HOUSTON – After several difficult years driven largely by the oil downturn, Houston’s office market shows signs of recovery, according to Patrick Duffy, President of Colliers International Houston.
“We are comfortable that the bleeding has stopped,” said Duffy, who leads Colliers’ Houston office operations.
Speaking at Colliers’ Houston Trends 2017 event at the Houston Country Club, Duffy said that office rents and vacancy rates should stabilize over the coming year after two challenging years for the market. He also noted improvement in one of the market’s most troubling metrics: the oversupply of sublease office space.
Prior to late 2014, the sublease inventory hovered around a normal level of three million square feet. That changed when OPEC, led by Saudi Arabia, chose in late 2014 to keep production high. The resulting collapse in oil prices forced U.S. energy companies to incur significant losses and lay off workers; roughly 100 energy firms, many based in Houston, ultimately filed for bankruptcy.
Colliers reports that the region lost about 80,000 energy-related jobs. Oil, which traded near $107 per barrel in mid-2014, sank below $30 by early 2016.
As energy firms shrank operations, they returned vast blocks of office space to the market. Sublease availability swelled to more than 12 million square feet as major companies—including Shell and Conoco—attempted to sublease unneeded space.
By the fourth quarter of 2016, Colliers recorded a modest decline in sublease supply to 11.4 million square feet. Meanwhile, oil prices recovered above $50 a barrel and renewed attention on the Permian Basin’s long-term potential encouraged energy firms to re-evaluate space needs.
“Oil companies are taking back some of the sublease space,” Duffy said. “The increase in vacancy is finally starting to slow.”
New office construction has also tapered. Only about three million square feet of office space remains under construction, much of it in Hines’ 609 Main and Texas tower projects nearing completion. Colliers reports Houston’s total office inventory at approximately 230.8 million square feet.
Despite these positive signals, 2016 was a bumpy year. Overall office vacancy rose to 17.5 percent at year-end, up from 15.3 percent at the end of 2015.
Within Houston’s broader real estate picture, office and multifamily sectors were the primary weak spots, while retail and industrial segments performed well. Single-family home sales, for example, achieved record levels in 2016, according to the Houston Association of Realtors.
Multifamily occupancy fell to 88.6 percent at year-end, down from 92.5 percent a year earlier. Developers completed 22,615 apartment units in 2016, up from 20,148 in 2015. Colliers also notes 61 apartment projects totaling 15,933 units currently under construction, concentrated largely inside the Inner Loop and Downtown and predominantly Class A, high-end product.
Demand for B and C class multifamily properties remains strong, with high occupancy and keen investor interest. “We get people calling every day saying: ‘I want to buy apartments. I want to buy apartments. I want to buy apartments.’ But there’s very little inventory,” Duffy said.
Houston’s retail market is tight, with a reported 5.8 percent vacancy rate and continued strength expected into 2017. Retail development continues to expand into growing suburbs, and many new centers are fully leased upon completion. New entrants such as Dick’s Sporting Goods and Total Wine have expanded into the market, and the exit of Sports Authority was absorbed without lasting impact.
The industrial sector is also robust: Houston has roughly 535 million square feet of industrial space, with 5.2 million square feet currently under construction. Major projects from companies like FedEx and IKEA contribute to that pipeline.
Overall, Duffy expressed cautious optimism. “We are getting back to business as usual in Houston, which is a great place to be.”
Jan. 26, 2017 Realty News Report Copyright 2017