Answering the Houston Office Market Questions…Sort of ?

by CoyDavidson on March 8, 2011

Events that Impact the Market are Beginning to Play Out

“Three Key Questions Persist for the Houston Office Market?”, that was the title of my past blog post here, which focused on three recent events at the time, that had the potential to create a significant headwind in any recovery for the Houston market. I posted this last May, long before it became a standard talking point in 2010, among the CRE community and the media when discussing the Houston office market.

Yes, you are correct in that I am claiming the credit for framing the discussion. I might add it is not that I consider it a flash of brilliance; I am sure some of my peers were coming to the same conclusion at the very same time; I just had an advantage in that I had a blog and beat them to the stage in establishing its relevance.

So What has Unfolded Since Last May?

Well there is more clarity on each issue, but still some grey areas. I will address each point by point.

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

Continental Airlines leases approximately 680,000 square feet in Houston’s Central Business District (CBD) in a lease expiring in 2014, with 1600 Smith previously serving as its Corporate Headquarters. As expected the announced merger with United Airlines was completed and the location of the merged company’s home base was designated as Chicago.

Continental has maintained all along Houston would remain as a major hub and employment base for United Continental Holdings. The question in my mind last May was; how many office using jobs will remain in downtown Houston versus operational facilities serving the airports?

Early last month United Continental Holdings Inc. announced plans to eliminate 500 positions in Houston from their downtown location, as the result of the headquarters relocation. In their press release the airline said, “The layoffs will be permanent, but the offices at those two locations “are not being closed in their entirety.” However, you have to wonder if there will be more layoffs at some point, and it struck me as carefully selected words in the press release. There is a difference between “not being closed in their entirety” versus “remaining open indefinitely.” I suspect we will get a better feel when we see how much if any sublease space hits the market.

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

This has been somewhat of a fluid issue all though the impact on the office market in the Clear Lake area is beginning to unfold. I have provided a more detail assessment in my recent post “Houston We Have a Problem” but in essence the end result is not the “worst case” scenario, but certainly more damaging than many hoped or expected. My projection is for at minimum approximately 800,000 square feet and perhaps more additional office vacancy, which will balloon the overall vacancy rate in the submarket to in excess of 20%. The good news is that the Clear Lake submarket is slightly less than 6 million square feet, and only 3 % of the total Houston market inventory. The Clear Lake area is clearly in a contraction phase of the market cycle, but the overall Houston office market remains in the early stages of recovery.

What’s the impact of the Gulf Oil Spill?

The end result of the Gulf Oil Spill’s impact on the Houston office market is much more difficult to ascertain at this point and remains an ongoing issue. The battle between the Energy Industry and the Obama Administration to resume drilling in the Gulf of Mexico has been well documented and extensively covered by the Media. While there have been some job losses among the drilling contractors and suppliers, you can’t really point to net loss of jobs among the Energy sector in general, as elevated commodity prices, mainly crude oil have propped up other sectors of the industry. However, I don’t think you can question the premise that the drilling moratorium has retarded job growth and potential office space absorption, whether actual or shadow vacancy that would have likely taken place, if the event had never occurred or the moratorium lifted in a shorter time frame.

The recent political tensions in North Africa and the Middle East which have spiked the price of oil to in excess of $100 per barrel is escalating fears the U.S. will slip into another recession or at the very least slower economic growth. This only complicates how this all plays out making it a very fluid situation.

The Cumulative Effect

In the end, as I predicted none of these factors have individually dealt a major blow to the Houston office market which has shown signs of improvement, albeit slowly. However if you look at the job growth that has taken place in the other major Texas metros, Houston has lagged Dallas, Austin and San Antonio. I don’t think there is any question these three events have delayed a more robust economic recovery in Houston, part of a Texas economy that has generally outperformed most of the country.

One last thought, attempting to place politics and a mild conspiracy theory aside there is a common denominator in all of these issues:

  • United –Continental established its corporate headquarters in the Presidents home state and city. He clearly didn’t make that decision, but I would speculate he privately strongly supported it as Department of Justice approval came relatively quickly. You have to ponder if Houston was the chosen Headquarters, would this have been such a routine process.
  • The job losses at Johnson Space Center are directly related to the President’s proposed budget and his vision for NASA, and he appears motivated to establish new space initiatives at other NASA facilities around the country.
  • I would also suggest a consensus exists that the current White House administration is not considered a positive factor on the economic health of the Oil and Gas Industry. Whether you believe that is good or bad policy is another debate. The fact that there is uncertainty in the rules for the economic playing field is what is delaying investment and ultimately job growth.

I believe it is apparent, the current White House administration is keenly aware of its chances of capturing the Texas electoral vote in the next election. While Congress has some say, I don’t think anyone expects any political favor coming to the State of Texas from Pennsylvania Avenue for a couple more years. No matter where you fall in your political view, that is just reality and it is contributing to the economic headwind in the face of the Houston office market.

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