income rate.

Correcting a depreciation schedule makes a difference if you recently sold a property since the additional depreciation will be taxed at the capital gains rate instead of the ordinary income rate. For example, assume an investor sold a property in late 2005, does a cost segregation study, and increases depreciation by $100,000. The net result is the ordinary income taxes will be reduced by $35,000 ($100,000 x 35%) and the capital gains taxes will be increased by $15,000 ($100,000 x 15%). This nets the owner $20,000 in federal tax savings by simply correcting an error in the depreciation schedule after the property has already been sold.

When told it is possible to increase depreciation and reduce federal taxes, most real estate investors ask, "doesn't my accountant take care of this for me?"

Our experience, after reviewing thousands of depreciation schedules for real estate, is that less than 5% of depreciation schedules have been properly established. Most real estate investors have a good relationship with their accountant and believe, as a matter of faith, that their accountant is doing everything possible to minimize their taxes. Unfortunately, many accountants have not focused time or attention on this issue for several reasons. Some accountants are aware of cost segregation as an option to increase depreciation and reduce federal taxes but believe it is very expensive (at least $10,000 per property) and is financially feasible only for large properties (typically over $10 million). Many of the providers started out either as big four firms or big four spin-offs who charged between $10,000 and $50,000 per property. Many of these providers were not interested in properties with a cost basis under $10 million and only did cost segregation for newly built properties. Other accountants have not focused on the topic.

Cost segregation clearly makes sense for properties with an improvement basis of at least $500,000. In many cases it makes sense for smaller properties. While accountants are becoming more and more active in reviewing options for depreciating real estate, in many cases the owner needs to take the lead role in proposing cost segregation as a mechanism to reduce and defer federal taxes.

Property owner involvement

Many property investors proudly take the stance that, "my federal tax return is too complicated; my accountant handles it."

It is almost a rite of passage that a "serious" real estate investor is one whose tax return must be prepared by a third party because it has become too complicated for the investor to complete. Only about 2-5% of depreciation schedule in federal tax returns have short life property properly separated to minimize the owner's federal taxes. While many parts of the federal tax return may be too complicated for an investor to understand and prepare, this area is simple: if you pay federal taxes and can use additional depreciation, you benefit from obtaining cost segregation studies. Most investors are not aware of cost segregation and do not understand the benefits it provides. Those who are familiar with cost segregation think it only makes sense for large properties (over $10 million). Regrettably, there is limited and inaccurate information regarding a material issue that could sharply reduce federal taxes for many real estate investors.

Some owners are passive while others are active. If you are a passive real estate investor you may not be able to use additional depreciation. On the other hand, if you are an active investor or a real estate professional, which includes people in a wide variety of activities from real estate broker to mortgage broker to leasing agent, you are entitled to deduct additional depreciation.

If you have determined you can use additional depreciation and are paying federal taxes, call a cost segregation expert and request a preliminary analysis. There should be no fee for this initial consultation. The preliminary analysis will estimate the amount of 5, 7, and 15-year property, which can likely be identified and will also identify the catch-up depreciation. This analysis will not involve a site inspection and will not be precisely correct. However, it should be accurate enough to help you decide whether a cost segregation study is financially feasible.

Once you obtain the preliminary analysis, you should consult your accountant, since he/she will be completing and signing your tax return. In many cases, it makes sense for the accountant, the property owner, and the cost segregation advisor to meet and discuss the options and issues.

Assuming you decide a cost segregation study does make sense, you should further review whether the extra depreciation should be used in a prior year, which would involve filing amended tax returns, or whether to use it in the current year. To minimize federal income taxes, make obtaining a cost segregation study a routine part of future real estate investments.

Correctly calculating real estate depreciation is important because it substantially reduces federal taxes for real estate investors. The process of fine-tuning the depreciation schedule is called cost segregation. The adoption rate for cost segregation is under 5% because of limited knowledge by many owners and accountants. In addition, there are misconceptions regarding the cost of obtaining cost segregation studies and the smallest properties for which cost segregation studies are financially feasible. As awareness of the practice and affordable service providers increase among real estate investors and accountants, the adoption rate will increase dramatically.

Patrick O’Connor is president of O’Connor & Associates.  The firm, in business since 1974, specializes in real estate appraisals, research, and state and federal tax reduction services nationwide.  With offices in Houston, Dallas, Los Angeles and Newport Beach, the firm employs more than 130 people.  Patrick O’Connor is frequently acknowledged by national publications as a respected source of information on real estate trends. 

Copyright by O'Connor & Associates, 2006.

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TxDot Moving to Acquire

Major Tracts Along 290;

Key RIght-of-Way in Northwest

          The Texas Department of Transportation is planning some significant roadway improvements that will require the agency to acquire hundreds of parcels of land along US Highway 290 and Hempstead Road .

          Approximately 700 parcels of land in Northwest Houston will be impacted, said Mark Sikes, principal with Houston-based Lewis Realty Advisors.

          “This effort by TxDot will represent one of the most extensive land acquisition programs in Houston in years. The acreage that will be taken by the state is mostly prime commercial property,” Sikes said. “This will have a real impact on the Highway 290 real estate market and property owners should begin now to map out their strategies for dealing with it.”

