‘Abundance of opportunity’

The Woodlands office market is seeing a higher vacancy rate as oil prices remain low

By Nora Olabi

With the realization that the price of oil will remain lower for longer, businesses are trying to cut rents, consolidate workforces and downsize to balance the books.

In The Woodlands, the high-end office market is hovering below a 10 percent vacancy rate or 1.1 million square feet of space, which is in contrast to the area’s five-year vacancy rate average of 6.9 percent. There are 48 Class A buildings with 11.8 million square feet of existing office space and nearly halfa-million square feet currently under construction, according to the North Houston Regional Center for Economic Development 2016 first quarter re-Growth

port. Class A office spaces are the newest, have highquality infrastructure, are well-located with good access and command the highest rates.

“That vacancy number is so fluid; it changes so frequently, I throw it out there with caution. It can change overnight almost. But is it a concerning number? Sure. It’s one that we haven’t seen in quite a while,” said Gil Staley, CEO of The Woodlands Area Economic Development Partnership.

Although that may sound like The Woodlands is losing steam, the area is faring well in comparison to other markets around Houston as the price per barrel of oil has started to inch back up. The price per barrel has fluctuated from the low to upper $40s since April after making a comeback from the steep decline to below $30 a barrel near the start of the first quarter. Suburban slump

The overall suburban market is at 15.5 percent vacancy by in the first quarter, according to CBRE, an international commercial real estate company. That position is slightly more than the close of 2015, where the suburbs had a 15.4 percent vacancy rate. The greater Houston area vacancy rate is 14.3 percent, a slight uptick from the close of 2015.

While suburban markets and Houston as a whole are struggling with increased office vacancies, The Woodlands has managed to maintain inventory, keep tenants and stay competitive. “In respect to the entire Houston region, we’re in good shape,” Staley said.

The Woodlands vacancy rate during the first quarter was 10.3 percent overall, with a 9.8 percent vacancy rate in its Class A office market, according to CBRE.

One of the newest vacancies in The Woodlands is in the Hughes Landing development, which sits on Lake Woodlands and has lots of luxury retail amenities. Exxon Mobil Corp. moved some employees into two buildings there, but instead of fully occupying both buildings, half of 1725 Hughes Landing is now up for grabs.

The construction of mixed-use development Hughes Landing, which comprises multi-family, retail and restaurant, hotel and office space developments on 66-acres around a walkable, urban center, started four to five years ago, when the region was booming and oil prices stayed between $80 and $110.

Now, Hughes Landing is about to get another office building. Three Hughes Landing put another 321,000 square feet of office space on the market in March. Its sister buildings — One and Two Hughes Landing — managed to fill pre-lease space prior to opening. But the younger Three Hughes Landing was only at five to 10 percent pre-leased in early March. Updated figures weren’t released.

“This is no different than anywhere else in Houston. The velocity of leasing has slowed with the cautious nature of the current economic environment,” Layne said. “I’ve been through since the 1980s several of these oil and gas economic cycles and the cautious nature of the office tenants; it’s the same as any other cycle we’ve lived through.”

With the additional space, The Woodlands Development Co. — not to be confused with The Woodlands submarket — will have a Class A office space vacancy rate of 24 percent, and The Woodlands market as a whole will be flooded with even more space. That may seem like a lot of office space, but take out the two newly available spaces from Hughes Landing from the equation, and vacancy rates drop to 2 percent for the company, Layne said.

“A lot of companies want to renew where they are. We think we’re a great landlord. It’s just been a little slower for companies to move to newer office spaces,” Layne said. New opportunities

Although the office market might look somber in The Woodlands, especially for high-end spaces, Layne sees the increase in inventory as an “abundance of opportunity.” When the market was white hot just a few years ago, businesses were clamoring to get in and were paying top dollar. Now, companies that want to move to the area have lots of opportunity to find the right spot at a better price point.

Aside from Class A offices, businesses can lease Class B office space since there’s a 12.8 percent vacancy rate.

With companies cutting their payroll and shaving off excesses in the budget, subleasing space has become a way to both save money while not being forced to break a lease and pay moving expenses.

The Woodlands has about 607,000 square feet of Class A and B sublet space in The Woodlands, according to the North Houston Regional Center for Economic Development 2016 first quarter report. CBRE puts that figure at about 294,000 square feet available to sublet, which brings the office market from 10.3 percent vacancy to 14.5 percent of total available space, according to the CBRE report.

“Sublease is very tough on these buildings that are sitting out there vacant. They can come in at a lower price point than those that are vacant on the market as we speak. It’s an interesting dynamic,” Staley said.

The Woodlands office market includes major energy players like Anadarko Petroleum Corp., Exxon Mobil, Huntsman Company LLC, Repsol USA, with the energy sector making up 32 percent of major employers in the area, according to The Woodlands Area Economic Development Partnership.

In early March, Anadarko, which is The Woodlands No. 1 employer, cut 17 percent of its global workforce, which included an undisclosed number of jobs at its headquarters.

That doesn’t include the number of ancillary businesses that moved in to service and support the big energy players. Some of the smaller players have been squeezed with spending cuts from big energy companies, forcing them to freeze hiring, cut jobs and scrimp.

“Until we see smaller oil service vendors hire and grow, I think it’s going to be a challenge,” said Josh Feinberg, a broker at J. Beard Real Estate Company LP.

Although The Woodlands thrives on the energy industry booms, many are optimistic that the area has bottomed without feeling the cuts like in other parts of the greater Houston area. “We don’t live and die by energy pricing. Our market as a whole I wouldn’t consider to be in a recession at all,” Feinberg said. “We feel good from a bottoming out standpoint. We hope that’s already occurred over the next 6 months. We are cautiously optimistic about the market.”