Houston CRE Performance Diverges by Sector

Houston’s different CRE sectors are responding to the city’s recent economic uncertainly in different ways, reported Transwestern, Houston.

The city–the largest in Texas and the fourth-largest in the U.S.–lost 4,000 energy-related jobs this year and oil and gas companies continue to announce layoffs and spending cuts. Both oil prices and rig count fell again through the third quarter, down more than 50 percent from their 2014 peaks.

“Through the third quarter, Houston’s commercial real estate market began to take pause as a downturn in the energy market caused a slowdown in the metro economy,” said Transwestern Southwest President Kevin Roberts. “The office market is taking the hardest hit as energy-related companies trim costs and increase efficiencies in reaction to declining revenue and margins.”

Roberts noted that the city’s industrial sector remained healthy through the third quarter, but he expects it will soften. At the same time, “retail is booming across the metro,” he said, “driven by high population growth and continued strong consumer demand.”

Houston’s office market began to falter as lower oil prices and economic uncertainty took a toll on fundamentals, Roberts said. “Leasing activity has slowed, and tenants with upcoming expirations are finding opportunities with changing market dynamics.”

Office asking rents still trended upward but concessions grew significantly between July and September, Roberts said: “The landlord market of 2012 through 2014 has given way to a tenant-favorable environment, though leverage varies by numerous factors including submarket and length of term.”

Houston industrial real estate remained strong in early 2015 but started to cool in the third quarter as lower oil prices hit the sector, Transwestern reported. “Looking at the job market, manufacturing is one of the hardest hit of the downturn and production of oil field equipment, a major driver of the sector, is not likely to pick up in 2016,” Roberts said.

But Houston’s retail market showed “tremendous” growth, adding 11,300 jobs over the 12 months ending in September, a 3.8 percent increase, Roberts said. “In fact, the retail job market saw its best January to September job growth by far since Houston exited the recession in 2011.”

Roberts said grocery-anchored centers dominate construction starts, while developers build new power centers for the first time since 2008. “The retail sector has been thriving even as oil prices have challenged growth in other sectors,” he said.

Retail vacancy dropped to 6.4 percent at the close of the third quarter from 7.7 percent a year ago, Transwestern said. Vacancy continues to shrink as market demand remains strong, and new space leases up quickly. Submarkets with the lowest vacancies include Galleria/Uptown, Katy/Cinco Ranch and Sugar Land/Stafford, indicating that market tightness occurs in both urban and suburban markets.

“Going forward, vacancy will remain tight as retailers seek new spaces to capture the evolving market,” Roberts said.

Roberts predicted that Houston’s commercial real estate market will stay active but at a slower pace. “Even though some economic drivers have cooled, the metro continues to diversify and be a target for international investment,” he said. “Looking ahead, Houston will benefit from an improving national economy, while low oil prices and a rising U.S. dollar will remain a drag on local economic growth.”