HOUSTON – Texas real estate will be unscathed by the significant decline in oil prices this fall, although the topic is getting a lot of buzz in Houston, known as the “Energy Capital of the World.”
Oil prices are a sensitive topic here. Houston was the place where the battle cry of the business community once was “$90 in ‘90” – as oil prices shot upward toward $90 a barrel in the 1980s.
In Houston, they remember the free fall that began in late 1985. West Texas Intermediate went from around $70 a barrel to below $30 in about three months. Over 100,000 people lost their jobs and their homes. Foreclosures wiped out home owners and commercial real estate investors. New office towers that had been started in the era of oil optimism became vacant monuments to failure.
Oil’s decline this fall is not the kind of thing to set off another real estate collapse, say Houston real estate experts. Prices for West Texas Intermediate oil, over $107 per barrel in June, has fallen sharply, dropping below $80 a barrel this fall. WTI fell further in December, dipping below $70.
“The fundamentals of Texas real estate remain strong and this retreat in oil prices will not deflate realty markets,” said Matthew Deal, principal of Houston-based Deal Sikes & Associates, a commercial real estate valuation firm. “Texas has more commercial real estate projects under construction than almost any place in the world, but many of these developments have tenants committed to pay sizable rents.”
“Vacancy rates are low in most sectors of Texas real estate and rental rates have risen. The health of the real estate markets will be enough to sustain the momentum, even with the many new projects being completed,” Deal said.
However, Deal adds, if oil prices fall precipitously and a significant number of oil rigs are mothballed this winter, Texas real estate markets would be impacted by late 2015.
At this point, the drop below $80 per barrel is not reason for to worry about Texas real estate, says John Fenoglio, executive vice president of debt and structured finance at CBRE in Houston.
John Fenoglio has been through many of the peaks and valleys of the Texas economy over decades. He co-founded and was CEO of Holliday Fenoglio Fowler, the nation’s largest commercial mortgage banker, before joining CBRE.
“This is not 1982 or 1986,” Fenoglio said at the recent CBRE forecast in Houston “We are not dependent on $100 per barrel oil to make this economy work.”
Houston added almost 120,000 new jobs over the last 12 months and Dallas was not far behind. The domestic “shale revolution” has created thousands of jobs in Texas and increased the need for office space, industrial space and housing.
The migration to Texas has been significant. Exxon Mobil alone is bringing in 2,000 employees to Houston. October 2014 was the strongest October ever for existing single-family sales in Houston, the Houston Association of Realtors reports.
“With the price of oil today there is a little bit of concern as to how that will effect the job growth in Houston. How that impacts the housing market next year remains to be seen,” says Houston residential broker Amy Bernstein of Bernstein Realty, which handles a lot of relocation activity.
“Even if there was a pullback. Houston is a sought-after place. There’s still a lot of relocation activity happening in Houston,” Bernstein says, noting the economy has diversified from the nearly complete energy dependency of the 1980s. “Our relocation activity is very diversified – it’s all over the city and its not just one sector, it’s not all energy. A large part of it is energy, but it’s not all energy.”
Clearly, as 2105 approaches, the future demand for commercial real estate in Houston deserves a close monitoring.
Houston is leading the nation with 17 million square feet of space under construction, more than twice of what’s happening in New York City, the No. 2 construction locale in the third quarter, says CBRE.
Across most of Texas, occupancy rates and rents are high in office, industrial and retail space. But if job growth tails off considerably, expect to see a drop in demand from developers, who will no longer need places to build new projects.
Initially, land prices for development sites – raw land or urban redevelopment parcels – would be the most susceptible to softer pricing, says Mark Sikes of Deal Sikes & Associates.
“As this growth cycle of the real estate markets begins to mature, we expect to see the demand dwindle for commercial development land,” Sikes says. “However, suburban land for new residential communities has plenty of price support because the single-family market has tight inventories. Builders have not yet caught up with the residential boom.”
Lawrence Yun, chief economist of the National Association of Realtors, remains high on Houston.
Yun told me in an interview at the NAR annual convention in New Orleans last week that Houston realty will be outstanding in 2015.
“Houston is an exceptional market. The city’s job growth situation easily outpaces the country,” Yun says. “With oil prices having coming down, that may slow some of the job creation, but the economy is now so diversified Houston will do well.“
Across the nation, Yun predicts that home prices will rise more 4 percent in 2015 as the economy improves. But Houston home prices increase more than the national average, Yun says. Houston will also surpass the nation’s projected 7 percent increase in the number of homes sold next year.
Yun’s memorable message: Even with lower oil prices, Houston’s residential market will outperform the nation next year.
By Ralph Bivins, Editor, RealtyNewsReport