The Challenges And Opportunities Of Continued Low Oil Prices

There’s no denying that Houston’s real estate market is feeling the effects of oil’s price drop: vacancies, stalled projects and low prices are the new normal, at least in the short term. We’re going to examine these challenges and opportunities (yes, there really are some!) at Bisnow's Impact of Oil & Gas on Commercial Real Estate event on Jan. 21 starting at 7:30am at 2 Houston Center. Register here to join us, and read on for a preview from three of our expert panelists.

University of Houston economist Adam Perdue says office is being hit twice with the cudgel of the collapse in oil prices. First, the sheer amount of office space delivered in 2015 is unprecedented. Second, the slowdown in employment growth will create less demand, suppressing absorption. For perspective, Adam points out that even if employment growth and absorption remained the same as last year, the amount of excess office space delivered last year would have still increased vacancy rates 1% to 2%.

But the effects of an ugly market haven’t been uniform over Houston. A lot of recent industrial activity at the Houston ship channel has helped offset some of the bad effects of low oil prices on real estate across more central areas.

JLL international director Bruce Rutherford (pictured here with his family) saw the impact of low oil prices on his own projects. At the end of 2013/first half of 2014, he had a variety of energy clients that were expanding, looking for space and initiating new projects. By October 2014, that activity was over and now many of those same clients are actively subleasing space and contracting their real estate footprint to reduce costs. It was a dramatic turnaround, Bruce says. “We’re seeing what our research people predicted would happen back in 2014, which is a severe drop in oil prices, leading to a dramatic decrease in energy industry activity, leading to a sharp decline in real estate demand.”

But Bruce (here speaking at our Oil and Gas event last year) agrees the ship channel is a bright spot in the Houston economy. As of this quarter, there is no available land along the ship channel, a first in Houston’s history. Bruce also finds a ray of light in the Medical Center; Houston's hospitals continue to do well and are still expanding to meet Houston's growing population and international demand. 

And even the weakened oil markets are creating some opportunities, Bruce says (and since JLL's past predictions were on target, take heed): energy companies with strong balance sheets might inexpensively acquire assets. Real estate can support this opportunistic expansion, he tells us.

Bruce expects an upturn in 2016. He believes it will take four to six months of prices above $62 a barrel before oil companies change operating plans and a few months after that, we should see the real estate market respond.

Deniese Palmer-Huggins, a senior energy adviser at the Center for Energy Economics at UT, isn't so optimistic. She's concerned that there's no end in sight for the construction that’s going up all over the place, contributing to an oversupply of real estate.  

“Projects have long lead times and once funded usually proceed to construction so we will still see a lot of activity around town,” she says. She’s noticed that since ExxonMobil relocated to The Woodlands, there's been some empty space in Greenway Plaza and Downtown while creating a bit of a pricing bubble in The Woodlands. She also suspects that in this low-price environment, we may see some increased M&A activity, which would impact the real estate market even more.