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Sun Belt Cities Start To Shine In Commercial Real Estate

With sluggish job growth many American cities are still waiting to see noteworthy commercial property gains, four years since the recession officially ended.

But to varying degrees some real estate markets across the Sun Belt are thriving. While a few are still battling high vacancy rates in some property types — particularly in the office sector — above-average job creation and capital inflows are fostering an economic upswing and optimism in the cities.

The hot spots, from internationally influenced South Florida to energy powerhouses in Texas, are expected to excel this year for a different set of reasons.

Houston, Dallas and Miami will be the top performing markets in 2013 outside of the major "gateway" cities such as New York and San Francisco, according to the consensus of commercial real estate executives polled by law firm DLA Piper. Phoenix, one of the hardest-hit areas during the recession, is showing signs that its commercial property sector is rebounding, too.

So what's seen spurring growth in these markets

Houston Heats. Energy, of course, is the driver of economic and commercial property well-being in Houston and for that matter, Texas. Widely considered the energy capital of the world, Houston is benefiting from the rise in shale oil production in Texas, North Dakota and other states. Hydraulic fracturing, horizontal drilling and other extraction techniques have put the U.S. on the path to energy self-sufficiency.

At the end of March, the Houston metropolitan area posted annual employment growth of 3.8%, a good dose above the U.S. rate of 1.5%.

Fundamentals across major property sectors continue to improve as energy companies and ancillary businesses absorb office and industrial space, says Marisha Clinton, director of capital markets research for real estate brokerage Jones Lang LaSalle (JLL).

She adds that among commercial real estate sectors, apartments in particular are benefiting from job and population growth: The average multifamily rental rate in Houston climbed 6% last year, well ahead of the 4.4% national average.

Office and industrial property vacancies are falling as well, sparking new building. The average office vacancy rate, for example, declined 40 basis points year-over-year to 14.1% in the first quarter, according to real estate research firm Reis (REIS).

Among other projects, Houston-based ConocoPhillips (COP) recently announced that it would occupy 850,000 square feet in two new office towers being developed by Trammell Crow Co. in Houston's Energy Corridor business and residential district west of downtown.

"People want to go where the jobs are, and job growth in Texas is among the fastest in the country," Clinton said.

Dallas Delivers. The energy industry is priming commercial real estate fundamentals in Dallas, as well. Similar to Houston, employment in the North Texas market grew at an annual rate of 3.4% in the first quarter this year.

That helped drive up multifamily rental rates 6.1% in 2012, which represents the biggest gain outside the technology markets of San Francisco and San Jose, Calif., according to Jones Lang.

While the office market had a high vacancy rate of 23.3% at the end of the first quarter, it still represented a year-over-year improvement of 30 basis points, Reis said. The average office rental rate in the first quarter, $20.08 a square foot, marked a 2.8% increase over the prior year.

Dallas' central location continues to make it an ideal distribution market too, Clinton said. Though still high, the average industrial vacancy rate there fell to 13.2% in the first quarter from 14.6% a year earlier, Reis said.

Miami Trades. On the job front, Miami has matched the annual average growth rate in the U.S. of 1.5%. But the tepid performance has failed to slow an inflow of cash from Latin America to bankroll new condominium projects.

Developers have proposed some 30 new condo towers of more than 8,300 units for downtown Miami alone since early 2011, according to Miami-based condo brokerage CVR Realty.

Deep trade ties with South America are driving leasing and investment demand in the industrial sector, Clinton said. The average industrial vacancy rate fell to 8% in the first quarter from 8.6% a year earlier, according to Reis.

Investment interest in South America should also bring more attention to Miami, says Jay Epstien, a partner with DLA Piper and chair of its U.S. Real Estate Practice. By a large margin, respondents to the recent DLA Piper property survey called Brazil the most attractive international market for investment.

"Miami has a perception of being a great jumping off point into Latin and South American markets," Epstien said.

Phoenix Revs. Although the housing bust and recession stung Phoenix more than most, this market's pro-business bent, demographics and low-cost operating environment have helped it rebound. The metro is close to replacing Philadelphia as the fifth largest city in the U.S. and in 2011, Forbes ranked it as a top 10 boomtown that would flourish in the coming decade.

Phoenix employment grew at a 2.8% clip in 2012, the fastest job-creation rate for any market outside of a technology or energy hub, says Steven Lindley, executive vice president of capital markets in the Phoenix office of commercial real estate brokerage Cassidy Turley. More encouraging, that growth largely took place without the aid of Phoenix's historical job drivers in the construction, real estate and housing sectors, he adds. But now those industries are starting to turn around.

Single-family homebuilders took out some 3,100 permits in the first quarter, for example, a year-over-year increase of 25%, according to the U.S. Census Bureau. While that's on pace to meet or surpass the number of permits issued in 2012, it's still some 45,000 off the peak, Lindley said.

Other sectors are compensating, however. While office vacancy in Phoenix remains high, among other expansion projects Santa Clara, Calif.-based Intel (INTC) this year is expected to complete construction of a $5 billion chip fabrication plant that will employ about 1,000 in the Phoenix suburb of Chandler, a market where Intel already has a significant presence.

Lindley notes that Phoenix traditionally has operated at two speeds: at a dead stop or 100 miles per hour. He suggests that the speedometer has hit 60.

"We're going back to 100 miles per hour," Lindley said. "The only question is whether we hit it in 2013, 2014 or 2015."