Comment of the Day: Where The Texas Office Space Bubbles Tend to Blow

COMMENT OF THE DAY: WHERE THE TEXAS OFFICE SPACE BUBBLES TEND TO BLOW “Houston is somewhat more diversified in terms of total jobs than it used to be – that’s why the region never went negative on job growth during this downturn. . . . That said, as far as users of large-scale office space go, there’s no question that diversification is sorely lacking. The energy industry and its service providers are still extremely dominant and drive the major swings in the market. This is a huge contrast to the Dallas side of the North Texas region . . . Look at the major relocations to the north suburban market there: huge deals — none of them are energy companies. . . . Around here, when an oil and gas boom is on, it seems to suck up all the oxygen, and growth in other sectors is squeezed out. When the inevitable downturn happens, there’s no rush by other economic sectors to fill the vacuum, despite the availability of high quality space and housing (and labor). I believe the Austin office market’s level of dependency on its tech sector is akin to Houston’s energy sector dependence, so a tech bust would be a disaster for them.” [Local Planner, commenting on Hines Parting Ways with 21 Eleven; The Most Expensive ZIP Code for Renters in HoustonIllustration: Lulu

One Comment

  • “When the inevitable downturn happens, there’s no rush by other economic sectors to fill the vacuum,”

    “that’s why the region never went negative on job growth during this downturn”

    Despite losing 10 of 1000s, if not a 100,000, of jobs in our primary industry we were still maybe (twc likes to change it numbers without notice) positive on employment growth. That sounds to me like a pretty diversified economy (I do agree that our economic diversification away from oil is often over-blown) in which the non-primary industries were able to fill the vacuum.

    “when an oil and gas boom is on, it seems to suck up all the oxygen, and growth in other sectors is squeezed out.”

    I agree but, have a slightly different interpretation. When the O&G boom was on it was sucking up all the oxygen. Much of the employment “growth” we have seen since the bust has been non-basic employment finally getting some oxygen and trying to catch up. That said, where we have seen growth has been largely in employment categories that are not using office space.

    ” That said, as far as users of large-scale office space go, ”

    The office market’s problems, while not helped by the oil bust, have largely been of its own making. From 2010 thru 2012 Houston was the only major (metropolitan) region (maybe Denver and Calgary) in the developed world that experienced economic growth. It was therefore essentially the only place with “”safe” “returns”” (yes I meant to put all those quotes). We saw lots of money flow into our region seeking these “”safe” “returns””. Developers going to Develop. From 2012-2014 over 20 million s.f. of office space was started with completions to come in 2015-2017, with no reason to expect given then history more than 4 million s.f. of absorption per year. That 8 million of extra space means that vacancy was going to go up by 3-4% (as opposed to the 8-10% we have seen) even if we didn’t have a bust.

    Brokers going to Broke. In 2015 and the beginning of 2016 a lot of the Commercial Real Estate industry was soothing themselves using the magic word “pre-leased”. Significant amounts of the then under construction office space was pre-leased. What they were missing in terms of the health of the total market was that new s.f. needs new employment to actually increase occupancy over the medium/long term. Exxon’s new 3 mil s.f. campus was still under construction and “pre-leased” (as an aside Exxon building a new campus/complex is a 100% (2 for 2) predictor of a Houston oil bust). They should have seen the writing on the wall. While Exxon did bring a few thousand employees down from Virginia they were still obviously going going to vacate Bell downtown, greenspoint, plus other spaces all across town. While I am rather conservative financially and wouldn’t invest (if I even had this kind of money) in an individual building that didn’t have significant pre-leasing, the fact that new construction space is pre-leased does not in and of itself have a positive effect on the market. New employment must still be coming to the region to back fill the now vacant old office space.

    The real estate saga of Conoco-Philips also nicely illustrates the difficulties of the Houston Office market and some of the odd artifacts of how occupancy and thus absorption is calculated.

    Background: CP had a .5 mil s.f. campus by Eldridge and I-10 and preleased 2 new .5 mil s.f. (1 mil s.f. total) office buildings on the other side of I-10. They increased their leased s.f. with the expectation of continued growth over the long term.

    1) when the new buildings were completed they were both counted as occupied since they had a paying lease and were not on the market

    2) a few months after completion CP put one of the buildings on the sub-lease market which makes it count as unnoccupied (negative absorption). They were always going to do this (maybe not the whole building but at least a significant portion) as they entered the primary lease based upon future growth and right now they are only vacating the .5 mil s.f. campus across the highway.

    3) As they complete their move out of their old campus, their old campus will eventually come on the market again adding to the apparent negative absorption.

    repeat this scenario (sub lease extra long term expansion space in their new buildings, and vacating old buildings) across the whole of the oil and gas sector and we get the current rates of apparent negative absorption. And this mostly has to do with CRE definitions of occupancy (vacant and for lease) and not much to do with actual physically occupied and utilized space.