Q&A with Charles Herder of Colliers International: Space City: Waiting for Recovery of Houston’s Office Market

Charles Herder

In Houston, Space City is living up to its nickname: it has a lot of office space and the figures are increasing. As stated by Colliers International, Houston’s citywide vacancy rate stood at 21.7 percent in the second quarter, up from the 18.8 percent recorded in Q2 2017. The sublease problem, exacerbated by Occidental Petroleum dropping 800,000 SF at Greenway Plaza, creates a dark cloud over the office market. Will companies continue to vacate office space? What about the new office space coming on to the market? While most sectors of the Houston market are strong, many wonder when the office market will recover. To find out more, Ev Konut Proje spoke with Charles Herder, a principal shareholder and Co-Chairman of Colliers International in Houston. Herder has more than 35 years of experience, and joined Colliers Houston office when there were only four members compared to today’s 175.

Ev Konut Proje: What is the current state of the Houston office market?

Charles Herder: Serious vacancies in all but the best markets, such as The Woodlands and East Fort Bend County/Sugar Land which are the healthiest Houston submarkets, primarily due to controlled development.

Ev Konut Proje: When will the office market turn around? 2020? 2021?

Charles Herder: It’s definitely trying to turn around now. Announcements like the big OXY sublease space hitting the market, Occidental Petroleum is slated to vacate close to 814,000 SF in Greenway Plaza, do not help. The question may not be “when will it turn around” but ‘when will it be a healthy balance of supply and demand.’ That could easily be post 2021.

Ev Konut Proje: How much new office construction is in the pipeline?

Charles Herder: Some 1.8 million SF of office space is under construction and 55 percent of the space is pre-leased. Build-to-suit projects make up 38 percent of the space under construction, and the remaining 62 percent is spec office space which is 60 percent pre-leased. Three of the BTS buildings that are under construction include two buildings for HP and one for ABS, all three of which are located in the CityPlace development near the Exxon Mobil north campus. In addition, about 12 million SF of office space is proposed. I don’t believe the proposed properties will begin anytime soon, especially without a tenant pre-lease in place for 50 percent or more of the building.

Ev Konut Proje: What will happen when all of this space hits the market? Will rental rates decline? Concessions increase?

Charles Herder: It is hitting the market now and I am surprised at the resiliency that is present. When the vacant space that is under construction hits the market, it will not have a major effect on the market since it is only about 800,000 SF, an insignificant amount in a market that has 230.7 million SF of inventory.

Ev Konut Proje: The Energy Corridor has been one of the hardest hit submarkets. What’s has happened there?

Charles Herder: The Energy Corridor is primarily made up of oil and gas tenants. Although the price of oil is steadily increasing I see a mindset change in this tenant group and expect it to be very cautious for the foreseeable future.

Ev Konut Proje: What do you see happening in the Energy Corridor over the three or four years.

Charles Herder: It will continue to recover but a healthy supply-demand balance is years off.

Ev Konut Proje: How is downtown Houston doing? Shell and Exxon Mobil have left. Did they start a trend?

Charles Herder: No one knows for sure, but my belief is that downtown Houston will remain strong reflecting Houston’s continued influence in the overall U.S. markets.

Ev Konut Proje: Is there an increase in concessions? What’s typical amount of free rent being offered?

Charles Herder: Concessions have remained around 3-6 months of free rent and abated parking. Of course, for a longer term of ten years or more, you can negotiate more free rent and larger tenant improvement packages. Rents have held relatively steady through the energy downturn as landlords prefer to give away free rent than lower the base rent.

Ev Konut Proje: What’s your economic outlook for Houston the rest of this year? 2019?

Charles Herder: Houston will continue to do very well. I expect the movement of so much natural gas into the Gulf Coast primarily for LNG export, will provide feedstocks for many new petrochemical facilities and associated manufacturing. Houston just has too much raw material, labor and encouraging governmental regulations to be hurt too badly.

Ev Konut Proje: Ten months after Harvey, what’s been the impact of the storm on Houston real estate?

Charles Herder: There is no question that planning in the residential developments has been impacted, but that’s a good thing.

Ev Konut Proje: What are some of the long-term effects?

Charles Herder: Better residential planning. While many look to governmental regulations to change, I am convinced that residential developers will take a much closer look at new projects and take into account the lessons learned with Harvey.

Ev Konut Proje: Will investors shy away from Houston?

Charles Herder: Of course, for a while, but only in certain areas where the flooding occurred.