HOUSTON – (By Michelle Leigh Smith) – Houston’s commercial real estate market at midyear 2017 reflects a mix of strength and challenge. Retail and industrial sectors are showing resilience, while the office market continues to struggle under pressure from the energy downturn and shifting tenant preferences.
Crude oil prices remain a drag on expectations for a rapid economic rebound. West Texas Intermediate (WTI) has failed to climb above $60 per barrel, tempering hopes for a renewed expansion in Houston’s energy-driven economy.
NAI Partners shared these observations and market data at a midyear press breakfast, offering a snapshot of demand, development and investment trends across property types.
Retail activity has provided an upbeat note this summer. “On a national scale, retail is seeing more play than office,” says Jason Gaines, Senior Vice President, Retail with NAI Partners. Major industry moves and retail innovation have shifted the conversation about brick-and-mortar stores away from doom-and-gloom scenarios toward more strategic location choices.
Fitness, fast-casual dining and value-oriented retailers lead current demand. Gaines has worked with operators such as the GRA Restaurant Group in Stafford on defining optimal sites amid a crowded food-service market. “The biggest item has been the oversaturation of restaurant category businesses,” he explains. “We’ve seen quality real estate return to the market because the number of food options exploded to the point where great locations alone aren’t enough. Many concepts are doing well, but food has been the absorption darling since 2009 and appears to be undergoing a period of self-correction.”
Department store dynamics remain nuanced. “I see Sears having a soft-goods crisis in their traditional mall stores more than in standalone outlets,” Gaines says. Yet outlet and value-oriented formats continue to draw shoppers. “Sears has more of a mall problem than a sales problem. The new outlet at Cypresswood and I‑45 in Spring is packed. People gravitate to value.” Retailers built on treasure-hunt, value-shopping models—such as TJ Maxx and Marshalls—are still thriving because consumers prioritize bargains as much as convenience.
Gaines focuses largely on strip centers, where the mix has shifted toward services, medical uses and food rather than traditional soft goods. Those categories face less disruption from e-commerce, and retailers such as Conn’s and Sears have not been closing local outlets in Houston at the scale seen in other markets.
The office sector has absorbed the greatest impact from the oil price slump and faces a longer recovery. Still, there are bright spots: Dan Boyles, Partner and manager of NAI Partners’ Office Tenant Group, points to strong pre-leasing activity at 609 Main despite broader market headwinds.
Managing Partner Jon Silberman notes that modern tenants increasingly seek open floor plates with fewer columns, abundant natural light and communal amenity areas. “There is some space available in Houston Center, as well as in Pennzoil Place—those 30- to 40-year-old Class A properties. Whoever moves in will likely invest significant capital to modernize. That architecture misses many things today’s tenants want,” Silberman says.
Boyles echoes that sentiment: older office buildings constructed in the 1980s may struggle to compete without redevelopment or substantial tenant improvements. Amenities rising in importance include lounge and collaboration spaces, improved cellular and connectivity infrastructure in elevators, tenant-only conference rooms and complimentary Wi‑Fi throughout common areas.
Despite challenges, Silberman and Boyles are encouraged by labor market indicators. NAI Partners’ quarterly report noted a 5.1% unemployment rate in the Houston metro area in May, marking the eighth consecutive month of economic expansion. The Baker Hughes U.S. rig count also climbed for the 23rd straight week, reaching 941 rigs—signals that energy-sector activity, while muted, is showing pockets of recovery.
However, energy forecasts remain cautious. The U.S. Energy Information Administration projected WTI to average $51 in 2017 and $55 in 2018, while many industry participants point to a $60–$65 range as necessary for sustained sector growth. At the time of the report, WTI was hovering near $46 per barrel.
The industrial sector stands out as a durable performer, driven by distribution demand, port and rail connectivity and e-commerce logistics needs. Notable leases include MEI Rigging and Crating’s lease of 227,000 square feet at 6501 Navigation in the East End, where NAI Partners’ Clay Pritchett represented the landlord. Partner Travis Land reports robust industrial leasing activity in northwest and near-northwest Houston inside the Beltway, with large distribution facilities frequently developed on a build-to-suit basis. Many users are institutional REITs treating Houston as one market among many in diversified national or global portfolios.
About 4.3 million square feet of industrial space was under construction in Houston at midyear, with only roughly one-quarter of that space still available for lease—evidence of tight market fundamentals. Southeast submarket developments oriented to port and rail access underscore Houston’s diversified economic base. Examples include a 500,000-square-foot rail-served distribution facility for Vinmar International in the TGS Cedar Port Industrial Park and IKEA’s completed 1 million-square-foot distribution center at Cedar Port. Investment in sites adjacent to navigable waterways and rail lines has been further encouraged by expanded Panama Canal capacity, completed in June 2016, which has increased container traffic and larger vessel calls to Gulf ports.
On the investment side, Andrew Pappas, Senior Vice President of NAI Partners’ Investment Fund, reports strong capital deployment. Fund I is nearly fully invested and Fund II is slated to launch later in the year. Pappas has assembled a $30–$40 million diversified, value-add portfolio spanning office and industrial assets across Houston, Austin, San Antonio and the Dallas–Fort Worth area, aiming to leverage local market expertise to produce attractive, risk-adjusted returns for investors.
Investment sales activity demonstrates continued confidence in Houston’s long-term prospects. A major recent transaction—reported at $1.2 billion—involved the Canada Pension Plan Investment Board’s acquisition of Parkway, owner of assets including Greenway Plaza. Parkway’s holdings include office campuses and towers across Houston submarkets with notable tenants such as Apache Corp., Invesco Management Group, Occidental, Statoil Gulf Services and Transocean, reflecting steady demand for quality institutional office properties despite near-term energy-sector pressures.