The Houston Rockets might be the NBA’s most fascinating team to watch over the next 12 months.

Four years removed from their last playoff appearance with James Harden leading the way, the Rockets climbed back to .500 last season by putting the right veterans around a core of young talent featuring six first-round picks since 2021.

Last season marked the beginning of “Phase 2” of Houston’s post-Harden rebuild. Phase 3 could be even more remarkable. With only Dillon Brooks among their veterans under guaranteed contract for 2025-26, the Rockets could create sizable cap space next summer. Or they could use those expiring contracts and a stockpile of draft picks to trade for a star.

As those plans are playing out, Houston must also decide which of its budding stars to pay as their rookie contracts expire — guard Jalen Green and center Alperen Sengun are both eligible for extensions now ahead of restricted free agency next summer. Those may, in turn, be informed by the play of the Rockets’ more recent picks, including promising rookie point guard Reed Sheppard.

Let’s look at what’s developing in Space City — and why the rest of the NBA should pay attention.

Rockets as a player development model

Excitement about Houston’s future was far less palpable 15 months ago.

After finishing the 2022-23 season with their second consecutive 60-loss campaign, the Rockets’ young core hadn’t yet coalesced into anything approximating a winning basketball team as they finished 27th in offensive rating and 29th in defense.

Following a crucial 2023 summer, Houston turned the corner by complementing homegrown talent — Green, Sengun and Jabari Smith Jr. — with proven veterans in free agency. The Rockets spent big on guard Fred VanVleet and wing Dillon Brooks, who slotted into the starting five alongside Houston’s recent first-round picks.

All three holdovers surged, with Sengun finishing third in Most Improved Player voting, Green averaging 27.7 points per game during a 13-2 March run — highlighted by an 11-game winning streak — and Smith boosting his true shooting percentage from .514 to .571 in Year 2. The veteran presence, plus new coach Ime Udoka, helped lift Houston all the way to 10th in defensive rating last season.

Aside from their defensive improvement, the Rockets’ shooting upgrades have made them a model for developing young players on a rebuilding team. Houston went from 30th in 3-point percentage and 29th in made 3s in 2022-23 to 14th in makes and 23rd in percentage, with VanVleet making a team-high 227 triples and Brooks shooting a career-high 36%.

The Detroit Pistons seemed to be following Houston’s path this summer, signing a pair of vets who can shoot (Malik Beasley and Tobias Harris) and adding another (Tim Hardaway Jr.) via trade to give recent lottery picks Cade Cunningham, Jaden Ivey and Ausar Thompson more room to operate on offense after Detroit finished 29th in made 3s last season.

The challenge for Detroit, and other teams hoping to emulate the Rockets’ rebuild, will be upgrading veteran talent without blocking development of young players. Houston was lucky the anticipated signing of veteran center Brook Lopez fell through. With Lopez on board, it’s unlikely Sengun would have had the opportunity for his breakthrough campaign.

The willingness of Brooks and VanVleet to take on smaller offensive roles gave Houston’s draft picks room to shine. VanVleet’s 20% usage rate was his lowest since 2018-19, while Brooks’ 18% usage was a career low. It’s important to find veterans who understand how they fit a young team. That could make the Rockets’ model difficult to replicate.

Houston as the West’s free agency threat

Two years after making a splash in free agency, the Rockets have a chance to do so again next summer, in part because of how they structured VanVleet’s contract. In exchange for guaranteeing VanVleet the max for two seasons, Houston got a team option on the third and final year. Add in a non-guaranteed 2025-26 salary for backup center Jock Landale and a team option on guard Aaron Holiday, and the Rockets have minimal guarantees beyond this season.

Houston could clear $80-plus million by shedding all of those salaries, plus a team option on the final year of forward AJ Griffin’s rookie contract and their 2025 first-round pick. But realistically, the Rockets could be in the neighborhood of $30 million in cap space with cap holds for Green and Sengun as restricted free agents.

