Q&A: CBRE Executive Vice President Rich Pancioli On The State Of Houston Office Market

The recovery for the Houston office market is predicted to be slow. 

Tenant expectations are applying pressure to property owners. Acknowledging the flight to quality, some owners have launched renovation projects to add more collaborative space, amenities and new food options. Meanwhile, improved efficiency in the workspace has caused a decrease in the square footage of office leases. 

Office vacancy is sky-high at 19.4%, according to CBRE's Q2 Office MarketView. Though the overall vacancy rose by 40 basis points quarter over quarter, the future move-ins suggest vacancy rates are poised to decline in the coming quarters, per the report. 

With the delivery of the Bank of America Tower in Downtown Houston, the construction pipeline in Houston dropped to 1.7M SF with only five active projects in the Central Business District, West Loop Galleria and a few other submarkets, per the report. 

CBRE Executive Vice President Rich Pancioli, who is a panelist at the Houston State of Office event Aug. 28, discussed with Bisnow the top trends impacting the Houston office market. The interview has been edited for brevity and clarity. 

Bisnow: What is the state of the Houston office market? Have any key fundamentals changed to suggest that the market is rebounding? 

Pancioli: Slow improvement in many areas/submarkets, but seemingly at a snail’s speed. Job growth and unemployment are strong and those are typically leading indicators that we should start to see vacancy rates drop, provided the developers don’t start aggressively overbuilding, anticipating the next growth cycle. Stable oil above $60 and increased rig count are typically good signs for Houston occupancy increases. 

Bisnow: As the Houston economy continues to diversify, does the price of oil still have the same impact on the Houston office real estate market? If so, what has been the impact as of late? 

Pancioli: As much as we say Houston is diversified, unfortunately, I think we are still an oil-dependent economy, meaning that even though medical, technology and financial institutions continue to grow in market share, we are still at the mercy of energy-related companies.

Looking at the stocks of energy companies and how they continue to show market weakness, even though the company’s financial statements are profitable and, in some cases, record-breaking, the baseline of our energy-based economy will remain, as long as oil and natural gas are in global demand.

We have seen many energy-related companies making some slow growth maneuvers in the office market, but they are not adding square footage as they add headcount. Mobility, floor plan densities, workplace changes, community or shared amenities, and technology are providing energy and other non-energy related companies the ability to scale workforce without necessarily taking more space like in the past. I see our vacancy rates slowly declining not as we had seen in previous cycles.

Of course all bets [are] off if we go to war with an Arabic country as oil prices will spike and pull us quickly out of the downward cycle.  

Bisnow: What are the challenges Houston has to overcome to see a change in the office market? 

Pancioli: A stable WTI price above $60/barrel for consecutive months/year. Better tax incentives that are competitive with the rest of the country to try and bring more companies/jobs to Houston. Get rid of more sublease space, under 3% of the market. Political stability locally, nationally and globally.

Bisnow: What will be the biggest changes in the Houston office market over the next five years?  

Pancioli: Changing workforce needs as the employees of the younger generation work drastically differently than the older workforce. Higher densities on floor plates mean more parking spaces or a significant increase in ride-share or public transportation. New construction is forcing facelifts for the older '80s Class-A space to keep up, so I think you will see upgrades to many buildings in order to attract/keep their tenants. This is already happening in the CBD more than most submarkets.

Bisnow: What is your advice to property owners in the down market? 

Pancioli: Spend money on upgrading your space, spend money on marketing, focus on credit tenant/risk tenant mix and don’t put all [your] eggs in one basket. Don’t just take any deal as some tenant uses drastically change the perception of the building and therefore you become known as the "blank" building and tenants will then avoid your building.

Bisnow: What submarkets are recovering faster than others and why? 

Pancioli: Recovery has been uneven across the city, but some submarkets are performing better than others as far as increased occupancy which are the North/Woodlands area and Katy Freeway/West/Energy Corridor area submarkets as these markets have not only experienced new activity with new deliveries but also expansion of existing companies and relocation of larger ones at the same time. 

Bisnow: What has been the role of redevelopment and street-level retail activation in the office market?  

Pancioli: It is critical to the younger workforce's attraction to certain employers/buildings. It is needed desperately and the more that happens, the more Houston will attract not only new companies but employee transfers, like what you see in Austin, Atlanta, Nashville, etc., where vibrant communities attract more and more businesses. Not to mention, it is nice to see some of the eyesores being reinvigorated.

Bisnow: What keeps you up at night? 

Pancioli: How to better my skills as a broker, a husband, a father and a Christian. All of which continue to be a daily struggle. I am constantly fighting to stay balanced and appreciative. I also am concerned about how not to become a commodity and stay relevant and wanted.