Identifying Problem Office Properties, Market briefs

In Houston, The national office vacancy rate is high and the problems for many older office towers appear to be acute, as stated by CBRE Global Chief Economist Richard Barkham.

Barkham, speaking at the recent 57th In Annual Conference presented in Las Vegas by Naree, the National Association of Real Estate Editors, identified the characteristics of many of the problematic properties.

“Eighty percent of the vacancy is in 10 percent of the real estate,” Barkham said

Overall office vacancy is high, Barkham said, but not every office tower is the same. The problem properties are largely concentrated in office buildings that are older and offer substandard amenities, or are located in less desirable locations.

Office brokers call the prevalent leasing trend “the flight to quality.” Companies turn their backs on older office buildings and relocate to new buildings with fitness centers, restaurants, outdoor plazas and flexible work environments that appeal to today’s employees.

In the post-Covid era, encouraging employees to return to work at the office can be challenging for employers.

Houston’s office market is an example of the national trends and many older buildings have pronounced vacancy problems.

The foundation of Houston’s office-space oversupply developed in the 1980s when Savings & Loan institutions were in high gear.

In Houston, aggressive lending and favorable tax treatments ignited construction about 40 years ago… In the early 1980s, over 70 million sq ft of office space was constructed in Houston. The space from that four-year surge equates to almost one third Houston’s total office inventory today.

In the first quarter of 2023, Houston’s office vacancy rate was 24 percent, CBRE reported. But Houston has 8 million SF of sublease office space, raising the availability rate to 29 percent.

Anecdotal evidence and recent reported deals, indicate that Houston’s office market is showing real signs of renewed activity. Houston’s Energy Corridor has demonstrated strength in 2023.

Barkham addressed broader impact of the nation’s office market, a sector that has raised concerns about declining valuations and the inability of property owners to secure new financing. Before the end of 2025, some $1.5 trillion in commercial real estate debt will mature. Experts say office properties appear to be most vulnerable and some have speculated that non-performing office building loans will squeeze financial institutions.

The economic forecast may grow cloudy later in the year.

The nation will likely slip into a recession in 2023, but it won’t last long before a recovery blossoms, as stated by the top economist for the CBRE Group.

“It’s quite clear we will be going into a recession, “ said Barkham. “It will be a mild recession, a moderate recession, toward the end of the year.”

The period of economic decline won’t last long. The Federal Reserve will likely take action to reduce interest rates and economy will recover in 2024, he said.