Obama, NASA and the Clear Lake Office Market

by CoyDavidson on January 31, 2010

In the president’s new budget, there is no money for the Constellation program. This is the next-generation human-launch system replacing the all-but-retired space-shuttle fleet, which was being developed to return our astronauts to the moon. This has Texas lawmakers preparing for major political battle to protect Houston jobs and the Johnson Space Center.

As many as 20,000 employees work for NASA and for space agency contractors in the Greater Houston area, pumping billions of dollars into the local economy.

Obama wants to push total spending on NASA to nearly $100 billion over the next five years by adding $5.9 billion to cover the costs of increased earth science missions, extending the life of the International Space Station, and subsidizing commercial rocket launching firms’ development of spacecraft to deliver astronauts and cargo to the orbiting space station, But it leaves too little money to return astronauts to the moon, spelling the effective end of the 5-year-old Constellation program “This represents a fundamental shift in U.S. plans for space,” said John Logsdon, a historian of the space program who is former director of George Washington University’s Space Policy Institute. “It’s going to spark a vigorous, spirited and heated fight with Congress.”

The demise of the Constellation program could cost the region as many as 2,500 jobs in addition to a projected loss of as many as 3,000 jobs when the shuttle retires next year, said Bob Mitchell, president of the Bay Area Houston Economic Partnership.

This isn’t the first major concern regarding NASA funding from Clear Lake area business leaders or office building owners with major NASA contractors and subcontractors as tenants. The area has survived previous NASA budget battles and two shuttle tragedies in the past. However, with the U.S economy just exiting the worst recession in recent history, the national unemployment rate at 10%, a costly war on terror and growing concerns over excessive government spending, the political winds might be blowing a little stiffer into the face of Johnson Space Center this time around.

What does this mean for the Clear Lake Office Market?

Historically, Johnson Space Center has survived these budget battles in pretty good shape and I wouldn’t even begin to attempt to predict how this budget battle shakes out, but any major loss of aerospace jobs to the Bay Area Houston region would be a serious blow to the NASA / Clear Lake Office Market.

The NASA / Clear Lake Office submarket is small with right at 5.45 million square feet of office space inventory (excluding buildings less than 10,000 square feet) and currently has a vacancy rate of 11.23%. NASA related tenants occupy approximately 45% of the currently occupied office space inventory and 41% of the total market. United Space Alliance, Boeing and Lockheed Martin account for the majority share of this occupancy and by far are the largest tenants in the marketplace. Taking USA, Boeing and Lockheed out of the equation and you can counter the number of office space users in Clear Lake with more than 50,000 square feet on one hand.

United Space Alliance alone, a joint venture between Boeing and Lockheed Martin and the prime contractor for the Space Shuttle contract which is scheduled to end in 2011 has 800,000 square feet of office leases expiring in 2010 and 2011. The optimistic assumption for Clear Lake area office landlords has been that this space would be absorbed by NASA Contractors working on other programs at JSC, but it appears some of those programs are in danger of cancellation if Obama’s plan is implemented.

For example, just applying the “what if”, maybe even likely scenario that half of the space currently occupied by NASA related tenants were placed back in the marketplace would result in a spike of the overall vacancy rate to approximately 32%. In comparison the Houston overall average vacancy rate citywide is currently 16.4% which is up from 13.5% a year ago. For the Clear Lake multi-tenant office building owner there is perhaps some silver lining in that many of the buildings occupied by the major aerospace contractors are single tenant buildings in-nature are not likely to be converted to multi-tenant use and would sit vacant until larger users most likely from outside the area could be captured. However, that is not the case for all the buildings with single or majority occupancy from NASA related tenants.

I don’t like predictions and I am hopeful the powerful Texas political delegation as in the past can keep these jobs in the Clear Lake area by either saving the constellation program or under some compromise agreement to the president’s plan.  A major loss of jobs and it could possibly take the NASA / Clear Lake office market years to recover from even in a vibrant Houston economy. More than likely there will only be a few vacant single tenant buildings in the marketplace and provided this ends up to be the case, building owners and business leaders in the community will be forced to actively seek companies from outside the aerospace industry as candidates for relocation to the area. In the long run diversification would be a very positive trend for the long-term vitality of the area economy and the commercial real estate market.

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