By
Rand Stephens (Houston)
While
the industrial market is thriving in Houston, the office market is moving at a slower pace. For eight
of the last nine quarters, there has been negative direct net absorption. The direct
vacancy rate is at an all-time high of 16.2% for the first quarter of 2018, and
the combined direct and sublease availability rate is at 22.4%. Meanwhile, the
industrial market has remained below a 5% vacancy rate and the momentum fueled
by distribution centers and robust activity around the Port of Houston
continues. Oil prices are above $65 a
barrel and the unemployment
rate in the Houston Metro Area is down from
5.4% in 2017, to 4.2% today. So, why the
lopsided recovery among the industrial and office sectors?
The answer is energy efficiency – and not
the kind that reduces your light bill. The energy industry is becoming more
efficient and shrinking their office footprint by doing more business with less
people, thus, easing the need for office space. Houston’s biggest oil and gas
companies have scaled back and consolidated their office spaces as they cautiously
emerge from the downturn. The average-sized deal has decreased by roughly 10,000
square feet and although more deals are being made, they are smaller in size.
Traditionally, when the oil industry is
flourishing, it has a ripple effect throughout the Houston economy, including
commercial real estate. And, most economic sectors have seen an improvement.
However, it’s going to take more than just an increase in oil prices to have a
positive impact on energy jobs and office space. The office market, particularly along the
Energy Corridor, is shaped by the upstream industry. Drilling in the Gulf of Mexico and other deep
waters has decelerated considerably since 2010, but the administration is
offering lower royalty rates for offshore activities and larger tracts for
bidding in an effort to revitalize
exploration and production. Office activity is likely to see a boost as
more offshore projects are launched.
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| Shell's Appomattox platform in the Gulf of Mexico |
It is encouraging to see major energy
companies such as Royal Dutch Shell, BP and Exxon Mobil announce exploration
projects in the Gulf and the Mediterranean. Shell recently completed and launched their
new deepwater Appomattox
platform in the Gulf and also discovered
the Dover well about 13 miles from the Appomattox. That’s Shell’s sixth
discovery in the Norphlet region of the Gulf. BP is also working on the Mad
Dog Phase 2 platform, which is expected to
produce first oil by 2021.
The anemic upstream activity of recent
years did not bode well for the office market, but these projects indicate that there is light at the end of the
tunnel. The office market will stabilize
as opportunities for job creation and added space by the energy industry
increase. It’s going to take some time, but it’s headed in the right direction.
(Rand Stephens is a Principal of Avison Young
and Managing Director of the company’s Houston office.)
