2010: 12 Predictions for Houston’s Business & Investment Community

It has been said that “the only thing constant is change.” While this is true, the rate of that change is anything but constant. If you pause to reflect on how rapidly things are changing all around us, you will realize that momentum is building and the change is picking up pace.

While this change has been unwelcome to many Houstonians, and most of the business owners that I am in contact, the very idea that the rapidity of this change means we may actually be able to see the changes manifest within our lifetimes is thrilling to me. Whether you feel the same way or not, it does make predictions such as these a bit more difficult to pen.

I’ve managed to get a majority of predictions right in my still young days, but admittedly I did not anticipate how quickly or strongly the stock market would rebound in 2009.  In 2008 to the present, I did not expect such a precipitous decline in real estate values, especially within my passion: commercial real estate – which actually seemed to move parallel to the stock market, yet still have not corrected.   So…

Here are my 12 predictions or best guesses for what will transpire in 2010:

1. Houston: We Do Not Have A Citywide Recession – By Year End.

The shock to the financial system produced significant volatility, which is now easing.  Volatility creates fear.  When businesses are fearful they will not make major decisions, banks ultimately will not lend, and a shake-out will occur.  The shake-out in Houston is still underway as the tremors of Wall Street volatility continue to be felt.  My simple prediction  for Houston is that the weakest business sectors in 2008 and 2009, will likely be the most promising industries in 2010, albeit for a short-term.  Houston’s base employment will decline – but not close to the 100,000 we saw in 2009.  Just a few shocks.  Added, the government will increase its presence in the city via census and new jobs, this will buoy the employment market to positive numbers by year-end.  Understandably, via significant government intervention, we are kicking a can down the road.  But I feel all of the credit bubble, national debt, doom mongers will likely have to hold their tongues throughout 2010.

2. Houston Tenants:  Get Prepared, Opportunities are Appearing

The commercial real estate sector, to which I specialize, is feeling the effects of a dried up lending market.  From a commercial real estate owner’s perspective, things look dire.  Because businesses are finding themselves not having the available resources to cover the monthly nut, they are shutting down.  As building materials and labor are not seeing significant declines, landlords are getting squeezed. So, in turn vacancy has risen dramatically in 2009, most of which is occurring in the 2nd half of the year.   To combat, Houston commercial real estate landlords and lenders are reducing tenant improvement allowances and getting tough on the building’s controllable expenses to offset a drop in rental rates and/or above-average tenant concessions.  I believe that no time since the early 90′s will concessions be so widely used to attract tenants as they will be in 2010.  Lease renewals dominated the 2009 leasing market, but as downsizing and deferred maintenance issues arise, I think the second half of the year we will see a pickup in companies relocating.  Thus the spread between good buildings and bad buildings will widen and likely begin to accelerate in late 2010, possibly start of 2011.   Expect end of 2010 rental rates to mirror 2004 or 5′s. In essence, the office leasing market will have pulled the slack from the 2006-2008 increases – tightening the rope towards a longer term trend.  This sudden reduction in rents will create building foreclosures for those who purchased during the period. 

3. Deflationary Pressure Continues

I believe the U.S. and world economy will likely experience a continued deflationary dip during 2010. Banks are still not lending and the expansion of the monetary base is not keeping pace with the massive contraction in the credit markets. With the commercial real estate shoe yet to be realized and a glut of production capacity, deflation is the more likely an immediate threat to the economy. I believe the Fed and government pull out all of the stops to fight the deflationary threat. With new consumer stimulus programs, tax rebates, government lending, pressure on the banks to lend and the printing presses running overtime, all of the newly-created money will eventually work its way into the system and as the velocity increases, deflation will subside and inflationary pressures will materialize. This could easily spiral out of control and lead to hyperinflation in a few years, as no matter how confidently Ben Bernanke speaks of his abilities, once the money is created and flows into the economy it multiplies via fractional reserve banking and becomes very difficult to soak back up. So while I view widespread inflation as inevitable, I don’t think it will happen in 2010.

4.  Stock Market Rangebound

I believe the plunge protection team will continue to support the stock market during 2010, although the growth will slow considerably. As stocks are mainly a cash market, the deflationary impact felt in the credit markets will have little impact on stocks. The market is due for a correction and there may be short volatile swings as investors lose confidence, but I think the market will end the year little changed (+/- 5%). No doubt, the market is on life support without an injection of liquidity via the government and Fed.

