Office market still seeing hope
Commercial real estate brokers and analysts have said for months that Houston’s office market has hit bottom. But they may have spoken too soon.
The vacancy rate for Houston office space continues to rise, climbing to 23.9 percent in the second quarter from 23.3 percent in 2018, according to the commercial real estate firm JLL. Houston has 206,700 more square feet of unleased office space than when the year began.
“The last three quarters actually had some fairly positive indicators,” said Eli Gilbert, head of research at JLL. “This quarter, there was a reversal. We’re not out of the woods. I would say for 2019, we’ll continue bouncing along the bottom.”
Several long-term trends are at play, analysts said. Tenants are occupying less space per employee — the national average fell 8 percent between 2009 and 2017, according to another commercial real estate firm Cushman and Wakefield — which means it takes more jobs to fill the same amount of space. In addition, developers continue to build office space despite the high vacancy rate because companies prize high-end, amenity-rich properties as a way to attract talent.
Major tenants such as the energy company Marathon Oil, law firm Vinson & Elkins and solid waste company Waste Management are building new office spaces, which will leave large openings in their old buildings and possibly
drive the vacancy rate even higher.
“The specter looming on the horizon is when they do leave behind these huge blocks of space, that will further exacerbate our vacancy issue,” Gilbert said.
The oil effect
Lower oil prices — down more than 20 percent from a year ago — might also be having an effect, undermining confidence and making companies more cautious about adding more employees and space.
“You’ve seen oil prices move downward a pretty decent amount … and it’s started to affect and it’s going to affect the office market,” said Alex Taghi, vice president of office tenant representation at the commercial real estate company NAI. “I think there’s a general uneasiness. Leasing velocity might slowdown from what it’s been the last 18 months.”
Mergers and acquisitions could have a similar effect. Take Occidental Petroleum’s takeover of Anadarko. Oxy currently occupies office space in Greenway Plaza and recently bought ConocoPhillips’ old headquarters in the Energy Corridor. Anadarko was headquartered in The Woodlands. It is unclear where the company will move its workers, but it is unlikely that it will keep all three properties.
“It’s possible that all of those things will be vacated for a newer, more efficient footprint,” said Mark O’Donnell, Houston branch manager for the commercial real estate adviser Savills. “You’re looking at close to 4 million square feet that could be dumped on the market for what Oxy determines is best for its workforce — which I can’t imagine being more than a million square feet.”
Tenants’ market
The older buildings left behind by companies seeking newer facilities will have to find ways to remain relevant. Almost half of Houston’s office space was built in the 1980s, according to CBRE.
Some real estate managers have begun investing heavily in their office buildings to help them compete with newer facilities. For example, Brookfield Properties has sunk $49 million into One Allen Center (built in the ’70s), putting in an allnew two-story lobby and a 1-acre outdoor green space where happy hours, exercise classes and other events are held.
“It’s a good time to be a tenant,” said Kevin Kushner, a broker at CBRE who represents tenants. “And we don’t see that changing in the near term, certainly.”