Office Buildings: The Return to Normalcy

HOUSTON – (Realty News Report) – Office building expert Bill Brownfield was a guest on THE RALPH BIVINS PROJECT, a new podcast produced by Realty News Report. To hear the entire podcast  CLICK HERE.

Here is an excerpt from his appearance:

RALPH BIVINS: Today, the office markets are undergoing tremendous transformations, with the work-at-home situation and the pandemic. We are talking with Bill Brownfield, co-founder of Alpha Office Escalations. He has been in the commercial real estate business since 1979. Bill, how would you describe the market right now?

BILL BROWNFIELD :Probably the best way to start is with some basics. The easy definition is supply and demand. We have slack demand, a lack of demand. This is based on three things that you have already touched on, Ralph. I’ll give them in the sequence in which they are having the most impact on the market. First, the oil and gas recession. I read an article today which states that in March of 2021, gasoline sales went up 10% from March of 2020. This is a good sign that maybe we are beginning to bottom out. Second is the COVID vacancy rate for office space. I have a chart here from December that shows how office vacancies across the nation went off a cliff in March of 2020 after being at 90% occupancy or a little more for January and February 2020. Houston was a little below that January-February figure. By mid-March, everyone had fallen off a cliff.  The chart shows 10 colored ropes all hanging off the chart. The chart showed the results for 10 major markets – New York, San Francisco, Dallas, Houston and other cities in between like Chicago. In March 2020, everyone hit bottom. New York was below 5%. Houston and Dallas were at 10%, maybe 11% occupancy. Across the later months, they gradually improved. But even today, New York is still around 10%. It’s still really dramatic. In Texas, Dallas is in the mid to high 30% range. Houston is 35 or 36%. But if you talk to our client base, you’ll see their take is fairly reflective of an overall rate in Houston of 20 to 25%. We expect this to increase. We are supposed to be approaching herd immunity. It may be possible for business to have the option of opening up, either in summer or fall, more likely summer.

RALPH BIVINS: And the third?

BILL BROWNFIELD: The third is the work-from-home situation which we have dealt with over the past year. I feel this will have a longer impact. If you want me to put a time frame on when we will come out of it, and it’s dangerous to put a time frame on it, I’ll give you two. I feel it will take two years for us to bottom out completely. In February 2020, the overall vacancy rate was about 22%. In February and March of 2021, for Houston, it is in the high 20s, maybe 28 to 30%. And that doesn’t include sublease space. Also, we have, I guess, a natural lease rollover of 12 to 15% a year. If you work with that and assume some leases will not be renewed – some tenants will vacate or downsize – then you’ll have to add 6 to 7% or even 8% on top of the numbers that I just talked about.

I think that for the next two years, we could be looking at being well into the 30% overall vacancy range. The numbers we just talked about are fairly reliable and indicative of all that could happen. Once we hit bottom, it would take three years to five years to climb out and reach some degree of stability, All this requires regrowth and backfilling, and it must happen. I do feel very positive about this. Texas has been the recipient of a great amount of in-migration. This should work as long as the city and county are successful in bringing new businesses to Houston.

RALPH BIVINS: It would be handy to have a few big hits.

BILL BROWNFIELD: It implies a strategy – maybe the next bumper sticker will be: “Survive till’ ’25.”

April 12, 2021 Realty News Report Copyright 2021

File: Office Buildings: The Return to Normalcy. Bill Brownfield. Alpha Office Escalations.  THE RALPH BIVINS PROJECT.. To hear the entire podcast  CLICK HERE.

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

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