5. Fed Funds Rate to Remain Near Zero

While many are anticipating a rise in rates during 2010, I believe the Fed will be forced to keep rates low due to deflationary pressures. Any rate increase would wreak havoc on the markets and this is the Fed’s biggest fear. At most, a small increase could occur towards the end of 2010. Higher rates are certainly on the horizon, but I think we need to see much higher inflation before the Fed changes course.

6. National Real Estate Prices Flat to Lower

Real estate prices are likely to flat-line or decline during 2010. As real estate is heavily reliant on the rapidly-contracting credit market, deflation will trump any inflationary pressures created from the expansion in base money. There is an over-supply of housing and the high rate of foreclosures is likely to continue or increase during 2010. I believe real estate will be an excellent buy at some point in the next 5-10 years, but it is not near a bottom yet.

7. Unemployment Remains Stable

Officially-reported unemployment (U-3) will hang around 10% for most of 2010, but could rise to as high as 12% nationwide. Of course, true unemployment that counts marginally employed and discouraged workers is closer to 20% currently. Government will be the major source of any new jobs, as private enterprise and small businesses continue to struggle. Of course, any wealth or jobs the government claims to create is really just a wealth transfer and not true or sustainable growth.

8. U.S. Dollar Rallies, but Drops to New Lows by Year End

With rates likely to remain near zero, I anticipate more dollar weakness during 2010. The Fed doubled the supply of base money during the past year, deficits are at record levels and Asian countries have already begun diversifying out of dollars. There have also been reports that several other countries are following suit. If the dollar begins to lose its status as world reserve currency, look out below! The current bounce could continue a bit longer before the plunge, but by the end of the year the dollar index will be at or below 70.

9. Gold and Silver to Make New Nominal Highs

While some are claiming gold has peaked, I believe gold is nowhere near a top and will reach a new nominal high between $1,200-$1,400 during 2010.  That is not to say it won’t go below $1,000, first.  Overall, I see a volatile year for the metal.  Gold can perform well during periods of inflation or deflation. While I believe deflation is the greater threat during 2010, this will occur primarily in credit-based markets such as real estate. Cash-based markets such as precious metals are likely to experience inflation as record amounts of new money have been printed during the past year. Look for more central bank purchases during 2010, as well as significant purchases from China and other countries that are eager to diversify away from dollars.

10. Energy Prices to Trade in Range

With the strengthening economy, increasing demand from China and India, plus declining supplies, I expect energy prices to move higher during 2010.  As I write, we are already nearing $80. Oil will trade most of the year in the $70-$90 range, likely nearer to the upper end of the range. I think natural gas will generate even greater returns than crude oil as it bounces off oversold lows. In addition, I expect clean energy companies to rebound during the 1st half of 2010 and think lithium and rare earth miners will benefit from this trend.

11. Agriculture Prices to Rise

One thing that is certainly not in over-supply is agriculture. With a very poor harvest season, lack of water in key agricultural areas and exploding demand from a growing middle class in Brazil, Russia, China and India, I believe prices for many food items will move higher in latter 2010 and significantly higher in subsequent years.

12. More Bank Failures, Political Tension, Voter Discontent

I anticipate a large number of  banks will fail during 2010, more than double that of 2009, allowing the largest banks to scoop up smaller competitors at bargain prices.  People will become less apathetic as government meddling and banker exploitation will finally begin to hit everyone in the pocketbook. Look for more frugality, local buying, community organization and a move towards becoming self-sustaining.

Weekly Rewind: December 21-25

Houston’s 2010 Business Survey (:The More The Merrier:)

Robert S. “Bob” Lowery:

The results will be posted in the upcoming 2010 forecast.  Yes, my elves will work through the holidays.  Best wishes to you and yours this holiday season!!

Top 10 Houston Blogs – As I See It

Off the Kuff

A Progressive political blog.

Latest Posts:

  • Judicial Q&A: Cheryl Harris Diggs
  • Precinct Analysis, District Council
  • Here Come the Gay Tourists
  • Bellaire Bans Texting While Driving
  • RIP, Laff Stop

Hair Balls

Houston Press Spin-Off.  Hilarious.

