Partners: Choppy Market Ahead

HOUSTON – (By Cynthia Lescalleet tor Realty News Report) – Using words like “mixed bag,” “choppy” and “gut check,” a panel of Partners’ partners discussed Houston’s commercial real estate status at a market outlook the company sponsored at their Houston headquarters. Formerly NAI Partners, the real estate company relaunched as an independently branded entity earlier this year and just opened a fourth Texas office, in Dallas, with the intent to grow services further and farther, meaning markets outside the state.

Jon Silberman

With rising interest rates, increasing construction costs, shifting tenant expectations about returning to the workplace, tightening capitalization, and much conjecture on whether a slowdown/recovery will be “U” shaped, “V” shaped, market sectors are jockeying within the shifting conditions before them, said Jon Silberman, Managing Partner of Partners Real Estate.

Among the talking points:

OFFICE

Houston’s vacancy plagued office market is still in a slump, though energy-related transactions are back, said Dan Boyles, Partner, Office Tenant Rep. Net absorption in 2022 thus far has reached 909,000 SF, compared to the deficit of 2.2 million SF in the same period of 2021. Overall vacancy sits at 25 percent.

Big transactions include EOG Resources’ renewal of 374,000 SF at Heritage Plaza; Enbridge’s 14-year sublease for 290,025 SF at Energy Center V; and Bechtel’s 205,000-SF lease in CityWest Place.

Dan Boyles

Submarket hot spots remain the Katy Freeway East submarket, dominated by mixed-use City Centre and the Memorial City commercial district. The Inner Loop/Heights area is also hopping, particularly with smaller companies, many of which are OK with hip, repurposed properties.

Sublease availability is ticking up, including 22 listings with more than 100,000 SF.

Tenants’ flight to quality buildings continues. That means the so-called “legacy” properties need to really think about whether (or how) to up their amenities, eliminate the less optimal space within their buildings, or, in rare cases, repurpose, Silberman said. The latter is still a rare, costly choice.

And some office properties, depending on location, size and age, are just never going to rebound. As is, such office buildings “just eat capital,” he said. Their fates are TBD.

Building owners, likely “exhausted” from trying to reduce available space, are pitting their available space against their sublease space — as well as against fully loaded spec space that’s ready to go, said Vince Strake, Senior Vice President, Office Project Leasing.

Silberman said that as companies re-assess what their workplaces will be — since flexible schedules and remote work aren’t likely going anywhere — re-upping tenants now might take less-but-better space with more hotel-like amenities to attract and retain a workforce.

One wrinkle is that employers who want their hybrid workforce at the office together a couple times a week still have to carry the same space to accommodate them.

INDUSTRIAL

With a vacancy rate of 5.7 percent, Houston’s still perking industrial sector does not have a problem, at least from the tenant standpoint, said Travis Land, Partner, Industrial Services. E-commerce, petrochemical industry activity and the Port of Houston are driving this market. The latter attracted temporary users during the pandemic that are now taking larger footprints here and shifting their satellite operations to the coasts, he said.

However, institutional debt and equity sources are backing off. Land prices have peaked. Look for some industrial projects to be shelved, he said.

Also affecting industrial space, in retail use, is a reversal of distribution center scale away from smaller satellite locations and toward the mega-sized centralized projects.

INVESTMENT

Investment sales are still happening, with multi-family, industrial and retail leading the way, said Scott Lunine,  Partner and EVP, Brokerage Services. However, deals are attracting fewer offers because buyers are “more choosy and attentive.” They’re looking for “deals that make sense,” not just pursuing a deal because it’s available.

About 40 percent of offers are coming from out of state, and 15 percent of activity is by foreign investors, primarily from South America, Canada and Mexico, said Adam Hawkins,  Partner, Capital Group. The dollar is strong and investors want U.S. assets.

DEVELOPMENT

“The timelines have shifted” due to rising capital and construction costs, said Carter Perrin, Partner, Capital Group, and Managing Director, Development. “It will take time for rents to catch up to where they need to be” before triggering new projects.

“Be patient. Be conservative. But keep moving.” – Carter Perrin

His advice: “Be patient. Be conservative. But keep moving.” In the meantime, some projects in the pipeline will fall out.

Looking ahead, the 2022 CHIPS & Science Act, intended to bolster the semiconductor industry and R&D, could have potential here.

Ditto green energy initiatives and requirements — particularly in Houston, where the definition of “energy capital” continues to expand beyond oil and gas, said Patrick Jankowski, Greater Houston Partnership’s senior vice president of research.


Nov 9, 2022 Realty News Report Copyright 2022

Photo  credit: Ralph Bivins, Realty News Report Copyright 2022

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