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Digesting Houston’s Oversupply of Office Space May Take Years

Ralph Bivins, Editor of  Realty News Report.

Ralph Bivins, Editor of Realty News Report.

  (By Ralph Bivins, Editor of Realty News Report.)

There is no quick fix.

The oversupply of office space in the Energy Corridor sector of west Houston is not going to be digested soon. The sublease belly-ache won’t pass overnight.

The office market is fine in some parts of Houston. For the most part, the trouble is centered in the Energy Corridor, Westchase and other West Houston areas.

The west side office market will be hurting for a while, says Jon Silberman, managing partner of NAI Partners. “It’s not going to be a 12 to 24-month fix. It’s going to be a three-to-five-year problem.”

Houston has over 9 million square feet of sublease office space now and the supply is set to rise even more. Some 16 buildings are under construction and will bring over 6 million square feet of new space onto the market.

Houston’s office availability rate, which counts sublease space and regular direct vacancy, is at 19.9 percent, according to NAI Partners. That’s a 16-year high. Awful.

Silberman, a veteran in Houston’s office market, told NAI’s press breakfast last week that landlords have been “in denial” about the market’s weakness and rents will have to be lowered soon. Landlords are becoming more generous with concessions.

“We are starting to see 12, 14 and 18-month free rent deals,” Silberman said.

I pause now to point out that the pain is not being felt in all sectors of Houston real estate. The industrial market is good. Retail centers are great. Single-family is just fine. Yes, the crash of the oil prices damaged the local economy. But I’ve been asked to remind you this is not the 1980s when S&Ls were failing weekly, scads of commercial properties went into foreclosure and thousands of homeowners were just mailing in their keys to the mortgage company and leaving for good.

Yes, the Houston apartment market is under pressure in some sectors. But it’s the office market, particularly the Class A market on the west side, that has been hurt the most by the oil crash.

Looking at the state of affairs at the end of the first quarter, NAI’s Dan Boyles calls it this way: “I see a market that’s continuing to trend downward.”

There is no quick fix.

April 29, 2016

Ralph Bivins is editor of Realty News Report, a Texas-based publication.

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