Does Oil Still Drive Houston Real Estate? Q&A with Rand Stephens, Avison Young
Rand Stephens
HOUSTON – (Realty News Report) – Houston’s real estate market faced a challenging year. Beyond the drag from low oil prices, the industry was hit hard by Hurricane Harvey. To assess the market’s outlook, Realty News Report interviewed Rand Stephens, Managing Director and Principal at Avison Young — one of Houston’s largest commercial real estate brokerages. Mr. Stephens opened Avison Young’s Houston office in 2010 and later launched the firm’s offices in Dallas, Austin and San Antonio. He has completed more than $1 billion in office, industrial and land transactions and served as Past President of the Gulf Coast Chapter of the Society of Industrial Office Realtors (SIOR) and as a board member of the Houston Office Leasing Brokers Association (HOLBA).
Realty News Report: Houston added jobs in 2017 and some commercial real estate sectors performed well. What do you expect in the coming year?
Rand Stephens: Our research points to continued steady job growth for Houston in 2018, which is generally positive for commercial real estate. From a trend perspective, we don’t expect any dramatic changes — largely more of the same. Most sectors should perform well, although the office market will remain the exception. We do anticipate modest improvement in office demand, but not a dramatic rebound.
Realty News Report: The office market struggled in 2017, with rising vacancy, negative absorption and substantial sublease space. Can that be reversed?
Rand Stephens: The steep drop in oil prices hit offices hardest, especially on the west side of town. The Energy Corridor, Westchase and the Sam Houston Toll Road West corridor are primary office submarkets for exploration & production (E&P) firms and energy services companies. Much of the recent demand in the energy sector came from offshore exploration, so a meaningful office recovery depends on offshore activity returning. Our research shows early signs of offshore activity, but it’s too soon to call it a recovery. Another challenge is that companies increasingly use less square footage per employee. Many expanding firms are doing so with lower space needs thanks to efficiency gains — so even when headcount rises, total leased square footage may not. That dynamic dampens overall office absorption.
Realty News Report: What other office trends matter?
Rand Stephens: Employers increasingly seek live-work-play environments to improve employee quality of life and reduce commute times. Tenants want collaborative workspaces plus modern amenities both inside and around the building — popular restaurants, lifestyle services, conference facilities, fitness centers, high-speed elevators, attractive lobbies, ample parking, transit access, and robust energy efficiency and technology infrastructure. Older buildings will need upgrades to remain competitive. Despite current vacancies, build-to-suit development will continue for large corporate users who can design efficient space that reduces square feet per employee. These are global trends, not unique to Houston, and for vacancy to be meaningfully absorbed we’ll need significant economic growth locally.
Realty News Report: How about the industrial sector? What’s next there?
Rand Stephens: Lower oil prices improved petrochemical profitability, fueling expansion on the east side of Houston and driving growth among third-party logistics providers supporting the petrochemical industry. Since the downturn that began in late 2014, the industrial market has held up well. E-commerce growth also boosted demand with large leases from companies such as Amazon benefiting the sector. In addition, Hurricane Harvey generated short-term industrial demand for space to support demolition and restoration efforts, which provided a near-term lift to leasing activity.
Realty News Report: Institutional investors returned to Houston in 2017. Will investment sales remain strong in 2018?
Rand Stephens: I expect continued investor interest. There is ample equity searching for opportunities, and Houston valuations still appear attractive compared with many other major metropolitan areas. Investors see Houston’s economy as having bottomed and moving upward while property prices have not fully recovered, making the market appealing for acquisitions.
Realty News Report: West Texas Intermediate crude fell from $107.95 per barrel in June 2014 to $26.19 in February 2016. That collapse hurt Houston. Have we fully recovered?
Rand Stephens: I believe we have bottomed, but the shape of the recovery remains uncertain. A stronger offshore exploration market would help drive a more robust recovery in the energy sector, and offshore activity still lags. Still, it’s encouraging how well Houston’s broader economy has performed despite the continued weakness offshore.
Realty News Report: With your extensive experience in Houston commercial real estate, what do you think is being overlooked?
Rand Stephens: The biggest surprise has been Houston’s resilience in the face of the oil price collapse. The city’s diversification — anchored by the Port of Houston, downstream pipeline and petrochemical industries, and the Texas Medical Center — helped offset the slump in exploration and production. While oil prices still matter, they are a less dominant barometer for Houston’s overall health than they once were.
Realty News Report: Anything else to add?
Rand Stephens: Office developments built beginning in 2010 were underwritten and financed conservatively, which has limited financial stress among owners. That conservative approach has added stability to the market during this challenging cycle.
