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Oil and The State of the Houston Office Market: The Q&A with Kevin Roberts of Transwestern

Kevin Roberts

Kevin Roberts

Beginning with Allen Brothers who founded the city,  Houstonians have been an optimistic bunch.  In recent years, since the end of the Great Recession, energy and real estate entrepreneurs exuded boundless optimism about Houston – and with good reason. With the price of a barrel of West Texas Intermediate crude rising to triple digits, the sky seemed to be the limit for black gold. The office market surged in the Energy Capital of the World. Then suddenly, the bottom fell out and Houston real estate developers are chasing a familiar scenario:  Too much office and too few tenants. Over his 26-year real estate career, Kevin Roberts, President, Southwest at national real estate firm Transwestern, has seen it all. Kevin, who has overall responsibility for Transwestern’s operations including Houston, Austin, San Antonio, New Orleans, and Denver, oversees the firm’s brokerage services and property management projects and also serves on Transwestern’s Board of Directors and Executive Committee. Realty News Report sat down with Kevin recently to discuss the current office sector.

Realty News Report: Oil was over $100 a barrel in summer of 2014; now it’s less than $50. What pressure has this put on the Houston office market?

Roberts: Anytime a commodity loses more than 50 percent of its value and presumably will stay there for any length of time, it puts pressure on all points on the spectrum. Upstream companies have seen significant pressures to reduce costs and increase efficiencies in their operations. It is being seen through decreased margins for service companies, idled rigs, anemic demand for oil field services, layoffs and mergers. Mid-stream and downstream are less significantly affected. Sublease inventories have grown from 4.1 MSF to 7.3 MSF in the last 12 months –additional supply we didn’t need.

Realty News Report: Do you think the market has bottomed out and is rebounding or does it still have a ways to slide downward?

Roberts: Our belief is that we have effectively found the bottom on pricing but there is little forward visibility as to when we will see improvement. We anticipate uncertainty for the next 12 months or so.

Realty News Report: What are the most challenging submarkets in Houston?

Roberts: Certainly, the Energy Corridor and Westchase have seen significant pressure as direct and sublease inventories increase and demand wanes.

Realty News Report: What about downtown Houston?

Roberts: The CBD certainly could have done without this lessening of demand. However, tenants will benefit from flattening rents and increased concessions, especially from developers who launched speculative projects.

Realty News Report: There’s still approximately 11 million SF under construction, what will happen to the office sector when this space hits the market?

Roberts: On the positive side, this space is over 60% preleased at this point in time.  Conversely, many of these tenants will be leaving behind large blocks to be backfilled when they move.  Exxon still leases over 1.2 MSF in Greenspoint yet to be vacated. Amegy Bank and Air Liquide will leave holes in the West Loop market when their new projects are completed. We do expect vacancy to continue rising over the next two years given the weaker economic conditions and this volume of supply set to deliver to the market.

Realty News Report: What’s the biggest threat to the Houston office market today?

Roberts: The greatest threat is a prolonged downturn in the energy business beyond a two-year horizon. Other sectors would impact the office market such as instability caused by rising interest rates and possibly our U.S. election results. Our view is that the next two years may be challenging for our market.

Realty News Report: The Energy Corridor seems to be the area that’s hardest hit. What’s has happened there?  And what do you see happening in the Energy Corridor over the next three or four years?

Roberts:  Houston’s Energy Corridor is desirable for many reasons. You will see less construction, possibly greater concessions on all product types. The path of growth for Houston continues to be westward, and though the one to two year outlook will reflect some pain, the long-term outlook for this area is positive.

Realty News Report: A lot of sublease space has hit the market this year. Is this the end of the sublease space or do you anticipate more coming?

Roberts: I think the big rush to list space is over and we are not going to see anywhere near the pace of increase that we saw in 2015.  That being said, in this kind of oil price climate, decreased margins, layoffs and mergers will continue to affect energy-related tenants’ space needs going forward. This may result in additional sublease space being added in 2016 as companies consolidate and look for ways to further streamline operations and cut costs.

Realty News Report: Is there an increase in concessions? If so, what’s the typical amount of free rent being offered?

Roberts: There has been an increase in concessions in some areas. It varies by a wide variety of factors including submarket, building class and length of term.

Realty News Report: What do you think about the far north submarket near the Woodlands, where the new ExxonMobil campus is located? How do you feel about this area being called “The New Energy Corridor”?

Roberts: We have a very positive outlook on the Woodlands and Spring Woods market areas. It has certainly attracted a significant energy tenant base because of the quality of existing product and the high quality of life scenes. We like to call it the Emerald City! It is the model for visionary development!  Perhaps not the next Energy Corridor, but very attractive for corporate campuses and build-to-suits, especially with the next Grand Parkway sections expected to open by the end of the year.

Realty News Report: Any other comments?

Roberts: We are very bullish on Houston. The continued centralization of the global energy business in Houston along with an economy that is continuing to diversify will keep this metro on the leading edge of desirable international cities.

Realty News Report is a Texas-based publication led by Editor-in-Chief Ralph Bivins.

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