Do Oil Prices Still Matter? Houston Real Estate Q&A with Rand Stephens of Avison Young
HOUSTON – (Realty News Report) – Houston’s real estate industry has had quite a year. During the struggle to recover from the impact of low oil prices, the real estate sector has been battered by Mother Nature in the form of Hurricane Harvey. What’s next? To gauge the health of Houston’s real estate market, Realty News Report talked with Rand Stephens, Managing Director, Principal, at Avison Young — one of Houston’s largest commercial real estate brokerage companies. In 2010, Mr. Stephens opened Avison Young’s Houston office and later opened Avison Young’s offices in Dallas, Austin and San Antonio. Mr. Stephens has completed over a $1 billion in transactions in office, industrial and land transactions; he is a Past President Gulf Coast Chapter Society of Industrial Office Realtors (SIOR); past Board member Houston Office Leasing Brokers Association (HOLBA).
Realty News Report: Houston gained jobs in 2017 and some sectors of the commercial real estate market were strong. What are you expecting in the year ahead?
Rand Stephens: Based on our research, we’re expecting continued steady job growth in Houston for 2018, which bodes well for commercial real estate in general. However, from a CRE trend standpoint, we don’t see any real revelations — just basically more of the same. All sectors will do well with the exception of the office market. We do expect some improvement in the office market, albeit modest.
Realty News Report: The office market went through a rough patch in 2017. Vacancy rose while negative absorption and sublease space were horrifying. Can this be turned around?
Rand Stephens: The drop in oil prices hurt the office market the most, particularly on the west side of town. The Energy Corridor, Westchase and Sam Houston Toll Road West areas are the major office sub-markets for companies that are in the exploration & production (E&P) business as well as the energy services industry. The real driver for office space in the energy industry were companies doing offshore exploration. We need the offshore business to come back to see significant absorption of office space. Our research shows some evidence of activity offshore, but we’re not ready to say that there’s a recovery underway in offshore drilling. Also complicating a recovery in the office market is the increasing trend for companies to use less square footage per employee. So, companies that are expanding will do so using less square footage in the past. Companies are constantly working to be more efficient by doing more business with less people. As a result, we’re seeing companies that are expanding but downsizing in total square footage used.
Realty News Report: What are some of the other important trends in the office market?
Rand Stephens: Another trend that will affect a recovery is that companies want live, work and play environments for their employees and to have improved quality of life by providing them with shorter commutes and a work experience that inspires people to produce at their best. Specific amenities include collaborative work space coupled with modern amenities inside and outside the building (cool restaurants and other lifestyle services) as well as conference room facilities and fitness centers, high speed elevators, attractive lobbies, ample parking, access to mass transit, and excellent energy efficiency and technology infrastructure. Older buildings will have to be upgraded to be considered viable lease options. Despite all the vacancy, there will still be ongoing development on a build-to-suit basis for large office users, as in the case of ABS Group of Companies (American Bureau of Shipping) and HP, where they are able to provide all the above at a lower cost. The net rate may be higher than what they can find in the market but they are able to offset that cost with a more efficient design utilizing less square feet/person). These are global trends and not local to Houston, but clearly when all these factors are taken into consideration, there will have to be significant economic growth in Houston in order to backfill the current office vacancy.
Realty News Report: What about the industrial market? What’s next in that sector?
Rand Stephens: The drop in oil prices fueled the profitability of the petrochemical business and there has been significant expansion in the last few years on the eastside — particularly with third party logistics companies expanding to handle the increase business from the petrochemical companies. As a result, since the downturn began in late 2014, the industrial market held up remarkably well. The growth in online retail sales has also seen many large industrial leases completed with companies like Amazon that has been a boon to the industrial sector. The other most recent benefit to the industrial market has been Hurricane Harvey. This may be a short-term phenomenon but there has been a significant amount of space leased to accommodate the demolition and restoration resulting from the storm.
Realty News Report: Institutional investors came back to Houston in 2017. Do you expect a continuation of strong investment sales or will this activity fall back in 2018?
Rand Stephens: I expect this trend to continue. There’s lots of equity looking for a home and Houston’s property values look inexpensive relative to other major metropolitan areas. Additionally, Houston’s economy held up remarkably well considering the dramatic drop in oil. Investors we meet with feel Houston’s economy has bottomed and is now on the upswing combined with property values that haven’t yet recovered. So Houston looks like an attractive place to buy.
Realty News Report: West Texas Intermediate crude dropped from a peak of $107.95 per barrel in June 2014 to a low of $26.19 in February 2016. This sharp decline of oil prices hit Houston hard. Have we fully recovered or will that take a few more years?
Rand Stephens: I believe we’ve bottomed. The question is what does the recovery look like. We need offshore exploration to be more robust for a real recovery in the energy industry and that is still lagging. What’s very encouraging is how well Houston is doing overall considering the offshore business is still in the tank.
Realty News Report: You have a great deal of experience in Houston commercial real estate. What are people missing? What’s been overlooked?
Rand Stephens: I think the biggest surprise has been how well Houston has held up with the dramatic drop in the price of oil. This shows that Houston is a big diversified city and that the Port of Houston, the downstream pipeline and petrochemical companies and the Houston Medical Center are major economic drivers that more than offset the collapse in the exploration and production business. I used to watch the price of oil like a hawk as a barometer for our business, I don’t want to give the impression that it doesn’t matter, but I’m not as worried about it anymore.
Realty News Report: Anything else you’d like to add?
Rand Stephens: The office building development that was done starting in 2010 was underwritten and financed very conservatively. As a result, we haven’t seen significant financial stress with ownership and that has provided stability to the market.