The naysayers of Houston’s economic success like to point to the energy business as the main driver, and that the city’s economy is not diversified and subject to a collapse based on a drop in energy prices. This is an outdated view of Houston’s economy that dates back to the ’80s.
There are now four economic power centres in the U.S.: New York City for finance; Washington for government; Houston for energy; and San Francisco/Silicon Valley for technology (the “big four”). Each of these centres are similar in that they have the infrastructure and intellectual capital that allow businesses in these industries to operate most efficiently by being in these locations.
While the common thought has been that cities with economic diversity are best from a real estate investment perspective, it appears that specialization is the way to go as it fuels growth and mitigates the downside when there’s an economic downturn. The “big four” are not only the fastest growing major markets in the U.S.; they have also been the quickest to recover since the recession.
The cause of the recession was a debt problem – not enough of it as the lending markets shutdown; with everything so highly leveraged, it’s no surprise the U.S. had a major economic meltdown.
The Houston economy has recovered faster than the rest of the country because businesses, consumers and real estate weren’t as highly levered as other places throughout the U.S. Houston did that in the ’80s, and lenders have loaned cautiously in the city since then.
The boom and bust reputation that Houston has endured isn’t because the city’s economy lacks diversity; it’s about debt and the potential for getting over levered as investors look to ride the energy wave. So far, the lenders have remained disciplined and the city’s fundamentals look great.
Rand Stephens is a principal and managing director at Avison Young. He joined the commercial real estate company in June 2010, and opened the Houston office. Since then, he has grown the office to become one of the leading full-service brokerage firms in the Houston market.