          The road widening will require the state, backed by the power of eminent domain, to take land along the dual corridors starting at IH-10 and ending at the Grand Parkway .

        TxDot will begin at IH-10 and go northward to U.S. Highway 290 and Hempstead Road then northwest along both corridors. Some 175 parcels along US Highway 290 between Loop 610 and Beltway 8 will be acquired by the state, Sikes said. Another 150 parcels along the old Hempstead Highway will be acquired, in addition to some property along Loop 610, south of the Northwest Mall.

          Sikes, a real estate appraiser and consultant, has a long history of working in right-of-way takings cases including TxDot. Over the last few years, he has worked with the majority of the Katy Freeway property owners who protested the purchase offers they received from TxDot.

          Coming up with a reasonable and fair offer can be a complex issue that deserves a great deal of study. Simplistic formulas do not always result in fair pricing, especially for commercial properties.

        Commercial properties, such as shopping centers, can lose a great deal of value if the government acquires a large portion of the parking lot. Shopping centers with inadequate parking cannot function effectively. Calculating the value of the remaining property in such cases is difficult and subject to interpretation.

     Sikes advises against accepting offers too quickly especially when there is the potential for remainder damages resulting from the taking. When governmental agencies are acting to acquire a property through eminent domain, the property owner should carefully consider all impacts to the remainder property.

       "While many condemning authorities make purchase offers initially, some owners may not get just compensation," Sikes said. "Lewis Realty Advisors has been involved in thousands of these cases since 1960s and it is quite common for there to be disagreement about a property's value or damages to the remainder of the property."     

        Lewis Realty Advisors will be deeply involved in the Highway 290 expansion and several land owners have begun to plan for the takings, Sikes said.

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DAVID M. LEWIS

Questions and Answers

David Lewis, founder of the Lewis Realty Advisors appraisal and
consulting firm, has a long resume in Texas real estate. He has
been a developer, a banker and an appraiser across Texas and in
other states.
Lewis Realty Advisors has a deep history of handling government related
work, with a client list including the City of Houston, the
Port of Houston and the Uptown Development Authority.
The company’s appraisal work has been making headlines along
the Katy Freeway, where it is representing most of the property
owners who are contesting offers from TxDot. Lewis recently took
a few moments to visit with Ralph Bivins, editor of RealtyNewsReport.com about  a variety of topics discussed in this interview, which first appeared in RedNews.

Q: You’ve been involved in many government related
projects, such as helping to assemble the land for
sports stadiums. That sounds like interesting work.
A: Yes, we were involved in the land for Minute
Park and the new basketball arena in downtown
Houston. We have appraised both the Astrodome
and the Summit (Compaq Center) several times.

Q: There are many wild ideas now being floated
about what to do with the Astrodome, making it into
a hotel or a casino or whatever. Is there any viable
plan for the Astrodome’s future?
A: The thing about the Astrodome is it’s no longer
one of the Seven Wonders of the World. There are
a lot of stadiums with roofs now. It may take three
or four attempts to redevelop the Astrodome
before a profitable re-use emerges. What the
Astrodome will become is anybody’s guess.

Q: Are there any areas of Houston that appear to be
sure-fire bets for real estate investors today?
A: I think I would start at the center of Houston
and work outward. Inside the Loop is in an exciting
phase. Look for redevelopment opportunities
there. The CBD has become vibrant with young
people moving in there and a 24/7 environment.
And that is crucial — having a vibrant downtown.
If the core of the city dies, the entire city withers.

Q: Some people criticize the results of the Minute
Maid baseball stadium saying it did not produce
enough new development. What are your feelings on
that?
A: The stadiums have generated activity and a
rebirth of downtown. Look at the lofts, all the
people living downtown. Look at the redevelopment
of the Rice Hotel. It’s a happening. It’s in
process and it is in full swing. We can thank
Mayor Bob Lanier for revitalizing our inner city.
When Lanier was first elected you could buy
downtown buildings for $20 psf.

Q: What is happening with the widening of the Katy
Freeway? The state highway department has been
taking ownership of a lot of freeway frontage land
through eminent domain. Your firm is involved in
helping many of the landowners appeal their purchase
offers from the state. Are the landowners getting
a fair deal from the TxDot?
A: We represent a majority of the private property
owners along the Katy Freeway. The state is taking
property every day. Our clients will get fair and
just compensation, I believe, as the state takes
ownership of their land. It is not an automatic
thing, however, and the landowners need to
aggressively pursue just compensation. Some
entrepreneurial real estate people are going back in
now and scouting around for good sites that will
have strong values when the dust settles in a few
years. My advice? Be early and be willing to wait.

Q: What about the widening of roads and streets,
such as some of the work going on in the Uptown
area? Is this a good place to invest?
A: Our firm is involved in the Uptown area. Some
of the growth you are seeing there, particularly in
residential and retail, is very promising. Freeway
expansion and highway construction do create
opportunities as well as damages. And it’s no secret
that future paths of the Grand Parkway, the Katy
Freeway and Highway 288 have a lot of potential.
For the last 10 years, Houston has a lot of solid
growth, projects that are justified by sound economics.
Of course, the growth really percolates
along these freeways.

