A Murky View for the Houston Office Market

by CoyDavidson on June 16, 2010

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The Impact of the B.P. Oil Disaster on the Houston Office Space Market

Rewind back to the end of the first quarter of 2010 and there was renewed optimism for a quicker recovery than previously expected for the Houston office market. Despite news, that there was potential for significant job losses at Johnson Space Center and one of our biggest employers Continental Airlines was contemplating a merger and relocation of their corporate headquarters to Chicago, there were plenty of reasons to be optimistic:

  • Houston was adding jobs again
  • The sentiment was leasing activity was picking up
  • Colliers International reported positive office space absorption for the 1Q
  • The National Economy was showing clear signs of economic recovery

Then 58 days ago on April 20th there were reports of an incident in the Gulf of Mexico. The news of the B.P. Horizon disaster certainly received significant media attention and without a doubt didn’t go unnoticed in the “Energy Capital of the World”. However at the time not knowing where we would be today; news of the event initially did little to bridle the new optimism that had been growing in the Houston business community.

Ten days after the event, the U.S government instituted a moratorium on deep water offshore drilling, and then all of sudden business people and the commercial real estate community at least began to think about what impact the spill might have on the Houston economy.

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A Game Changer ?

The six-month government ban on deep-water drilling already has caused disruptions, forcing oil and gas firms to idle equipment and thousands of workers and scurry to redeploy them elsewhere. Even if the moratorium on deepwater drilling ends in November as scheduled, and it may not, Houston could feel the effects of the interruption long after according to industry insiders.

“Six months could be 50,000 jobs that either people get laid off or redeployed out of the region, which means their money is not being spent here,” according to John Hofmeister, former president of Shell Oil, who anticipates a “multiyear setback for hiring, employment and for spending” for the offshore industry.

BP’s failure to stop the Gulf spill is raising concerns in the energy industry that a wave of new regulations is likely that could significantly alter the economics of the offshore drilling industry.

The moratorium has affected 18 firms active with deepwater rigs in the Gulf and 16 of those firms have a significant presence in Houston. The consensus opinion is that when drilling resumes, the industry will operate under stricter regulations and closer federal government oversight.  Since the major players in the offshore drilling industry are so concentrated in the Houston area, the impact of the new deep-water drilling ban and whatever new regulations come after could possibly affect the city for years to come.

The Houston Office Space Market

Houston is headquarters for offshore operations for major industry giants like Exxon-Mobil, Shell, Chevron, BP, Anadarko and a host of other independent energy companies as well as the drilling contractors and equipment manufacturers. These companies represent a lion’s share of Houston’s largest office tenants, many who are known recently to be either evaluating office space options or were actively in the marketplace for office space.

One thing I have learned over my 20 years of being involved in the commercial real estate industry is the energy companies in Houston make their big investments, which includes hiring and ultimately involves office space, when there is relative certainty in projected energy prices and business conditions going forward. I don’t pretend to be knowledgeable enough to predict what impact the B.P disaster will have on energy prices, or the government’s energy policies.

However, the longer this crisis in the Gulf continues the worse it is likely to be on a major sector of the Houston economy. We were fortunate not to feel the brunt of the recent recession like many cities around the country and the energy industry was a major factor in that outcome.  One thing is for sure now, all the optimism that the Houston office market would recover to pre-recession levels sooner rather than later went out the window on April 20, 2010, and we just didn’t realize it at the time.

Taking Advantage of Market Concerns

I have been advocating since the end of last year, the window of opportunity for Houston office tenants to lock into attractive leasing terms was now, because that window of opportunity could close quicker than expected. The recent event in the Gulf of Mexico may very likely extend that time frame, but I would argue it is now even a better time to be in the marketplace as any recent optimism from Houston office building owners has been dampened.

Right now the vision of what the Houston office market will look like in 12-18 months is about as clear as the water in the Gulf of Mexico.

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