Wednesday , 28 September 2016
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Sublease Supply will be Over 10 Million SF Soon: Oil Companies Shedding Office Space in Houston

Brandon Clarke

Brandon Clarke

HOUSTON – The Houston office market is headed into a rough year. Houston’s energy companies are shrinking and at the same time 22 office buildings are under construction.

“It’s pretty bad out there. I’m not going to sugar-coat it,” said office tenant representative leasing broker Brandon Clarke, senior vice president of CBRE in Houston. “Houston is a down market right now.”

Office vacancy rates jumped to 17.6 percent (including sublease space) at year-end. Clarke predicted at the CBRE Press Luncheon last week that Houston’s vacancy rate, with the sublease bubble, will be over 21 percent shortly.

Energy firms are dumping loads of excess office space. Some 8.6 million square feet of sublease space is on the market now and at least 1.5 MSF more is coming soon, Clarke says. The supply of sublease space is bigger than it’s been in decades, he says.

Shell Oil Co. has placed 350,000 SF of office space in the 50-story One Shell Plaza tower onto the sublease market in downtown Houston.

Shell is one of many energy companies that excess office space following a sharp downturn of oil prices. West Texas Intermediate crude was at $107 per barrel in 2014. It’s less than $30 a barrel today.

Two additional dark clouds threaten the office market: (1) Mergers and Acquisitions will create more empty space and (2) bankruptcies are looming.

Fifty energy companies declared bankruptcy in 2015 and another 50 to 100 possible bankruptcies could be in the pipeline, Clarke says. To prepare for the onslaught, Vinson & Elkins and other law firms are hiring additional bankruptcy attorneys. Bankruptcies apply heat on building owners. It could metastasize.

In 2016, Clarke says, office rents will be lower. Vacancies will be higher.

“We are looking for a large amount of vacant space to come online,” says Robert Kramp, CBRE’s director of research and analysis.

Most other parts of Houston’s real estate market are doing fine. And some office buildings are in great shape. Overall, however, the office sector is facing difficult times.

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