HOUSTON – Fear about Houston’s office market began to mount roughly three years ago when the collapse in oil prices hit energy firms hard and flooded the sublease market with available space.
Some building owners, including Cousins Properties, chose to exit the market. Capital markets turned away from Houston and investor interest dropped sharply.
Today, while some perceptions linger, a closer look shows that Houston has improved and is becoming attractive to buyers again. Hurricane Harvey dented the city’s image further, but for investors willing to dig deeper, Houston now presents compelling opportunities.
“We like Houston for a number of reasons,” says Hilary Spann, managing director of the Canada Pension Plan Investment Board (CPPIB), which recently paid $1.2 billion for a 19-building Houston office portfolio that includes Greenway Plaza. Spann explains that CPPIB invested because “Houston is still in the nascent phase of its recovery.”
Spann told a luncheon hosted by the Urban Land Institute (ULI) that when news of CPPIB’s Houston acquisition leaked, other investors began reaching out to join the deal. That immediate interest signaled that sentiment was shifting — the market had likely bottomed and was on the mend.
Investor sentiment can swing quickly.
Just a few years earlier, Houston topped ULI’s city rankings as the No. 1 real estate market in the nation. In the most recent Emerging Trends report, Houston fell to No. 60. That dramatic decline reflects changing perceptions and the emotional nature of sentiment surveys.
“One year you’re up and one year you’re down. It’s a sentiment survey,” says Patrick Phillips, ULI’s global CEO. “There may — or may not — be a sound empirical basis for the movement in the rankings. But it’s how people feel. So there tends to be an over-reaction, either positively or negatively, depending on events.”
Phillips noted that many participants in the ULI survey were interviewed before oil prices stabilized in the $50–$55 per barrel range, a factor that influenced their responses.
Investment sales in Houston were weak in 2016 — under $400 million — but rebounded in 2017, with more than $4 billion of investment-grade office properties transacting through the year to date.
Industrial real estate has been another bright spot. Industrial sales rose dramatically — NAI Partners reported a 127 percent increase — while warehouse leasing remained strong and large distribution facilities started coming online fully leased.
“Our industrial business has been going crazy in Houston,” says Mark Cover, CEO of Hines’ Southwest region and Mexico/Central America, highlighting robust demand in that sector.
Cover added that office leasing is rebalancing and prospective tenants are showing more confidence, which supports improving fundamentals for the office market.
Ric Campo, CEO of Camden Property Trust, underscored how quickly investor perceptions can change. When news of Hurricane Harvey first broke, Camden’s stock plunged. But in the days after the storm, the narrative shifted as many displaced residents moved from single-family homes into apartments, boosting multifamily occupancy.
That rapid change in outlook pushed Camden’s stock to an all-time high of $96.39 on Sept. 8, about a week after Harvey passed. Wall Street had revised its view of Houston.
Overall, while challenges remain, current activity in investment sales, industrial leasing, and recovering office demand suggest Houston’s real estate market is moving through an early-stage recovery that may offer opportunity to patient investors.