Industrial, Retail Sectors Come Out Ahead During Oil Downturn in Houston
HOUSTON – April 5, 2016 – Varying levels of opportunity still exist within each of Houston’s real estate sectors despite dropping oil prices, according to a new report from CBRE Group Inc.
In the past 18 months the oil industry has seen falling rig counts, lower WTI costs leading to increased speculation that the commercial real estate sector will repeat the downturn that happened in the 1980s. Although Houston is experiencing softness in the office market, other sectors, specifically industrial and retail are benefitting from healthy activity in the downstream sectors as well as population gains.
The report, ‘One Forecast Doesn’t Fit All CRE Sectors: What’s Ahead for Houston in 2016?’ provides an overview of Houston’s CRE sectors. Highlights include:
Port, petrochemical, plastics and activity in the Panama Canal are contributing to positive activity in Houston’s industrial sector. Industrial markets are benefitting from the health of the midstream and downstream sectors, and several energy companies are still seeing Houston and the Gulf Coast as a solid investment. At the end of Q4 2015, industrial vacancy was still 200 basis points lower than the historical average of 6.9 percent. Despite the perception of slowdown, year-end absorption totals remained strong closing the year at 6.3 million sq. ft.
Rapid five-year population gains and an expanding consumer base are driving growth in the retail market. This growth, coupled with extra cash savings at the pump, resulted in Houston’s absorption of 2.5 million sq. ft. at the end of 2015 – the most in ten years. The increase of suburban development, especially around the newly opened Grand Parkway, is also poised to add additional large-scale retail expansion. Although volatile oil prices are hitting the office sector hard, the retail sector is currently considered to be the most secure in Houston.
With Houston energy companies driving most of the demand for commercial real estate, the office market is the most affected by the current downturn. Sublease inventory has spiked 179 percent to 8.5 million sq. ft. Rent concessions, including free rent and tenant improvements increased throughout the year with negotiated face rates on prime space for long-term credit remained stable. While prime, well-leased properties are able to hold asking rents, higher-risk properties with large amounts of vacancy, are more willing to adjust rates in order to secure a tenant. New construction, which is concentrated in the CBD, West Loop/Galleria and west Houston sub-markets, will add another 3.3 million sq. ft. of vacant space with almost 6.8 million sq. ft. of new product delivering this year.
“Since the late-1980s, the Houston region has recorded more than 25 years of consecutive population gains. While growth this year will be slow, new jobs added to the city’s employment base and continued in-migration are forecasted to gain even more steam in 2017 and 2018,” Texas/Oklahoma Director of Research and Analysis Robert Kramp said. “These fundamental demographic patterns will support the region’s expanding gross product and, while each local commercial real estate sector is in a varying cycle, Houston’s outlook remains solid.”
The entire report can be accessed here.