Q: What is you opinion of our light rail system?
Are there opportunities there?
A: If we follow the example of what happened in
Dallas, the rail will spawn some new development.
Several significant projects are located along he
Dallas rail line. Projects that are at the stations and
train stops do quite well. Those who are not at the
stations, just wave as the train goes by. As far as
mobility, I don’t think there’s any doubt that it is
an asset. Remember were aren’t doing rail to make
money in real estate, we’re doing it for mobility. As
future segments of the rail are added, whether it be
to Northline Mall or the University of Houston,
real estate investors would do well to be remain as
close to the stations as possible. It’s the people on
the rail that make these developments exciting,
not just the fact that the rail runs by. And Metro is
continuing to be creative with all sort of real estate
development. For example, Metro is now seeking
developers to build a commercial element as part
of a Park & Ride lot near Highway 290 and
Barker-Cypress.

Q: Many lawyers call on you regularly to give expert
witness testimony in legal proceedings. Can you give
us an idea of how that started and how often you’ve
testified about property values, appraisals and those
kinds of issues?
A: I’ve testified for over 40 years. If you know the
subject matter well, the testimony will turn out
well. And I do like to go into these situations very
well prepared. Research, research, research is the
only basis for sound opinion. Giving depositions,
which can go on for days, are actually tougher
than the briefer courtroom appearances. The
expert witness avenue really opened up for me in
the early 1960s, when Mayor Louie Welch asked
me discuss real estate issues before the City
Council. I have remained close to the mayor over
the years and I give him a great deal of credit for
any success I have had.

Q: You developed a large parcel of Houston land on
Highway 249 near FM 1960 for entertainer Johnny
Carson, who recently passed away. I understand that
you had a lot of contact with Johnny over the years.
A: Johnny was an American icon and a great person.
He was one of the nicest guys that I have ever
met.

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The Real Cost of Real Estate

By Ryan Morris

Upstream testing can make the difference in downstream success or failure of a corporate move.

Companies considering a real estate change can now take advantage of a preliminary test prior to a corporate relocation that can give a good indication of whether their occupancy cost expectations after a move are achievable. Real Estate Partnerships and Alliances (REPA) is an occupancy cost manager that administers an occupancy test to determine how the total systems that support business and personnel will respond to a changing business environment.

Within seven working days of a request, REPA can provide a turnaround benchmark analysis for corporate review comparing the total occupancy cost for the term of the lease for the three corporate cost expectations cited below. There is no charge for the initial testing. REPA’s fees are paid out of the savings created by integrating proven occupancy cost strategies that cope with change. Occupancy cost testing is subject to a minimum square footage limitation and open to companies where a future real estate activity is a realistic consideration.

The relocation of a company requires a major capital investment in business and employee systems (92%) that support a lease which are now significantly higher than the rent (8%) and now make up the majority of the occupancy costs of running a company. Strategic occupancy cost testing of your current work environment, technical infrastructure and real estate helps determine if expectations for cost control in a changing business environment are achievable. Corporate cost expectations can be broken down into three categories.

Low upfront cost expectations are a conventional approach to lowering cost based on anticipated concessions gained through lease negotiations including free rent, turn key build out of the tenant’s needs by the owner and a cap on operating expenses. This expectation works well on paper, but may not test out well in a changing corporate business environment which can quickly recapture concessions previously negotiated and accelerate occupancy costs outside the lease.

Low bid expectation is a second conventional approach based on the lowest bid approach to driving down all components of occupancy cost including the selection of 1) the building through the request for lease proposal, 2) the technical infrastructure, 3) the telecommunications equipment, 4) the work environment and 5) the purchase of assets that support the company. This cost expectation can have the most harmful consequences to the future viability of a company because it makes the assumption that there will be minimal changes within the occupancy cost components for the remainder of the lease term.

Total occupancy cost expectations differ from the first two examples cited above. This approach does not focus on the lowest upfront costs or lowest bid approach but places emphasis on 1) introducing flexible business and employee support systems to lower the total occupancy costs over the term of the lease or ownership of the building, 2) calculating the payback on initial occupancy cost components used in conventional approach and REPA’s cost strategies approach and 3) helping retain negotiated lease concessions that can be lost in a changing business environment.

When the first two conventional approaches are implemented to lowering occupancy, companies may be blindsiding themselves to the real drivers of occupancy cost outside of the lease created by inflexible business and personnel support systems that can’t support change. These unforeseen occupancy costs can quickly lap the field of concessions created through negotiations. Free rent and generous tenant improvements within a lease can quickly give ground to the real drivers of cost outside of the lease created by a changing business environment – such as turnover of key personnel, premature technical obsolescence, downtime of equipment and personnel, inflexible work environments, and ongoing capital investment to replace outdated assets.

Ralph Bivins, editor, and David

Lewis, founder of Lewis Realty

Advisors. See Q&A interview

at left.

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