When Will the Houston Office Market Rebound?

by CoyDavidson on September 12, 2010

3 key questions still unanswered, but the national economy is the real issue

Back in early May of this year, I wrote an article here on “The Tenant Advisor” titled “Three Key Questions Persist for the Houston Office Market” which revolved around the following issues:

  1. The Offshore Drilling Moratorium: The BP Gulf incident had just occurred and the Offshore Drilling Moratorium had just been put into effect creating uncertainty as to what this meant for Houston, the center of the offshore drilling industry.
  2. Continental Airlines – United Airlines Merger: The announcement of Houston based Continental Airlines decision to merge with United Airlines and that the corporate headquarters for the combined companies would be in Chicago.
  3. Obama’s Vision for NASA: Concerns over the President’s proposed vision and budget for NASA left Houston’s Johnson Space Center and area aerospace contractors vulnerable to massive job losses.

Four months later, the answers to these questions still are not totally clear.

Drilling Moratorium Expected to End in November

The director of the agency that oversees drilling in federal waters says a ban on deep-water drilling probably won’t be extended past its Nov. 30 expiration date. The moratorium has affected 18 firms active with deepwater rigs in the Gulf and 16 of those firms have a significant presence in Houston. New drilling is expected to resume in the Gulf of Mexico, but under much more scrutiny and regulation which will alter the economics of energy offshore exploration.

The deep water drilling moratorium is impacting revenues for the major energy producers, but strong domestic land and international activity is mitigating the impact. However, for smaller players, drilling contractors and equipment manufacturers, the moratorium has made a more significant impact.

The overall impact of the BP incident, the drilling moratorium and new offshore drilling regulations in the Gulf remains to be seen. Chevron a major downtown tenant has announced it will be reducing its downtown office space holdings. Most believe new rules for drilling in the Gulf is not going to deal a severe blow to energy employment in Houston, but could restrict growth in that sector of the oil & gas sector, as drilling interests are shifted other international locations.

Continental HQ Move to Chicago

Federal regulators have approved the Continental-United merger so any hope of retaining this corporate headquarters in Houston are now gone. Continental leases 680,000 square feet in Houston’s Central Business District (CBD) with 1600 Smith serving as its corporate headquarters in a lease that expires in 2014. Continental has publicly said the merged company will maintain a significant presence in Houston but that decisions on office-space needs haven’t been made yet.

The question is my mind is what is Continental-United’s definition of significant presence? Does that mean 100,000 square feet or 300,000 square feet of office space or operational facilities at or near the airport? I suspect once we see how much sublease hits the market in the Central Business District we will know their definition of significant.

Congress will determine the direction of NASA, not the President

Obama proposed earlier this year ending the Constellation moon program and temporarily relying on seats on Russian rockets. The president also called for emphasis on the development of commercial space flight. The president’s plan along with the scheduled end to the Space Shuttle program was projected to impact the NASA-Clear Lake with as many as 5,000 job losses. The prevailing school of thought from both Houston and Texas business leaders is not to expect any favors from the Obama administration regarding NASA.

The House and Senate are developing bills to accelerate NASA’s heavy-lift rocket program, which are counter to Obama’s proposal. There are differences in the bills being written in the Senate and House. But there is common ground. The two houses of Congress must come together to develop the NASA authorization bill, but it is generally believed this will happen.

“The Congress, while not yet unified as to what the nation should do in space, is clearly unified in regard to what will not be done,” says Mike Griffin former NASA Administrator during the Bush Administration. The worst case scenario for the Houston and the NASA/Clear Lake area at this point seems to have been avoided.

Uncertainty is the Big Issue

The single biggest impediment to job creation is uncertainty. Today, companies are simply reluctant to hire as they wait for a clearer vision as to what the future holds. In addition to worries of a “double dip” recession, there are other concerns that remain for both Corporate America and small business.

  • The 2011 Tax System
  • The impact of Healthcare Reform on labor costs is a mystery; and
  • New financial regulations create a new set of questions

Key issues over the last six months such as the drilling moratorium, the Continental merger, and the future of NASA have injected even more uncertainty into Houston’s economy, which has fared better than the national economy in general. Despite these local issues the national economy is still the big question market for Houston as with any major city and the commercial real estate market in general.

Optimist or Pessimist?

So to answer my question stated in the title of this post. “Am I optimistic or pessimistic about the Houston office market”? In the short term I am pessimistic. Houston has added jobs in 2010 but not in a big way, and I don’t believe we will see any significant hiring at the earliest until after the November elections and more likely not until late 2011. In the long term Houston is well positioned; offshore drilling will resume, Continental is only 600,000 square feet in a 200 million square foot office market and it appears jobs losses at NASA will be in the hundreds rather than the thousands.

When the national economy begins to rev up, so will Houston and likely at a faster pace. The Houston office market has only experienced approximately 1.4 million square feet of negative office space absorption since the beginning of 2009 when the market began to feel the downturn. I expect very modest positive absorption for the 3rd quarter if any, but relatively speaking  1.4 millions square feet is not that is not that much to make up once significant hiring begins and companies begin to take more office space again. The key questions are: When significant hiring begins? and How much more negative absorption will occur in the short term?

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