Will Houston Start to Act More Like a Tech Town?
The recent drop in oil prices could be the beginning of a systemic change in Houston’s economic cycles, says JLL global energy practice leader Bruce Rutherford. We’ll delve into the interplay between oil prices and forecast its effect on real estate at Bisnow’s 2nd Annual Impact of Oil and Gas event on Feb. 26 at the JW Marriott Houston, starting at 7am.
Energy companies, and as a result, Houston, have been used to long cycles with plenty of time to plan and react. But Bruce (who’ll speak at our event) is forecasting a new era of short, sharp two-year cycles, and Houston will start to reflect the ups and downs of the tech industry. (Tech companies change very rapidly with the introduction of new innovations.) Oil prices are already moving much more steeply — in ’08, they plunged, but recovered in a year. Prices started dropping again in mid-2014, and Bruce believes they’ll hit bottom this quarter and be a lot higher in the second half of this year.
The West Texas Intermediate has been bumping along just below $50 per barrel; oil in the $70 to $80 range would put land-based drillers to business as usual, Bruce says. (They’re the ones really feeling the pain right now.) But since the energy industry as a whole can’t respond as quickly, he believes commercial real estate — and particularly the Energy Corridor and Westchase — won’t feel tangible relief for another year. Bruce says these shorter cycles should change your real estate strategy, with an even heavier emphasis on buying properties at the depth of the cycle and selling at the peak.
The drop in oil prices is impacting each property type differently, says CBRE director of research and analysis Sara Rutledge (another panelist). Office will be hit first and foremost — 1M SF of sublease space has already hit the market this year. That’s created 2.5% vacancy, and Sara says 3% is the tipping point to really impact rents. It’s possible we’ll see rates drop even this quarter. Of course, we’ve had record rents recently, so a cool down was due soon anyway. (Similarly, a drop in construction activity is healthy.) Here’s Sara with hubby Bill and son Dylan at the Trains at NorthPark (thus the mini Big Tex behind them).
The industrial side is a little more of a mixed bag, Sara tells us. Upstream has slowed activity, and heavy machinery manufacturing (which is often tied to drilling) will probably ease. But downstream is remaining strong, and petrochemical activity won’t be impacted by lower oil prices. That’ll especially benefit Southeast Houston, where Chevron, Exxon, Dow and Formosa Plastic have expansion projects delivering in 2017 that’ll add 27,000 construction jobs and more than 1,000 permanent positions. To prepare, the southeast submarket has 1.2M SF of industrial development underway, which is 68% pre-leased. That’ll deliver into the tightest market since ’03, with 5% vacancy.
Multifamily demand has been so strong that Sara doesn’t think oil prices will have a significantly negative effect. The single-family market has less than three months of supply, and multifamily occupancy is still very high, so although activity may slow through the first half of 2015, she still forecasts 2% to 3% rent growth this year. Meanwhile, retail is poised to flourish. It’s incredibly well-occupied with minimal construction, and should get a huge boost from lower gas prices. Moody’s Analytics shows that a one-cent drop at the tank creates $1.2M of excess disposable income nationwide in one year. That takes a while to translate into retail sales, Sara says, but with gas dropping about $1, it should be a pretty massive benefit. To hear more, please join us for Bisnow’s 2nd Annual Impact of Oil and Gas event on Feb. 26 at the JW Marriott Houston, starting at 7am. Register here.
