Brokers Bet On Houston’s Historic Resilience, Growth To Prop Up Business In 2024

After a rocky economic year and facing continued uncertainty, Houston brokers say they will lean on the area’s history of bouncing back and projected population growth to get them through 2024 and beyond.

The past year has been a rough one for a number of asset classes, brokers at a CBRE press luncheon said Tuesday.

Houston’s office market saw record-high vacancy in 2023, as newer product leased up but obsolete office space languished. Multifamily had no problem with demand, but soaring insurance and interest rates made operation and construction more difficult.

Industrial, healthcare and retail saw more bright spots in 2024 due to population growth. But economic turmoil, high construction costs and supply troubles kept brokers on their toes all year and could do so again in 2024.

Despite all that, CBRE experts said they are bullish about the long term, pointing to Houston's No. 1 ranking among large markets for projected growth over the next five years and its history of rebounding from crises, CBRE Associate Research Director Michael Valleskey said at the luncheon.

The city gained 1.8 million people and 700,000 jobs since 2008 and the the Global Financial Crisis, a tumultuous time that included a market crash, the fracking bust, Hurricanes Harvey and Ike, and the coronavirus pandemic, he said.

“That's just an incredible testimony to Houston's resilience. It’s continued to grow,” Valleskey said, adding expected growth “translates to demand for multifamily or healthcare, industrial, e-commerce, warehousing, retail.” 

Below, read what brokers specializing in those asset classes had to say about where Houston is and where it is going.

Office

Growth has traditionally benefited office, but that has changed with hybrid work trends, Valleskey said, and Houston’s office market has just endured a year of economic headwinds that shifted its fundamentals, resulting in an availability rate near 27%.

“[That] leaves us with other 56M SF of available office space,” CBRE Executive Vice President John Spafford said. “It’s a daunting number.”

But those numbers require context, according to Spafford.

A third of the available space resides in the city's most in-demand, highest-quality buildings, another third is in commodity, or older, less amenetized space, and the bottom third is in buildings that can be described as functionally obsolete.

Some of the latter buildings could find new use through conversion, he said. Several office buildings are already being converted to apartments, including Three Westlake Park, and others are being marketed as potential conversion opportunities, including 1021 Main. 

Meanwhile, newer, high-quality buildings like TC Energy Center and JPMorgan Chase Tower are doing well with leasing, Spafford said. Texas Tower has seen the city's highest velocity of leasing, and the Energy Corridor has been the most active submarket in the last 12 to 18 months, according to CBRE data.

“Thirty percent of our market has been built and added since the year 2000, and that's where the highest occupancy sits,” Spafford said, adding that one upside of high interest rates is that they have curbed Houston’s office development pipeline, resulting in low inventory under construction.

Multifamily 

Owners pressed pause on investment sales activity in 2023 due to a massive move in interest rates despite a looming supply-demand imbalance, CBRE Senior Vice President Jock Naponic said, and investment sales likely won’t pick back up until interest rates drop.

There has also been a significant drop in multifamily construction starts, so supply is almost sure to drop in 2025 and 2026, driving up rents 

“It's just really hard to make a new deal work,” Naponic said, adding that “if we continue to have strong demand, it’s going to create the need for more housing.” 

Insurance is also a pain point across the city, he said. Multifamily owners are seeing premium increases of between 25% and 75%, making it difficult for them to budget properly.

“There's not a clear path to when that will moderate. We think it's sooner than later. It just doesn't seem sustainable,” Naponic said. “That continues to be a major issue in the valuation and the ownership and operations of apartments.” 

Healthcare, Retail And Industrial 

Houston’s population growth has been a major plus for some sectors, leading to strong demand for retail and industrial space, brokers said.

Healthcare space, which is largely insulated from macroeconomic conditions, is also seeing significant demand as the population grows, CBRE Senior Vice President Brandy Bellow Spinks said.

But practitioners are requesting shorter lease terms as they deal with broader uncertainty. Bellow Spinks said she believes that like multifamily, healthcare supply will drop in 2025 and 2026 and rents will increase.

“Rents have been steadily going up. Annual increases have been going up,” she said. “The office folks look at us and they’re like, ‘What, 3% to 3.5% annual increases, are y’all crazy?’ But that’s really where we are.” 

Retail has been dealing with strained supply for months, and there is virtually no space left to build retail inside Beltway 8, CBRE Senior Vice President Mark Witcher said. What retail growth is happening is largely along the Grand Parkway, he said.

“The days of surface parking a grocery-anchored center inside the beltway are over,” Witcher said. “You can’t afford the dirt. The apartment guys will [buy it] at $60 to $80 a foot.” 

Retail occupancy sat a 94.7% last quarter, according to CBRE data. 

Generally, the only large vacancies in the city come from bankruptcies of brands like Bed Bath & Beyond and Tuesday Morning, which has led to opportunities for some landlords, he said.

“All of that space is getting gobbled up, in some cases for double the rent,” Witcher said. 

Industrial has seen its availability rise to about 8%, driven by high deliveries, but that is expected to level off with a decline in construction starts. What cost $50 to $60 per SF to build in 2019 or 2020 costs about $95 to $110 per SF to build today, CBRE Executive Vice President Nathan Wynne said.

“With 14M SF under construction now and 40% of that spoken for ... if we keep absorbing the way we have been, I’d expect the market to get very tight by summer of this year,” Wynne said.

Houston typically absorbs about 10M SF to 11M SF of industrial space each year, according to CBRE data.

“I think you could see the market really tighten and rent growth start to take off again until we put more shovels in the ground,” Wynne said. “I truly believe we need more buildings, given the demand that we’re seeing.” 

Expansions at the port and people moving to Houston are driving the surge, he said.

"Population growth here is certainly robust," Wynne said.