HOUSTON – (Realty News Report) – A Houston real estate advisor warns that independent energy companies face rapid failure and that the Houston commercial property market will suffer as oil prices plunged to historic lows this week.
JLL International Director Bruce Rutherford, who leads the Global Energy Practice Group for the international real estate firm, predicts significant losses among the nation’s small independent producers and drilling companies over the next three months, including many operating in Texas oilfields.
“We are going to lose a very significant portion of the 6,000 independent oil companies over the next 90 days. They are going to go bankrupt or be acquired by other companies. Their hydrocarbons are not going to disappear. The hydrocarbons are still going to be in the ground and somebody is going to harvest that,” Rutherford said.
Speaking at a Bisnow Media webinar on Tuesday, Rutherford said the Houston office market is also headed into a difficult period. West Texas Intermediate crude briefly went below $1 a barrel on Monday and reached a one-day low of negative $37 a barrel, a one-of-a-kind drop that underscored the market’s turmoil.
“Even before this catastrophic drop in oil prices yesterday, the Houston real estate market was being pummeled by effects of the pandemic and low oil prices,” Rutherford said.
He added that oil prices around $20 a barrel were already having severe consequences. “Oil prices at $20 a barrel were bad, very bad. We saw the vacancy rate in Houston office space … going north,” said Rutherford, who is based in Houston with JLL, also known as Jones Lang LaSalle.
At the same time, Rutherford noted the downturn could create attractive opportunities for tenants seeking long-term office space. With landlords competing for fewer occupants, favorable lease terms are likely to emerge.
“These unprecedented times have slowed commerce to a near halt,” said Anthony Squillante, principal at Avison Young Houston, in a statement. “However, if tenants are willing and able to transact, landlords are likely to offer aggressive concession packages in response to social distancing and work-at-home orders in an effort to keep their building’s occupancy rate up.”
Avison Young reported that Houston currently has 21 office buildings under construction, totaling about 3.8 million square feet. The 47-story Texas Tower developed by Hines is the largest of these projects, and new deliveries have benefited from a tenant preference for higher-quality office space.
CBRE reported that Houston’s overall office vacancy rate was 20 percent in the first quarter, up from 19 percent in the same quarter of 2019. The market experienced negative absorption during the first quarter, with 576,723 square feet of office space becoming vacant.
Economic strain across the metro area is reflected in unemployment claims. Patrick Jankowski, chief economic analyst for the Greater Houston Partnership, said more than 240,000 claims were filed over a recent four-week period. He noted the Texas Workforce Commission’s website and phone lines were overwhelmed and expects total claims to exceed 300,000 once the backlog is resolved.
For many U.S. energy producers, West Texas Intermediate prices need to be above roughly $40 a barrel to reach break-even. As of Wednesday morning the price was near $15 a barrel amid a global oversupply of oil.
Rutherford suggested that some energy analysts expect a full recovery in oil prices could take about 18 months, though he acknowledged there is no certainty.
