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Oil and Houston’s Office Market: Q & A with Bob Parsley of Colliers

Bob Parsley

Bob Parsley

For more than three decades, Bob Parsley has been involved in all phases of the commercial real estate business.  A native Houstonian, he has an undergraduate degree from the University of Virginia (College ’76) and the University of Texas Law School (JD ’79).  He joined Colliers in 1983 where he is currently the co-chairman and one of the company’s principal shareholders. Named Office Broker of the Year by NAIOP based on his overall production and community service in 2005, Parsley currently serves on the Colliers National Occupiers Advisors team, the Legal Services and Healthcare Services practice groups.   With oil continuing its downward spiral, Realty News Report talked with Parsley about what the current commercial real estate situation is, what Colliers sees for the future, and how the local economy will continue to be affected by declining energy prices.

Realty News Report: Oil prices recently dipped under $30 a barrel. What effect will the energy decline have on the Houston real estate markets?

Bob Parsley: The price of oil will have a significant effect on the Houston real estate market – and has been having a significant impact over the last year as prices dropped from $90 per barrel to down below $30 per barrel today. But energy companies are taking much more decisive action regarding their operations, based on the decline in oil prices, than they did in previous energy-related recessions. That means we’re seeing a significant amount of sublease space put on the market. The amount of space in the last year has more than doubled. It was 3.8 million square feet in 2014 and was over 8 million square feet at the end of 2015. We anticipate that there will be additional sublease space put on the market in 2016 until there is more clarity about the future of oil prices. We know of at least one company that will add an additional 500,000 square feet of sublease space to Houston’s inventory. That’s just from one company. For everyone in town, that’s the million-dollar question: when will oil prices stabilize?

Realty News Report: The office market in the Energy Corridor appears to be under duress. How will things unfold for this submarket?

Bob Parsley: The city’s Energy Corridor is home to many large energy headquarters as well as firms that want to be near the big oil companies. Some of the greatest activity is occurring where companies like ConocoPhilips and BP have a large presence. Many major energy companies with a significant presence in the Energy Corridor have announced significant layoffs,  and this has resulted in a substantial increase in sublease space in the Energy Corridor.  We expect that this will continue depending on the price of oil over the next few months.  Until energy prices start rising, we’ll have uncertainty. The energy corridor is feeling the effects of a ‘perfect storm.’ There are a number of new buildings that have been under construction for 2-3 years that are coming on line. Some are still not completed, but will be finished this quarter. This is occurring at the same time energy prices are crashing. So the submarket has a lot of new space being added to market, while companies are still unsure of when the decline in oil prices will bottom and begin to rise again. There is a lots of supply and demand has slowed. We expect the energy corridor will continue to be under duress until oil prices stabilize. Keep in mind that a large amount of new space coming on the market now was pre-leased because energy companies wanted more space for expansion based on the price of oil at that time.  Of the 3.2 million square feet of new inventory that came on the market in the 2015 fourth quarter, 58% was pre leased to energy companies. Those firms now say they do not need that additional space.  With the uncertainty, some energy companies don’t know what decisions to make and are in a holding pattern.  Many tenants are renewing in their existing spaces, but seeking shorter renewal terms and less rentable square footage.

Realty News Report: What’s ahead for the downtown office market?

Bob Parsley: The overall Houston market is impacted by low energy prices, not just in the energy corridor, but also throughout city. Downtown is no different.  In the Central Business District, Hines is building a new spec building — 609 Main – and has signed Kirkland and Ellis, a law firm as its first tenant.  However, the market velocity has slowed.  Downtown is home to a number of large energy companies such as Chevron, Shell, Total, and Hillcorp Energy and we’re beginning to see the impact of low energy prices being felt not only by energy companies, but also companies associated with the energy industry. Law firms, engineering companies and accounting firms, are just a few of the service providers that are now being impacted by the slowdown and are cutting back on their space requirements.  In 2015, overall vacancy rates citywide increased by 430 basis points, from 11.1% to 15.4%. Vacancy rates are continuing to increase and we’re seeing a number of law firms putting sublease space on the market. Ironically, one group where business continues to be strong is the healthcare services industry.

Realty News Report: Do you foresee any building owners having foreclosure problems?

Bob Parsley: That all depends on number of factors, including the location of building, the quality of the space, the building’s tenants, the lenders and the developers. I suspect we will see some problems, but most of the new buildings coming on the market probably — at least from what we are seeing — structured their loans to provide 2-3 years of lease up activity. Right now, I don’t see a lot of foreclosure problems happening.

Realty News Report: Are Houston’s building owners cutting rental rates?

Bob Parsley: Not yet, but we expect it to begin soon. Rental rates historically have lagged economic conditions. The velocity of transactions has slowed significantly. There is a clear indicator that market conditions have changed.  But building owners have been slow to react. That’s just the way the industry works. We are seeing a return of free rent as the market slows down and landlords work hard to retain or attract tenants to their buildings. Today’s landlords understand that due to the energy slowdown and reduction in the velocity of transactions, they must do whatever they need to do to grab a prospect.

Tenants, on the other hand, today want shorter lease terms and are contracting the amount of space they seek.  In good times, if a tenant needed 10,000 square feet of space, they might lease 12,000 square feet planning for future expansion.  But in bad times, instead of that 10,000 square feet, they’ll lease 7,000 and make the space fit.

Realty News Report: Several major energy company mergers, such as Halliburton Company’s acquisition of Baker Hughes Inc., have been in the works.

Bob Parsley: With Halliburton, there is still uncertainty whether the government will approve the merger, or require Halliburton to spin off additional business units to gain governmental approval.  Overall, we expect merger & acquisition (M&A) activity in the energy sector to increase as companies with a high level of debt seek partners with a strong balance sheet.

Realty News Report: What about The Woodlands office market and the new Hughes Landing project that is partially leased to Exxon Mobil?

Bob Parsley: The Woodlands has been one of the bright spots in the Houston office market over the last several years. In terms of vacancy, The Woodlands has historically been lower than the overall Houston market and rental rates in The Woodlands have been higher than the overall market. Two new Class A buildings that were recently completed by The Woodlands Development Company (3 Hughes Landing, with 320,000 square feet and 1725 Hughes Landing, with 150,000 square feet of available space) and these buildings are available for immediate occupancy.  More companies are focused on The Woodlands submarket, but the impact of energy prices has impacted the velocity of leasing activity in The Woodlands also.

Realty News Report: Over the last year, a tremendous amount of sublease space has been placed on the market. Is that over or is more sublease space supply coming in 2016?

Bob Parsley: It’s not over. They’ll be more sublease office space coming on line, driven by what’s happening with energy prices. In the Houston area, energy prices are the driving factor in all real estate.

Realty News Report: Any other thoughts you’d like to add?

Bob Parsley: Overall, the Houston office market and the city of Houston will continue to be very strong over the long term. There is a good feeling about the city and its leadership position in the energy industry. That hasn’t wavered. We’ve lived through slowdowns before. Ultimately, the market will recover and become even stronger. Right now, though, it’s a very trying time for the energy and real estate industries and the city. 2016 will be a year where companies like Colliers be even more focused. We continue to understand that the world’s economic situation does not change overnight.   We are focused on our current projects, developing new relationships in a difficult market and not allowing the uncertainty of the economic cycle to keep us from working hard.  There are opportunities in good times and bad times. During difficult economic times, companies want the best professionals representation and the ‘so-so’ brokers fall by the wayside. We have experienced people who understand this situation and can solve client requirements.

Jan. 20, 2016

Realty News Report is a Texas-based publication edited by Ralph Bivins.

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