Mixed signals, where do we go from here?

by CoyDavidson on February 7, 2010

We all know what a challenging year 2009 was, but as we have moved into 2010 there is a steadily growing sense of optimism for both the Houston and National economy. Almost daily now we read a couple of news stories with positive economic news, but every third or fourth story we see tempers that enthusiasm a little with some negative economic trend that is reported or projected.

Let’s take a quick rewind of some of the key economic news that has been reported since the first of the year. On January 17th in a story reported in the Houston chronicle, longtime Texas economist Ray Perryman predicted that the Texas economy would be the first to recover, and not to expect a huge rebound but rather a slow steady recovery. A week later in another Houston Chronicle story it was reported the Houston economy added jobs for the 4th consecutive month. However we did lose 93,000 jobs in Houston during 2009. Just last week it was reported the economy grew in the 4th quarter faster than it had in six years and the national jobless rate unexpectedly dropped to 9.7% from 10% the month before. However, as I outlined in my blog post Obama, NASA and the Clear Lake Office Market the potential for thousands of job losses locally with President Obama’s plan to cancel the Constellation program at Johnson Space Center.

What about the office space market?

In mid January Colliers International released its 4Q 2009 Houston Office Market Report and just last week our 4Q 2009 North American Office Highlights. What did these reports tell us? Well it was not a good year for the Houston office market and certainly for most major office markets around the country and Canada. However, what can be gleaned from the reports is that we are starting to see the early signs of stabilization. Houston reported 1.16 million square feet of negative absorption in 2009. However, all though minimal Houston reported positive absorption of office space (236,880 SF) during the 4th quarter of 2009, but this is offset by a substantial inventory of sublease space.  Houston actually posted positive absorption in 2008 as we were one of the last places to feel the recession, as most markets around the country started the negative absorption trend in early 2008.

The reports also reveal that Houston has not experienced the same percentage of depreciation in rental rates in 2009 that were felt around many major markets around the country. Let’s compare Houston with a few major markets for Class A office rental rates:

  • Houston CBD: 2.73% decrease
  • Houston Suburban: 2.2% decrease
  • Midtown Manhattan: 24.04% decrease
  • Boston CBD: 22.65% decrease
  • Denver CBD: 19.85% decrease
  • San Francisco CBD: 19.40% decrease
  • Seattle CBD: 19.12% decrease
  • Chicago CBD: 17.95% decrease
  • Atlanta CBD: 6.8% decrease
  • Atlanta Suburban: 4.84% decrease
  • Phoenix Suburban: 14.44% decrease
  • San Jose Suburban: 13.44% decrease

Where do we go from here?

I tend to be a “glass half full” kind of guy but the consensus appears to be that the economic recovery has clearly begun and the only debate centers on the velocity of the recovery. Will it be a slow bumpy ride as many predict or could we see a return of significantly improved economic conditions much sooner than most anticipate? Despite majoring in economics at the University of Texas I don’t pretend to know nor will I venture even a slightly educated guess. However, I have been advocating since last August for office tenants and industrial tenants as well to get into the marketplace now, if at all feasible to take advantage of current market conditions while the window of opportunity still exists. Just in the month of January we have seen some of Houston’s largest employers announce major real estate decisions beginning with KBR’s announcement to scrap its West Houston campus plans and expand their space downtown. This followed by Anadarko’s announcement they have purchased their Woodlands headquarters building and while ExxonMobil has made no formal announcement it is widely believed to be certain that they are planning a massive office campus on a land tract they purchased just south of the Woodlands.

Currently most Houston Landlords are in “deal making” mode offering lower rates and more liberal concession packages than in the past and this climate has really only been in existence in Houston for about 3 quarters. While I don’t believe we will get back to 2007 / 2008 rent levels over night, I do believe the liberal concession packages will dissipate quickly if we continue to get positive economic performance both locally and nationally. As, I have been saying for months, “the opportunity is now”

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