HOUSTON – (Realty News Report) – Mark Taylor, senior managing director at the Houston office of CBRE, says the office market will face headwinds for the next few years. Many companies will downsize their offices as employees work from home, at least a few days a week. But Houston’s population continues to grow and there is demand for top-quality office space in a trend called “the flight to quality.”
Mark Taylor was a recent guest on THE RALPH BIVINS PROJECT, a podcast produced by Realty News Report.
Here is an excerpt from the Mark Taylor conversation:
Ralph Bivins: We are here today in Houston, Texas, the energy capital of the world. We saw oil prices a year ago at zero dollars a barrel, the lowest point ever, and now, in summer 2021, the price has risen to more than $70 a barrel, coming out of the pandemic. Some companies have done well, others have not. There is a lot of uncertainty out there. To address this uncertainly, we are lucky to have as a guest Mark Taylor from CBRE, the largest commercial real estate company in the world. He is the senior managing director at the Houston office, and has a vast amount of experience. Mark, welcome, what’s the state of affairs in the Houston real estate market?
Mark Taylor: Thanks, Ralph, for having me on the show today, and thank you for providing information about the business community for a couple of decades now. Like most Houstonians, I’m pretty optimistic. I’m very optimistic about Houston’s future, in spite of some of the things we’ve been through. You and I go back a few decades, we have been through a few things from decade to decade, and we continue to prosper. I’ll tell you that as far as Texas in general and Houston specifically, what will solve most of these problems is just sheer growth. Houston and Texas continue to grow. The numbers we see from the period of 2010 to 2020, prior to the pandemic, show that Houston led the country in population increases with 20% overall growth, or 115,000 people or so a year, every year, coming to Houston.
I’d like to quote a statistic. We all know that Houston was founded in 1836. By 1955, the population reached 1 million. So, it took 150 years for the first million people to come in. It’s only taken a little over seven years to add the last million. Houston continues to grow. People are coming to Houston, and most sectors of the market are pretty strong. I will talk more about the office sector, which is probably the weakest, but there is still reason to be optimistic about it. In general, Houston continues to grow, continues to be robust and that growth drives opportunities that drive a market that stays fairly strong across all sectors.
Ralph Bivins: There’s a lot of concern about the office market. The vacancy rate is somewhere in the mid-20% range, the highest in decades. There is a lot of sublease space. And when companies merge, they throw off extra space. Across the city, more than 50 million feet are vacant. When you think about it, it’s seems almost impossible to fill all this space. What is happening in this area?
Mark Taylor: We’re definitely facing a headwind, and we have faced it ever since 2014 with a lot of slowing down in the energy market. The second shoe that dropped was the whole pandemic; COVID changed the whole dynamic. Lots of people at CBRE are studying this full time, to really get into the heads of clients and particularly into the heads of some of the biggest clients globally. I can tell you that people who say they know the way offices will be used in the future are just kidding themselves. This is still to be determined.
The concepts of flexible workspaces and working from home will continue, but not on a wide scale. Even before the pandemic, people were working an average of 4.2 days a week in the office. Many studies say that this will likely drop by up to one day a week, to 3.25 or 3.5 days a week. There will still be pressure to downsize. Anecdotally, we are representing a number of tenants in the market. I’d say that flat is becoming the new up. Most tenants are downsizing, from 20% to 30%. There will continue to be pressure to downsize.
In Houston, as you said, we have about a 23% vacancy rate. Including sublease space, which is fairly stable, but starting to come down slightly, we are at 27%. Some space in some of these buildings will be difficult to fill. We are continuing to see the whole idea of flight to quality. Look at the buildings built since 2010. With these, there is positive absorption. Look at those built before 2010 and you’ll see negative absorption, and this has been going on for five or six years. There continues to be a flight to quality. The nicest and best managed buildings will continue to win. The office market as a whole will face headwinds for about the next 5 to 6 quarters. The market of older buildings will still be weak and will be met with negative absorption. Things may start to improve in late 2025 or early 2026. By then, we hope to be out of recovery and into a little expansion. But that will still be four or five years from now.
Ralph Bivins: That’s going to take a lot of patience. Also, we are set to add 4 million feet of office space that is under construction.
Mark Taylor: These are pockets of suburban office buildings, some build-to-suits. In terms of spec office buildings, they will probably not overrun the market. There are not going to be a lot of spec buildings developed in the near future, but those in the works will probably do very well. This goes back to the flight to quality concept that I talked about. In the path of this flight, companies moving to new buildings will effectively leave a bigger vacancy than the space they end up occupying, People will pay more, but will also become much, much more efficient. We see lots of examples of this. Tenants will move from a 300-something SF space to a 200-something SF space and will pay 30 to 40% more in rent. But the total occupancy cost will be down slightly, and the new location will allow for recruitment and retention of employees. This is all part of a big company strategy. And if they don’t hire good employees and can’t hang on to them, then they are not going to succeed.
So, these new buildings will do fine. Some of the buildings we saw constructed in the period from 1978 to 1984 – which makes up a lot of the buildings that are still out there – will require significant renovation to maintain high quality.
June 21, 2021 Realty News Report Copyright 2021
File: Highs & Lows: Midyear 2021 Mark Taylor. CBRE . – File (2) Houston. Office. Highs & Lows: Midyear 2021. CBRE. Mark Taylor, senior managing director. Flight-to-Quality. Negative Absorption.
For more about Texas real estate, check out the book Houston 2020: America’s Boom Town – An Extreme Close Up by Ralph Bivins. Available on Amazon http://tiny.cc/4a2g6y
Houston 2020 Ebook version https://tinyurl.com/4xm7z8b5