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Tuesday, December 18, 2018

Influential Trends Shape Commercial Real Estate in Houston during 2018


By Rand Stephens (Houston)

Houston has made the year of 2018 as the year of resilience, opportunity, and growth. After more than 12 months following Harvey, major economic drivers such as energy, the Texas Medical Center and NASA remain steady and strong. Houston’s population is surging as people from all over the country (Houston ranks No. 2 in the nation for largest number of new residents – 94,417 as stated by most recent Census estimates.), and the world, are flocking to H-town, where housing prices are affordable, and jobs are aplenty. According to data from Greater Houston Partnership, 117,800 new jobs were added to the Houston metro area this year. Several contributing factors deserve to be recognized for making 2018 a great year for Houston’s commercial real estate market.

Oil & Gas continues to make a comeback

Houston, indeed, has a diverse economy, but let’s be honest, the success (or failure) of the oil and gas industry has a ripple effect on nearly every business sector in the greater metro area. In the commercial real estate sector, the energy industry has the biggest effect on the office market. With stability in the energy industry, 2018 was a positive year for the office sector. However, there is still a considerable hangover of available space that will take some time to burn-off, but 2018 finally saw an improvement in the overall office market after a three-year decline. There was also increased offshore energy exploration this year, which really generates jobs that fill office buildings. However, for a full recovery in the office market, particularly in Houston’s Energy Corridor, there needs to be more robust revitalization in offshore exploration.

Flight-to-Quality Soars

This was a year that many firms and companies made the move from older heritage buildings to newer modern buildings. Tenants increased their demand for higher quality spaces with amenity-rich work environments. This flight to quality is happening despite the highest vacancy rate in 20 years. People are scratching their heads as to why companies are choosing to locate to new class A+ buildings that are charging rents often double the cost of older generation class A buildings. The reason is that Class A+ buildings are much more efficient and allow companies space layouts using up to 50% less space per employee. So, tenants can upgrade at the same cost per employee. This is a positive trend for Class A+ development as evidenced by Hines’ announcement of their new downtown building on Texas Avenue. Flight to quality ignited a spark that increased momentum for Class A office space in 2018.

Industrial Strength

The industrial market is the strongest commercial real estate sector in Houston. E-commerce suppliers spent most of 2018 meeting the expectations of their growing consumer base which resulted in an increase of leasing activity. For example, big box retailers such as Best Buy and Conn’s HomePlus both expanded their space to satisfy increased customer demand. Port Houston also contributed to the industrial sector’s stronghold, as a boost of petrochemical activity occurred in the southeast. The fundamentals of Houston’s industrial market had a solid year and are consistent with the performance of the market nationally.

The year of 2018 did not bring the commercial real estate industry any major surprises. As expected, the energy industry bottomed out with a healthy recovery, our local economy is strong and Houston’s commercial real estate sectors are doing well. What can we expect next year? Forecast and predictions for 2019 will be revealed in January’s blog.

(Rand Stephens is a Principal of Avison Young and Managing Director of the company’s Houston office.)

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