HOUSTON – There may be some scarier places in The Universe than West Houston’s Energy Corridor office market. But there aren’t many.
On Monday, a big decline in oil prices, with West Texas Intermediate crude dropping to near $45 a barrel, cast an even darker shadow on the Energy Corridor.
Since the beginning of the year, energy firms have slashed their workforces severely, laying off thousands of people and dumping big blocks of Energy Corridor office space onto the sublease market.
It’s horrible timing. The contraction is happening while some 3 million square feet of office space is under construction in the Energy Corridor and there’s over 1.5 million square feet being built in nearby Westchase.
So it’s a triple whammy. Tenants are shrinking. The supply of empty sublease space is growing. And more new buildings are opening soon.
At the end of Spring, it seemed like things were going to be all right. West Texas Intermediate stabilized around $60 a barrel. The rig count bottomed out and even went up a tad. But about a month ago, the WTI started sliding again, dropping below $50 a barrel and the massive layoff announcements resumed. Only a year ago, oil was over $100 a barrel.
“When oil prices go down, sublease goes up,” says Lucian Bukowski of CBRE.
Among the energy giants shedding excess office space is ConocoPhillips, which recently dropped 500,000 square feet of sublease space onto the Energy Corridor market, which, of course, leads Houston in sublease inventory.
Rental rates for Class A office space in the Energy Corridor dropped $4 per square foot in the second quarter alone, CBRE reported.
Most sectors of Houston real estate, including residential, remain very strong and are even improving.
But veteran office broker Dan Boyles of NAI Partners admits he holds a “bearish” outlook for the local office market as he bemoans West Houston’s 15 big blocks of sublease space (over 100,000 square feet each).
Things can change quickly. A couple of years ago, the Energy Corridor, located along Interstate 10 in West Houston, had a pristine office occupancy rate over 99 percent. Occupancy is down now, but it’s still around a respectable 90 percent for Class A. However, occupancy is rapidly declining and the Energy Corridor is headed for a rough patch.
During this correction period, Downtown’s office market will be bruised a bit. The Greenspoint submarket will also suffer as it strives to stay afloat amid its downward spiral.
But the epicenter of pain will be the Energy Corridor. If conditions get even worse, the Energy Corridor could become Death Valley for building owners who don’t have enough staying power to last until the next up-cycle.
Commentary by Ralph Bivins, Editor of Realty News Report.