Real Estate: More Than Oil in Texas

Faced with the credit crunch, the oil crisis and inflation, the markets seem to be standing on shifting sand. With the $613 million merger between Staubach and Jones Lang LaSalle, the transaction sets a solid foundation. Based on key markets in Houston, Dallas and Austin, Staubach may have thrown his best touchdown after 31 years in the business.

Lang LaSalle scores the extra point. With access to Staubach’s tenant only business model, the deal includes clients such as Halliburton (HAL), Cisco (CSCO) and Pepsi (PEP). Globalization has forced tenants to focus on rent worldwide. As the rest of the world seeks access to the US, the leading developed commercial real estate market in the world, the real estate market is expanding beyond traditional borders. In the recent report from CB Richard Ellis, rent in Dubai is higher than in Manhattan and occupancy cost in Moscow has increased 92.7% over the past 12 months.

The clue is in the tenant business. The impact from rent changes should be an indication of local market strength. Accordingly, the willingness of the tenant to participate in the local market and commit to a long term lease should measure the strength of the sector. Depending upon the sector, the pricing of long term lease structures should determine the future outlook for the sector. The ultimate benefit is to trade on the information in both the cash and derivative markets.

In some cases, the prices signal the froth as in San Francisco before the Internet bubble ‘01. In New York, the financial and service sectors have kept pace with the market on a steady climb since the recovery in ’04. In Houston, the market showed evidence of recovery after Katrina and has continued upward based on the strength of energy and oil.

Real estate is still a frictional cost market. The impact of a long term commitment for office space reflects beyond the local economy and to the sector. Given the cost of rent to the bottom line, managing market exposure and total return should be critical information. The leading real estate firms understand this situation and will continue to manage and consolidate their position. When the market makes the shift to embrace rent based information, it should move from sand to solid footing.