By Elizabeth Szep on December 1st, 2017
Houston can lay claim to the best team in baseball, but when it comes to commercial real estate, Dallas has the #1 spot. Across several key metrics that Real Capital Analytics tracks and that one may use to define a “top market”, Dallas is beating its Texas rival. For now, that is.
A top market can be defined as the one with the most deal volume, with the largest stock of existing assets, or with the deepest pool of potential buyers. On the performance side it can be defined by price growth, or in a number of other different ways. Dallas is eclipsing Houston across multiple concepts of liquidity and performance.
Houston is one of the largest markets in the U.S., but Dallas is bigger. Transaction volume for 2017 through the third quarter has placed Dallas in the #2 spot among all U.S. markets, second only to Los Angeles. Houston ranked #8 by volume over the same time. With volume hitting record levels in Dallas, its liquidity is persisting at elevated levels.
Since 2015, Dallas has been a more liquid market than Houston. Measuring liquidity of disparate markets is a challenge in real estate, but Real Capital Analytics provides a solution to this problem through its Capital Liquidity Scores. The scores measure the amount and diversity of investment activity in a market.
Houston’s capital liquidity score peaked in 2014, preceding a decline in oil prices. Whether the perception is right or wrong, institutional investors view Houston simply as an energy market. The impact of oil uncertainty reduced institutional interest in the market and commercial property prices started to dip a year later. Houston prices, as measured by the RCA CPPI, have shown low growth − up only 5.3% since the start of 2014 through the third quarter of 2017.
Dallas’s liquidity score is elevated, with greater activity and more diverse buyer interest. Prices in Dallas have risen strongly over the past year − up 7.9%. But whether or not Dallas can hold onto its title depends on if these changes are structural or cyclical.
Transaction volume in Houston and Dallas diverged in 2014, but the gap may be starting to narrow. Volume in Dallas weakened in the most recent quarter, and Houston showed increased activity. Furthermore, institutional players may be returning to Houston: these investors participated in close to 50% of the deals done in the market this year so far, compared with a 35% share in 2016.
It may be too early to say, but if the tides are truly shifting, Houston may have another shot at Texas’ top spot. As baseball shows, everyone loves a comeback story.
To learn more about the RCA CPPI (commercial property prices indices) and to sign up for reports click here. If you are an RCA client you can access the RCA Capital Liquidity Scores report, methodology and data file on the RCA website.