Lee: Tenant Sentiment Is Up — They’re Excited and Looking at Space
Mike Spears
HOUSTON – West Texas Intermediate crude is trading near $64 a barrel, drilling activity is picking up, and the Houston commercial real estate market is seeing the benefits, according to a leading figure in the city’s industrial property sector.
“Our clients—many of whom are in oil and gas—are upbeat. They’re energized, actively searching for space, and making decisions quickly,” says Mike Spears, managing principal of Lee & Associates – Houston. “They are moving and they are moving very quickly.”
The industrial market is gaining momentum. More than 6.2 million square feet of industrial space is currently under construction in Houston, and rental rates are rising, according to Lee & Associates.
“We expect that trend to continue through 2018 and 2019,” Spears said during a recent Lee & Associates media breakfast.
The growth of e-commerce is boosting demand for distribution space as Amazon and other online retailers compete with traditional stores. The need for “last-mile” distribution hubs has driven strong demand for warehouse land inside Houston’s densely populated Inner Loop, said Reed Vestal of Lee & Associates.
“We believe that’s just getting started,” Vestal said.
In West and Northwest Houston, major retailers are seeking sites for large distribution facilities. For example, Amazon is developing a one-million-square-foot distribution center in the Katy area.
The market for manufacturing facilities with crane service—used to produce steel oilfield equipment and valves—was hit hard during the energy downturn that followed WTI’s plunge below $30 a barrel in early 2016.
“North Houston was overbuilt in 2015 when oil and gas demand fell off,” said Robert McGee of Lee.
Still, the U.S. rig count has rebounded. According to Baker Hughes, there were 936 operating rigs last week, a roughly 35 percent increase from a year earlier. While energy activity remains well below peak levels, conditions have noticeably improved.
Houston’s office market, however, faces a longer recovery. Large-scale layoffs in the energy sector created significant vacancy even while new office buildings were completed. Since 2010, the market has absorbed roughly 40 million square feet of new office space, said Chris Lewis, managing principal at Lee. At one point, Houston led the nation with more than 17 million square feet under construction.
When energy and office demand fell, sublease availability surged to record levels—exceeding 12 million square feet a few years ago.
The office market saw a temporary improvement after Hurricane Harvey when some tenants relocated from damaged properties. In the fourth quarter, Houston posted its first quarter of positive absorption in 18 months. Citywide vacancy stood at about 16.3 percent, and when including sublease inventory, approximately 50 million square feet remained vacant, according to Lee.
“It’s going to take time to work through that excess supply,” Lewis said.
