HOUSTON (Commentary by Ralph Bivins) – Houston’s real estate markets took serious hits when oil prices plunged from around $107 a barrel in June 2014 to below $30 earlier this year. While the downtown office sector weakened, other areas—such as retail and industrial real estate—performed well, and overall existing single-family home sales have remained strong.
The coming year looks mixed as well. Below is a summary of the good, the bad, and the ugly in Houston for 2017 — the Energy Capital of the World.
THE GOOD
Rex Tillerson —Reports indicate that ExxonMobil CEO Rex Tillerson was President-elect Donald Trump’s choice for Secretary of State, while Oklahoma Attorney General Scott Pruitt was selected to lead the Environmental Protection Agency. With former Gov. Rick Perry mentioned as a potential Secretary of Energy, these appointments suggest an administration likely to be supportive of the oil and gas industry. Tillerson’s tenure at ExxonMobil points to favoring projects such as the Keystone XL pipeline, which would bring oil through the Canadian border toward the Houston region. A pro-energy federal stance should boost Texas’s economy and, by extension, Houston job growth—though ExxonMobil’s move out of its downtown 1-million-square-foot tower to suburban offices did not help downtown employment. Overall, however, federal policies supportive of energy are a positive sign for jobs and investment in the region.
THE BAD
Houston Apartment Market —Roughly 40,000 new apartment units were completed in the past two years, with at least another 15,000 units projected to come online in 2017, according to Transwestern. The pressure is concentrated in the Class A segment, while Class B and C properties have fared better. Concessions in some new developments have reached as much as three months free rent. Class A occupancy has fallen to about 80 percent and is expected to dip further. The market should stabilize in 2018 once new construction slows, but stronger job growth will be needed to absorb the excess supply; it may take time for any federal policy shifts to translate into the jobs that would provide that demand.
THE UGLY
The Energy Corridor —JLL recently named the Energy Corridor the nation’s leading submarket for sublease office space, highlighting how deeply the energy downturn has affected west Houston. A few years ago, Class A occupancy there was around 99 percent; after the oil industry decline, availability climbed toward 30 percent. Some sublease inventory has been withdrawn when ConocoPhillips moved from an older campus into the newly completed but still largely vacant Energy Center Four, a 22-story tower. Across all property classes, the Energy Corridor now has more than 5 million square feet of available office space, according to Transwestern’s TrendLines report. Downtown Houston faces similar challenges after Shell’s departure, contributing to sublease pressures. Even with recent gains in oil prices, additional sublease space is likely to reach the market, and more energy-related firms may face financial distress before conditions improve. A large corporate relocation to the Energy Corridor would be welcome and helpful, but it would take a significant move to meaningfully change current market dynamics.
Dec. 12, 2016 Realty News Report Copyright 2016
Commentary by Ralph Bivins, editor of Realty News Report, a Texas-based publication.