As ESPN’s Bobby Marks recently broke down, cap space will be scarce next summer. Only the Brooklyn Nets currently project to have more than $30 million, and the Nets figure to spend one more year rebuilding after reacquiring rights to their 2025 and 2026 first-round picks from Houston earlier this summer.

That leaves Houston as a potential spoiler as teams consider extending their star-level potential free agents. In particular, the Denver Nuggets must keep an eye on the Rockets, who could make a run at forward Aaron Gordon if he doesn’t strike an extension ahead of his 2025-26 player option.

Houston’s options in free agency also affect negotiations with Green and Sengun. Like Philadelphia 76ers guard Tyrese Maxey, Sengun has a relatively low cap hold ($16.3 million) compared to the raise he’ll command on his next contract. That could make it wiser for the Rockets to forgo an extension now, then use Sengun’s Bird rights to re-sign him after spending cap space, as Philadelphia did with Maxey.

Since Green’s cap hold ($34.4 million) is in the ballpark of the projected max salary for players with less than seven years of experience ($38.7 million), there’s less incentive for Houston to hold off on an extension. In Green’s case, the challenge is finding the right value for a deal, particularly with more Rockets due for new contracts in future years — Smith in a year, 2023 lottery pick Amen Thompson and Sheppard down the line. If Houston uses cap space, this group could quickly get more expensive, making it important that Green’s next contract doesn’t prove difficult to trade.

How well Sheppard plays as a rookie will also help determine whether the Rockets feel comfortable letting VanVleet go and spending that money at another position. If Sheppard looks capable of starting by his second NBA season, that route becomes far more realistic.

Houston as a trade destination

If the top free agents available either sign extensions — like Denver guard Jamal Murray did last week — or don’t look like fits for the Rockets, they can also pivot to becoming players for the next star to hit the trade market. Houston’s combination of young talent, expiring contracts and draft picks means the Rockets can make virtually any kind of deal.

VanVleet’s $44.9 million team option looms large, too. If a deal comes together next June, Houston can exercise VanVleet’s option and include him with draft picks or cheaper contracts as matching salary. The Rockets can’t compete with the Oklahoma City Thunder or Utah Jazz when it comes to draft options, but they do have control of all of their picks starting in 2027, plus first-rounders in 2027 and 2029 picked up from Brooklyn this summer.

Most notably, Houston potentially controls Phoenix’s first-round picks in 2025 (swap), 2027 and 2029. That could make the Rockets the Suns’ first call if they ever decide to trade Kevin Durant or, down the road, Devin Booker.

As a destination for max free agents such as Dwight Howard and Chris Paul (via opt-in and trade) in the past, Houston figures to be a more attractive landing spot for a traded star than Oklahoma City or Utah. And the Rockets have more to offer in a trade than the desirable landing spots in the East, which might mean the Texas rival San Antonio Spurs are their most formidable competition when it comes to landing a star.

The potential of Houston including one of its cornerstone young players is an interesting wrinkle. San Antonio has far less proven talent around 2023-24 Rookie of the Year Victor Wembanyama to offer. Specifically, the Rockets could consider dealing Sengun, a possibility ESPN’s Tim MacMahon pondered in the spring. Sengun wasn’t part of Houston’s March run, when the Rockets shifted styles by playing Thompson and Smith together in a switch-heavy frontcourt that’s not possible with Sengun on the court.

One key question: How aggressive will Houston be with its timeline? Landing Durant, who turns 36 later this month, would make the Rockets competitive now but would limit their ability to upgrade when their young stars reach their prime years. Adding a star in their 20s would give Houston a window to contend. However, those players — like Booker — are less likely to be available any time soon.

For now, the Rockets are in a unique position. They lead the NBA with eight players on rookie contracts, yet unlike the teams in a similar position (Detroit and Washington, with seven), Houston is in contention for a play-in spot right now. With the hiring of Udoka in 2023, the additions in free agency and a number of promising draft picks, the Rockets nailed Phase 2 of their rebuild.

The decisions Houston makes over the next year will determine whether Phase 3 can be as successful, with ripple effects felt throughout the league.