Texas commercial real estate and the Houston market in particular have suffered as a glut in production drags down oil prices.
Crude prices remain 15 percent lower than their 2014 peak. Prices continue to linger below their historic averages. The Houston office market has since seen negative office absorption rates since oil prices crashed in 2015. Low oil prices eat away at the profit margins of the areas energy firms. New employment by these firms remains tepid and the need for new offices has contracted considerably. Hurricane Harvey’s impact on Houston’s office market will have a short term effect. In the long run however, low oil prices will have a much larger impact on demand in the area for new offices.
Turbulent oil prices had taken a toll on Houston’s office market long before Hurricane Harvey arrived. Negative absorption rates in the market, left more office space empty than could be sold off. Twenty percent of the cities office space sits vacant according to Colliers, the highest rate in two decades. Uncertainty in the oil markets drove many companies to shrink their foot print in the region, or to consolidate their existing space. Tenants extracted lower rents from their landlords or demanded new renovations in return for holding onto their existing leases.
Office construction was booming prior to the oil slump. Energy companies experienced record profits, as a result of fracking and other new found efficiencies, which increased oil production. Prior to the slump in 2015, Moodys claimed the region would experience record job growth because of these new developments in the oil industry. Such forecasts fueled speculative office construction. 10 Empire State Buildings, or 26 million sq. ft. of new offices were constructed during the oil boom. But the advances led to a surplus in oil, which dragged down prices worldwide and demand for offices fell as oil prices declined. Energy companies decreased their near-term hiring, which lowered their need for new office space. This dynamic reveals why so much of Houston’s office-space now sits vacant. If oil prices continue to languish, these offices will likely remain vacant in spite of Houston’s relatively robust economy.
Economic diversity has helped sustain the Texas commercial real estate market in the midst of the oil slump. But if oil prices decline in the future, job growth and the demand for offices will decline as well.
Houston benefits from increased economic diversity, which helped offset the painful effects the decline in oil prices. Jobs in the area have increased by 15,200 since prices collapsed in 2015. Jobs may be growing steadily, but if oil prices remain at historic lows this growth could contract, putting the regions office market greater at risk. Houston remains heavily dependent on the energy sector. 10 of the cities top 20 employers are in the oil business. CBRE analysis indicates that lay-offs haven’t spread far beyond drilling and exploration at many of these companies. Even so, 80,000 jobs remain at risk if oil prices continue to languish according to Federal Reserve spokesman, Keith Phillips.
Oil prices continue to define Texas’ commercial real-estate market.
Oil prices will continue to define Houston’s office market. Until oil prices return to historic averages, employment is likely to remain below the expectations of many analysts, or could even shrink should prices fall any lower. Uncertainty in the oil markets is perhaps a greater threat than Hurricane Harvey to Houston commercial real estate market.
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About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.