Houston Office Market Recovery After Hurricane: Q&A with Chris Lewis
Chris Lewis
Hurricane Harvey struck Houston in late August 2017. Initially, observers thought the storm’s main damage affected residential properties while the office market would remain largely resilient. Over the following weeks, however, signs emerged that the office sector was not immune. Some new developments in the Energy Corridor experienced issues, and tenants such as Telecheck vacated space. As 2018 begins, Realty News Report asked Chris Lewis, managing principal at Lee & Associates, to assess the post-Harvey office market. A Texas A&M graduate, Lewis represents landlords and tenants in leasing and sales of Houston office properties. He applies market analysis and targeted marketing to tenant relocation, expansion, lease negotiations and property promotion.
Realty News Report: How would you describe Harvey’s impact on the office market?
Chris Lewis: Harvey caused widespread damage along the Texas coast and affected many commercial properties in Houston. Yet only a small portion of office buildings—particularly those adjacent to bayous—suffered flooding severe enough to take them offline for some time. Overall, less than 5 percent of the commercial office inventory was impacted, and most of that has been restored and returned to use. On a citywide, long-term basis the effect on the Houston office market is minimal. That said, the storm did prompt short-term shifts in supply, demand and capital allocation.
Following Harvey, displaced tenants created a short-term surge in demand for move-in-ready sublease space, which was quickly absorbed. Tenants have generally been cautious about making long-term commitments, and the average tenant footprint continues to shrink as firms seek greater efficiency. As a result, available direct space faces less competition from large furnished subleases that once dominated the market. This dynamic will benefit submarkets such as the Galleria/Uptown, Greenway, West Houston and the CBD over time. While the commercial office sector should see only modest long-term impact from the storm, many small businesses faced immediate financial strain: employees’ homes and personal property were affected, supply chains were disrupted and capital that might have been invested in expansion was redirected to recovery. In the short term, Harvey slowed market activity much like a recession would, but once businesses rebuild, the long-term consequences for office occupancy should be limited.
Realty News Report: 2017 was a difficult year for Houston’s office market. Lee & Associates reported more than 3 million square feet of negative absorption by the end of the third quarter, with some estimates nearing 5 million by year-end. When will Houston return to positive absorption?
Chris Lewis: Absorbing the excess supply will take time, even accounting for the quick uptake of sublease space and tenant relocations within the CBD. Oversupply, smaller tenant footprints and the drive for greater operational efficiency are reshaping tenant preferences. Encouraging signs include institutional investors re-entering the market as energy prices stabilize. I expect conditions to remain tenant-favorable for roughly the next 18 months while the market works through available space. Gradually, as demand normalizes and large blocks are leased or repositioned, absorption should turn positive.
Realty News Report: The Energy Corridor is experiencing significant vacancy. What do you see ahead for that submarket?
Chris Lewis: The Energy Corridor has one of the city’s highest vacancy rates, a situation made worse by the energy downturn and lingering effects from Harvey. Large sublease blocks are set to mature soon, which could add more available space. However, the area remains attractive for many reasons: quality housing, reputable schools and proximity between home and office. We do not expect a mass exodus of tenants, but occupiers will be more selective. Non-flooded buildings should recover faster as tenants prioritize locations with lower future flood risk. Conversely, buildings that were flooded may need to offer higher concessions to attract tenants, creating opportunities for cost-conscious companies that previously couldn’t access certain spaces.
Realty News Report: Greenspoint has roughly a 50 percent vacancy rate depending on the source, and ExxonMobil’s departure was a major blow. Is recovery possible for Greenspoint?
Chris Lewis: Greenspoint faces significant headwinds, especially as ExxonMobil completes its exit. Without a primary economic driver to create organic growth and a complementary tenant base, the submarket will likely attract mainly firms that must be near the airport or serve northwest Houston. Much of the office stock is aging, and with attractive alternatives elsewhere offering better concessions, tenants are drawn to markets with stronger activity, newer multifamily housing, nightlife and better school options. Unless redevelopment occurs around the mall area or another local catalyst emerges, Greenspoint’s recovery will be limited.
Realty News Report: Were there ever periods, such as the 1980s, when Houston’s office market was in worse shape?
Chris Lewis: The S&L crisis of the mid-1980s was a far deeper downturn than what we face today. Current cycles—characterized by overinvestment in some areas and lower oil prices—are challenging, but the scale is smaller than in the 1980s. Historically, Houston has weathered energy and banking cycles and recovered each time. There are positive indicators: rig counts rose between December 2016 and December 2017, and OPEC’s production adjustments helped stabilize energy markets. Houston’s lower cost of living, steady population growth—about 400 new residents per day—and substantial homebuilding support long-term demand. The city’s resilience, workforce, and affordability will continue to attract businesses and residents.
Realty News Report: Are you a native Houstonian? Tell us about your background.
Chris Lewis: Yes—I’ve lived in Houston for about 40 years, aside from four years in College Station while I attended Texas A&M. I grew up inside the inner loop and began working in real estate during high school. Coming from a family involved in real estate made it natural to pursue this career.
Realty News Report: What are your expectations for 2018?
Chris Lewis: I anticipate moderate recovery in the office sector, stronger growth in industrial and multifamily, and a relatively flat retail market.
