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Houston Office Market Challenged by Oil Woes and Pandemic Impact

HOUSTON – (Realty News Report) –  Houston office market is going through a rough patch, as the vacancy rises amid today’s economic setbacks.

Houston has 50 million square feet of vacant office space and many believe it will never be filled.

The owners of the city’s office towers face the pandemic-inspired recession and a weak oil market. But long-lasting questions hover over office markets as corporate tenants ponder working-from-home, the effectiveness of online Zoom meetings, and appropriate employee density amid changing attitudes about infectious disease and wellness.

Second Quarter 2020: Houston’s office space has a 21.6 percent vacancy rate, up from 19.4 percent in the second quarter of 2019, according to CBRE. Rental rates? They are down. The average asking rate per square foot is $28.94, down from $29.47 per square foot in the second quarter of 2019, CBRE said.

CBRE reported the Houston office market suffered 1.1 million square feet of negative absorption in the second quarter – a sizable splurge in supply of vacant space.

The Woodlands, where OXY relinquished a big block of former Anadarko space, was a major contributor to vacancy in that master planned community. Stage Stores, which filed Chapter 11 in May, is vacating 200,000 square feet on the West Loop.

Additional supply is coming online, too. Some 4.7 million square feet in currently under construction, led by the 47-story Texas Tower building built by Hines in downtown. The new buildings should are expected to attract tenants. It’s the Class B buildings that will feel the pain of being outclassed by the brand new office towers, experts say.

Industry leaders report leasing activity has tapered off. Madison Marquette says Houston’s second quarter leasing activity was down 50 percent from a year earlier.

“As the commercial real estate market reckons with the rapid spread of the coronavirus and the ongoing volatility in the energy markets, landlords are bracing themselves for additional layoffs, bankruptcies and downsizings that will likely translate into lower rents, higher vacancies and foreclosures in the months ahead,” Madison Marquette says

Houstonian Griff Bandy, a partner at NAI Partners, says a rebound is unlikely in 2020. But he expects a recovery in 2021. A recent NAI report placed the market’s negative absorption at 1.7 million square feet year-to-date – meaning a significant amount of space has gone vacant this year.

The city has recovered more than 100,000 jobs since the pandemic crushed the Houston economy earlier this year.

Although domestic drilling activity is down considerably to near-record lows, oil prices have been holding firmly above the $40 a barrel point for weeks, high enough that many energy exploration and production firms can keep their heads above water. West Texas Intermediate is priced around $43 a barrel, an impressive recovery from April, when prices dropped below $0 for the first time. But demand is weak because people aren’t driving as much during the pandemic.

Bankruptcies have been plentiful in the energy sector. The Houston-based Rystad Energy consulting firm forecasts that another 150 energy companies will file Chapter 11 by the end of 2022, unless oil prices rise substantially.

Rystad’s forecast for the remainder of 2020: An additional 29 energy firms will file Chapter 11 by the end of the year.

M&A is another threat to the office market because corporate mergers and acquisitions often result in office space vacancies. For example, Chevron recently made an offer to acquire Houston-based Noble Energy.

The energy industry is a major user of Houston office space. Lifting the Houston office market out of a 20-year low, will be difficult under the weight of a weak oil and gas business.

“The oil and gas sector has created a vacuum,” said office leasing veteran Dan Boyles, a partner at NAI Partners. “We have a lot of companies that have a lot of excess space. All of the clients and prospects that I talked to are looking for ways getting out of (their office leases) whether it be by subleasing on restructuring a lease.”


Sept. 1, 2020 Realty News Report Copyright 2020


File: Houston Office Market Challenged by Pandemic and Energy Industry Woes

 

 

 

 

 

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