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Underestimating Hurricane Harvey: Houston’s Office Market and a Reversal in the Sublease Recovery

Ralph Bivins, Editor

HOUSTON – (By Ralph Bivins, Realty News Report) – Maybe we got too carried away with optimism a new months ago when Houston’s supply of sublease office space dipped below 9 million SF. There’s been a reversal.

Now, the sublease supply is back over 9 million SF, thanks to TechnipFMC dropping 376,000 SF on to the Energy Corridor market.

NAI Partners Sublease Index, measuring the amount of sublease space, rose to 15.5 percent in February, up from 15 percent in January.

Sublease peaked at 12 million SF in 2016, the worst in the nation. It improved in 2017, partly because of displacement due to Hurricane Harvey.

The impact of the hurricane on the office market has been downplayed all along. Many commercial real estate experts said only 50 buildings in Houston’s 230 million SF office market suffered damage. And many firms that were back in their buildings within 30 days, the experts said.

However many large commercial real estate firms don’t track Class C buildings, the smaller and older properties that offer affordable office space. If Class C would have been included in the flood count, maybe 7 percent, perhaps 100 office buildings were hit hard by the hurricane.

Some companies that suffered flooding problems found refuge in Houston’s massive supply of sublease office space.

So the office market’s improvement in the fourth quarter was hurricane aided to some extent. The decline in the sublease supply and the bit of positive absorption in the fourth quarter may not have occurred if Harvey had not impacted the office market.

Some sizable companies relocated because of the storm, including Saudi Aramco, which left its Meyerland building near Brays Bayou to lease 200,000 SF in Allen Center downtown. Saudi Aramco’s lease involved several floors of sublease space that had been occupied by Devon Energy.

In northwest Houston, HP’s large campus on Compaq Center Drive suffered major damage. That’s not to mention the hurricane’s impact on the Energy Corridor.

The impact of Harvey on the office market was underestimated. Celebrations over the office market recovery should be subdued. Houston’s real estate markets can turn on a dime. But for now, it appears the improvement will be slow.

Colliers’ president Patrick Duffy summed it up in a recent speech. “We expect the office market to remain a little ugly and bounce along the bottom for a while,” Duffy said. “It’s going to be a long crawl out.”

March 5, 2018 Realty News Report Copyright 2018

 

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