HOUSTON – (Realty News Report) – As more of Houston’s office space goes vacant, the pressure will rise on building owners. Unless there’s a turnaround pretty soon, some landlords could run into trouble.
“Are we going to see a round of foreclosures? There’s a reasonable chance there will be,” said Jon Silberman, managing partner for NAI Partners, at a recent press briefing.
However, Houston’s office market has a track record of making lightning-quick recoveries, Silberman said. But even though oil prices have risen significantly, that hasn’t translated into positive office leasing.
“The major oil and gas companies have not started expanding,” said NAI Partners’ Dan Boyles. Leasing activity is slow, he said, and progress is hard to achieve in the office market.
“It’s like treading water with a couple of weights tied to your ankles,” Boyles said.
In the second quarter, the direct vacancy rate was 19.2 percent, up from 18.3 percent a year earlier, NAI said. Negative absorption is prevalent.
Then there’s the sublease problem. Silberman notes large chunks of sublease space are coming back to landlords in the near future.
Forty-three full floors of sublease office space will be returned to Houston building owners within the next 12 months as the term of the lease expires, according to a second quarter report by Colliers International.
Some 9.4 million SF of sublease space exists, most of it related to shrinkage in the energy industry, according to an NAI sublease report at the end of July. A couple of years ago, the sublease supply was around 12 million SF.
The biggest sublease block is Occidental Petroleum’s 806,000 SF in 5 Greenway Plaza, followed by BP’s 479,000 SF in Four WestLake Park, and KTI/Technip’s 376,000 SF in Energy Tower II.
Looking a little further out, even more sublease is quickly heading toward expiration and return to the landlord’s inventory. Colliers reports that leases for 84 full-floors of office space in the sublease inventory have remaining terms of one to three years. That’s a 2 million SF time bomb.
About two years ago, Hines and partner General Motors Pension Fund, cut loose the 1.5 million-SF Greenspoint Place office complex on the north side of town where the office availability rate soared when Exxon Mobil departed from Greenspoint market. The Hines/GM lender, Northwestern Mutual Life Insurance, took ownership of the buildings in a $77.5 million foreclosure sale. “Considering the average occupancy rate in this depressed (Greenspoint) submarket is only about 50 percent, due largely to the fact the energy market is hurting, ownership of the asset will be turned over to the lender,” Hines said in a statement released in July 2016.
Lenders could be taking a hard look at Houston properties in the coming months as loans come due. With leases on sublease space expiring, building owners many not be able to present pristine properties with outstanding financial statements when seeking to refinance.
Many landlords have been able to maintain quoted rental rates and avoid rent cuts, although concessions, including free rent, are very generous in some cases. NAI reported second quarter rental rates of $28.28 per SF, up from $28.06 in the second quarter of last year.
While Houston’s other real estate sectors are booming, the office market is not. Houston’s job growth has been exceptionally strong, with more than 100,000 new jobs created in the last 12 months. The office market is the primary blemish on Houston. Some 50 million SF of office space lies vacant.
“The office market is very disappointing this year. It’s rough right now. There’s just no demand,” Silberman said. Full recovery for the office market could be two, three or even five years away.
“It will recover,” Silberman said, “it’s just a matter of when.”