Three Key Questions Persist for the Houston Office Market?

Most of the economic news we have been reading lately has been on the positive side. Houston had begun to add jobs and there was growing evidence that even though Houston was late to enter the recession, that we would also be one of the first markets to lead the recovery. The Houston office market posted positive absorption in the first quarter of 2010 and there was a growing optimism that leasing activity was picking up.

However, due to events of recent weeks, there are three big questions that arise regarding the recovery of the Houston office market, that temper the enthusiasm of even the most optimistic.

What’s the impact of the Continental-United Merger?

Continental leases 680,000 square feet in Houston’s Central Business District (CBD) with 1600 Smith serving as its Corporate Headquarters. Losing the merged Continental and United to Chicago as its corporate headquarters is certainly not a positive outcome for the office market in the Central Business District.

Continental has indicated that Houston will remain a major hub for the merged airline so there is optimism some jobs will remain in Houston. The question is how many office jobs that will sit in corporate office space in downtown Houston versus operational facilities serving the airports?

What’s the impact of the Obama Administration’s plans for NASA and Johnson Space Center?

I have written previously on the Obama plan for NASA and its potential impact on the NASA/Clear Lake Office Market. The demise of the Constellation program and the end of the shuttle program was predicted to cost the region as many as 5,500 jobs from the workforce at Johnson Space Center and among the various NASA contractors.

President Obama has since revised his vision for NASA, but it appears significant job loss while maybe not as severe as first feared is still imminent and many believe his revised plan, is of much bigger benefit to Florida and Kennedy Space Center than Johnson Space Center.

What’s the impact of the Gulf Oil Spill?

What’s the gulf oil spill have to do with the Houston office market? The disaster occurred just as President Barack Obama had eased a moratorium on offshore drilling in the Atlantic and Eastern Gulf in the hopes of passing a comprehensive climate change and energy bill. Now, predictably, the moratorium has been reinstated, and even though government officials are ostensibly keeping a wait-and-see attitude on the long-term prospects of offshore drilling, this disaster will likely put a long-term hold on opening new offshore areas.

Houston is the energy capital of the world and a huge number of employees responsible for finding the oil and gas and designing and manufacturing the equipment used to extract it, sit in Houston real estate.

The Cumulative Effect

In the end, none of these factors will individually deal a major blow to the Houston office market.

• The drilling in the Gulf will likely continue under tighter regulations, but opening up new offshore areas  for drilling is not likely. While there will be a new push for cleaner sources of energy, we remain dependent on fossil fuels. For Houston, a sector of our economy “Offshore Drilling” which once had the potential for significant growth likely will remain at current employment levels.
• In the short term there is going to be some job loss at Johnson Space and among its various Aerospace contractors, but JSC will likely continue to play a major role in the nation’s space program.
• The most likely scenario is that Continental will place office space on the sublease market that is no longer needed as jobs are shifted to Chicago. The good news is that Continental Airlines downtown office space is only approximately 680,000 square feet of a 200 million plus square foot office market.

However, you add all these factors up and the cumulative effect likely translates into additional time for the full recovery of the Houston office market to materialize back to pre-recession levels. How long that is, will depend on the velocity of the overall economic recovery. Even for the most optimistic, three small steps backward equal to one large step backwards.