Houston Commercial Real Estate Adapts to Prolonged Downturn

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Oct. 17, 2016

By: Steve Burkett, Executive Vice President, JLL Houston

Houston commercial real estateThere has been no shortage of reports, articles, ponderings and predictions about the Houston office market and its eventual recovery. At a recent commercial real estate panel, hosted by the Houston Business Journal, panelists representing tenants, landlords, developers and the capital markets, agreed: No one knows when the market will recover. Those in Houston commercial real estate are largely at the mercy of macroeconomic conditions and must remain flexible to adjust to the environment. However, adapting to the prolonged downturn has manifested differently for various actors.

Tenants

By and large looking to cut costs, tenants, particularly energy companies, have unloaded excess space onto the sublease market at record rates. For tenants who are active in the market, the most significant matter is the economics of a deal. Core amenities such as conference space, dining and workout facilities have become fairly universal and therefore have less leverage than they once did.

Landlords

Building owners are under increased pressure to make upgrades to their assets to compete with the latest generation of product and discounted Class A inventory on the sublease market. Furthermore, to minimize risk, landlords are examining the finances of current and potential tenants much more closely than before. Landlord representatives are working hard to stay in front of tenants and keep communication lines open as to not lose a single tenant. Significant concessions are being made in order to maintain face rates and preserve buildings’ values.

Developers

A developer’s job is to develop, and that doesn’t change in a down market. Much of Houston’s inventory, like many other major U.S. cities, was built approximately 30 years ago. A “flight to quality” exists even in a down market and for this reason some level of development will occur. That being said, market conditions have made construction capital very hard to come by so development will be severely limited.

Investors

As for capital markets, there is no shortage of investor interest in Houston. Interested investors are looking for signs of distress that would signal a deal to be had. Despite market conditions however, there has not been widespread distress in building ownership as with previous cycles. Because of this, there have been very few office transactions in 2016. Like landlords, investors interested in Houston are scrubbing rent rolls and evaluating the energy exposure of assets as a key consideration in transactions.

While there is some demand among smaller tenants, law firms, and in Houston’s CBD, overall demand remains languid. Demand may increase slightly in the next year or two, but namely from the rollover of lease expirations. As market conditions continue to turn in tenants’ favor, new and developing industries may find more opportunities for expansion in Houston. In particular, Houston’s relative affordability and diverse and educated workforce present technology companies with an opportunistic alternative to mainstream tech hubs like San Francisco or Austin.

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Houston commercial real estateAbout the Author

Steve Burkett is an Executive Vice President within JLL Houston’s office Tenant Representation group. His market knowledge strong finance and analytical skills, extensive negotiation experience and knowledge of the development process enable him to serve clients in straight lease, lease-equity and ownership transactions. He is regularly a top producer within the firm and has previously been named Office Broker of the Year by NAIOP.

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