Latest Posts:

  • All of Sharpstown Mall’s Problems to be Solved with Name Change
  • More Allegations of Sexual Harrassment and Abuse at the Houston Humane Society
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  • Game Time: My Plea to In-And-Out Burger…Let Me Speak for You
  • Survey of Top Pop Culture Dogs Proves Aggies may have Skewed Priorities

Houston Strategies

An open dialogue on serious strategies for making Houston a better city, as well a coalition-builder to make it happen.

Latest Posts:

  • An Agenda for Mayor Parker
  • World’s Smartest Cities
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  • Houston VS. Chicago, Seattle, Portland
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BlogHouston

Focuses on Houston politics, media, and life.

Latest Posts:

  • What’s the Status of the City’s Sorely Needed New Emergency Radio Network?
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  • City of Houston to Harris County:
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Houston Clear Thinkers

Observations on developments in law, business, medicine, culture, sports and other matters.

Latest Posts:

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Houston Tomorrow

Collection of writings from Houston’s Visionaries.

Latest Posts:

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Bay Area Houston

Dedicated towards Clear Lake, Houston, and Political Junkies.

Latest Posts:

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Houstonist

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Latest Posts:

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Swamplot

Covers real estate, home design and renovation, architecture, and the landscape of Houston.

Latest Posts:

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Culture Map

Everything Houston.  Great site that toes the line of news and blog.

Latest Posts:

  • No Joke: Houston’s Legendary Laff Stop Closes
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Honorable Mention:

SpaceRef

Startup Houston

NeoHouston

Voted by Robert S. “Bob” Lowery

Weekly Rewind: December 14-18

If you think last week was slow, wait for the next two.  Enjoy the football and family!

5 Negotiable Items in your Office Lease (Part 2 of 2)

In my previous article, 5 Negotiable Items in your Office Lease, I explored items of negotiation in your office lease.  The typical office lease that our tenant representation group comes across is approximately 40 pages, with 5-10 exhibits.  Within a lease are hundreds of negotiable items, some downright (Texas term) questionable.  Believe me when I tell you that office leases are evolving to heavily favor landlords, especially now that many are in the red.  As I write, landlords and attorneys are structuring creative lease clauses in an effort to pass their “controllable” costs on to businesses like yours.

Next 5 Negotiable Items…

6. Furniture

As tenants, large and small, have vacated their respective spaces in 2009, many owners are finding themselves in the furniture business.  In many office buildings that have 50,000 SF or greater, a selection can be vast.  With the over-abundance of office furniture that is currently available, prior to signing on to a building space, ask whether any furniture will be provided.   Also request that after your lease expires you have ownership right or responsibility.  Depending on your situation, you may or may not want the office furniture because of its difficulty and expense to move. So, your best bet is to negotiate free use of the furniture and the right to keep or purchase it at the conclusion of the lease, should you want to take it with you to your next location.

7. Expenses (Upfront)

Larger companies have the ability to get landlords to contribute to the upfront costs of the move process. This can only be negotiated during times where the market has a lot of vacancy. Small business typically can accomplish this same concept through free rent, as noted in item #4.

8. Security Deposits

Security deposits are typically a function of how much money a landlord will spend to get you to move into the space (commissions and tenant improvements) vs. how confident they are in your ability to pay rent (financial statements review). We have seen security deposits range from 1-12 months depending on the situation. A good rule of thumb is 1-3 months of security deposit for a small business who needs only minor improvements and 2-6 if offered a turnkey build-out.  A larger company, in today’s leasing market, is not likely to have to place a security deposit.

9. Commission Payment

If you are represented by a tenant rep broker, you have the ability to pay for your tenant representation broker under your own arrangement (flat fee, hourly, percentage), in which you can use this leverage during your negotiations.  Typically a commission is split between a landlord’s representative and a tenant representative.  The only problem is that most landlord representatives are compensated for the entire fee, so having the tenant rep will actually cost you nothing.

10. Lease Options

Renewal Options, Termination Options, and Expansion Options all should be negotiated. These options provide you with the most flexibility and control of your office lease.  Our tenant representation team is skilled in the negotiation of options.  Believe us when we say, you cannot read this stuff in a book.