HOUSTON – The Houston office market will be the first real estate sector to feel the pinch of lower oil prices, which have cast a cloud over the Houston real estate market.
“The office side is where we are going to feel it first,” said Jonathan Brinsden, CEO of Midway Cos., a Houston based firm that develops office and mixed-use projects. “There is a lot of sensitivity around the $60 a barrel point.”
The price of oil, which was over $107 a barrel earlier this year has been on a steep decline this fall, with a rapid free fall that began after Thanksgiving. West Texas Intermediate fell to $53.60 a barrel Tuesday (Dec. 16) before mounting a modest rebound at midday.
Brinsden, who is immediate past chair of the ULI Houston (Urban Land Institute), said investors from around the world are keeping a watchful eye on the Houston real estate market.
The memory of Houston’s boom-and-bust realty cycles, including the horrific crash of the mid-1980s, remains fixed in the minds of many investors, lenders and developers, Brinsden said in remarks late last week at the BoyarMiller real estate forecast breakfast in Houston.
“There are a lot of people saying: ‘Here we go again,’” Brinsden told the BoyarMiller’s annual outlook gathering at the Houstonian hotel where falling oil prices were a hot topic.
He said the energy industry will pull back from expansion in 2015. Brinsden is also expecting an uptick in office vacancy in 2016 and 2016 as Houston’s job growth retreats from near-record highs.
The Houston office market is currently in excellent condition, however, with more than 4 million square feet of absorption, according to Colliers.
Rental rates for Houston office space rose 5.1 percent over the last year, according to a third quarter report by Colliers International.
Citywide vacancy stood at 11.9 percent at the end of the third quarter, down from 12.6 percent a year earlier, Colliers reported. The average CBD Class A vacancy is 9.8 percent.
Although Houston will lose energy jobs, it will be gaining jobs in other sectors, said economist Patrick Jankowski at the Greater Houston Partnership’s annual Houston Region Economic Outlook event last Thursday.
After gaining about 120,000 new jobs in 2014, Houston will add only 62,900 jobs in 2015, predicted Jankowski, who is on staff at the Partnership.
Jankowski said the sharp drop in oil prices will encourage some real estate developers to drop plans to start on speculative projects. Some energy companies will have layoffs, he said.
Houston has 17 million square feet of office space under construction, far more than any other city in the nation, but it has substantial pre-leasing.
Other speakers at the BoyarMiller breakfast: Will Holder with Trendmaker Homes; Allen H. Crosswell, with NewQuest Crosswell and Welcome Wilson, Jr. with Welcome Group, delivered fairly positive forecasts for other sectors of the Houston real estate market.
Houston’s reputation has been exceptionally high as the city’s population and job growth have been high during the recent boom, which was fueled by shale oil’s phenomenal gains in domestic production.
Investors selected Houston as the top city for commercial real estate investment in 2015, in the annual Emerging Trends in Real Estate forecast by PwC US and the Urban Land Institute (ULI).
The ULI report, issued earlier this fall, said investors will be looking beyond the traditional “core” coastal markets, such as New York and San Francisco to other parts of the nation in 2015. Texas is particularly robust as the awakening of domestic energy production and hydraulic fracturing has generated hundreds of thousands of new jobs.
The Emerging Trends report , which was released before oil prices began falling sharply, reflects the opinions of more than 1,000 investors and commercial real estate professionals who evaluate the nation’s commercial real estate markets.
The Emerging Trends forecast said: “Houston offers a significant amount of investment opportunity. Investors believe that the energy industry will continue to drive market growth and that will support real estate activity in 2015. Houston was ranked number one in both investment and development expectations for next year; housing market expectations are ranked number two.”