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Wednesday, February 11, 2015

Will Houston's Office Rental Rates Decrease Dramatically?

By: Rand Stephens (Houston)

With the big drop in oil price, many companies in Houston are trying to make sense of what’s happening and how to respond. 

For those companies that are putting off facility decisions now to wait for a significant drop in rental rates, they may be sorely disappointed. 

Avison Young’s recently released white paper “The Price of Oil and Its Impact on Houston Rental Rates” shows that during the last three major economic downturns rental rates remained stable.  The paper presents a historical review of oil price and the correlation to Houston office rents. The three most relevant periods to examine are “The Asian Flu”, which lasted about one year between the end of 1997 through the beginning of 1999; the “Merchant Energy Meltdown” which in Houston’s case exacerbated a national recession that began with a stock market crash caused by the Technology sector in 2000 followed by 9/11; and, more recently, the Great Recession, which hit the Houston very hard in 2009. In all three downturns, contrary to popular thought, Houston’s office rental rates were not dramatically impacted.
Jeannie Tobin, Avison Young’s head of research in Houston and the author of the recently published white paper says, “judging from past recessions, a “wait and see” approach is not likely to benefit current tenants in the market with significantly improved lease terms.  For companies currently in the process of making long-term real estate strategic facility decisions that improve operations, or a company’s cultural environment, delaying that decision hoping to negotiate better lease terms,  may prove to be a mistake.  However, decisions involving non-core facilities, or expansions based on procuring future business, a “wait and see” strategy may be appropriate and should be evaluated on a case-by-case basis.”

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