Houston Real Estate Update: Industrial Market Healthy as Office Market Struggles

HOUSTON – (By Dale King, Realty News Report) – Many Houston office buildings have high vacancy rates and more space is being emptied as companies reduce their footprint.

In October, office vacancy hit 23.2 percent, up from 21.6 percent in October of 2019, according to NAI Partners, one of the largest privately held commercial real estate services firms in Texas.

“The vacancy rate has hit a high in the mid-20 percent range,” said Griff Bandy, an NAI Partners office tenant representative specialist. Some 3.7 million square feet of office space has been emptied this year.

Some building owners may turn to selling their properties because they that can’t attract new tenants and subsist on partial rent payments, Bandy told a NAI Partners press briefing. “We may see several buildings change hands  within the next 60 to 90 days.”

All property types have been impacted significantly this year by COVID-19.

NAI Partners conference touched on why office leases have fallen through the floor, why big box retailers face dire straits at the same time 7-Elevens and Jiffy Lubes are sprouting, and why a pervasive, work-at-home strategy is becoming a new norm.

And the prospect for one or more vaccines for the ailment that has held the world at bay for close to a year is offering “a psychological” boost that could provide a road to post-COVID normalcy.

The Industrial Market

“Lots of positive things” are happening in the industrial submarket, said Clay Pritchett, who handles the manufacturing trade for Houston-headquartered NAI Partners.

Demand, he said, is beginning to crank up for large (over 200,000 SF) properties while 4.5 million SF of industrial space is under construction, generally in the western and southwestern submarkets.

As for “trends” happening as the third quarter of 2020 ends, Pritchett said “decision makers are moving. There is demand for e-commerce space.” Movement can be seen in the market for distribution centers and warehouses.

Amazon has been expanding at rapid pace, occupying large distribution buildings as e-commerce grows.

Pritchett pointed out that he and fellow NAI partner Zane Carman represented 10631 Corporate Drive Realty, LLC, which purchased a Class A corporate office and food processing facility at 10631 Corporate Drive in Sugar Land. It consists of about 153,000 SF of combined office, freezer-cooler warehouse and food processing space.

“Demand for specialized freezer-cooling facilities is a first for Houston,” Pritchett said.

The retail market has taken “a wild ride” in 2020, said Jason Gaines, senior vice president of retail services.  It was “a big year” for some retail segments, among them, the food and beverage area which “is coming back the quickest.”

He said restaurants that are weathering COVID restrictions have begun to adapt to the heavy emphasis on take-out and delivery, mask requirements and the necessity for sterilization and sanitation.

Other retailers likely to succeed in a coronavirus-restricted environment include convenience stores, store/gas station combinations, “7-Eleven, Jiffy Lube and all the gas guys.”

Big box stores are seeing firms locating in areas that need backfill. “The bad news is most of them are low-rent payers and discount liquidation places. We have just a cut-rate store which is like a Big Lots store. We are working to fill an old Stein Mart box. [Getting] traditional real estate rents for warehouses is challenging.”

A Biden Administration?

And what about the impact of a Joe Biden presidency and political pressure on fracking and fossil fuels?

“There’s a lot of anxiety,” said Pritchett, adding: “This trend is not new. Fracking was a big political issue.  Fracking has slowed. It is not the driving force it once was. I don’t know if [Biden] will be a huge impact.”

Michael Sieger, vice president of office project leasing, said the lack of capital investment by some companies is a “bigger issue than fracking or the Green New Deal.”

“The energy sector,” noted Bandy, “has done well with Democratic and Republican presidents.”

NAI also has an investment fund platform called Partners Capital and a development vehicle called Partners Development, both wholly owned subsidiaries of the firm.

Adam Hawkins, vice president of Partners Capital, said that segment of the company “has been very busy” in 2020 as it moves toward a $1 billion goal for the division that’s held in four funds.  His division added several properties recently, including Trails at 620 in Austin and Blanco Crossing in San Antonio.

“It’s a good time to buy right now, for the right properties,” he said “We’ve seen buyers coming in despite COVID. They are excited about 2021. There is a lot of capital out there.”

Dec. 4, 2020 Realty News Report Copyright 2020

File: Houston Real Estate Update 12-4-20

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