Nov. 8, 2017
Energy-related employment reached an inflection point in 2017, with office positions increasing despite the low-price environment. In Houston, energy employment increased 1 percent year-over-year. While encouraging, modest employment gains have yet to translate to a meaningful recovery in Houston’s commercial real estate market.
Energy tenants find relief, opportunity in soft market conditions
The Houston office market is characterized by 28.7 percent energy occupancy. Like other energy-centric markets including Calgary, Pittsburgh and Denver, Houston has experienced declining energy occupancy, increasing vacancy and a growing sublease inventory in recent years. The city’s sublease inventory leads the nation at 10.4 million square feet, the vast majority of which is Class A space.
Midstream and utility companies are capitalizing on sublease opportunities in Houston brought to market by upstream companies, as evidenced by NRG’s 431,000-square-foot sublease from Shell and Crestwood Midstream Partners’ 54,000-square-foot sublease from BG Group.
The midstream sector has been largely unaffected by the downturn and is in the midst of a rebound due to rising global demand for American oil and gas. Europe and Asia have increasingly imported more oil from places such as Corpus Christi, the top ranked port for U.S. crude exports in 2016. The sector is also well-positioned for future growth as production from newer basins, such as the Powder River Basin in Wyoming, will require supporting infrastructure.
Buoyed by increased subleasing activity, energy leasing activity in Houston is up significantly from 2016. The increase however, has less to do with hiring trends and more to do with energy tenants executing leases that have been pushed further and further out in expectation of the bottoming of the office market.
Despite incremental improvement in some of Houston’s office fundamentals the market-wide total vacancy continues to rise and will continue to do so as 1.8 million square feet of sublease space is set to expire in the next 12 months.
Downstream sector adds demand to already hot industrial market
Houston’s industrial market is faring better than its office counterpart, give the overarching strength in the warehouse/distribution sector, a trend echoed in other energy markets including Pittsburgh, Calgary and Edmonton.
Landlord favorable conditions in Houston’s industrial market can also be tied to the downstream energy sector. Refineries are among the least affected from the downturn and continue to outperform the pack. According to the American Chemistry Council, U.S. petrochemical investment sits at $185 billion as of October, and 310 projects are now on the drawing board.
While construction activity on a whole has been decreasing in metros across North America, submarkets most closely aligned with the downstream sector are experiencing sustained demand and supply increases, boding well for long-term health.
In Houston, construction activity is increasing in the Southeast submarket in anticipation of petrochemical plants. Players such as Chevron, Dow Chemical, Enterprise, Product Partners and C3 Petrochemicals have invested billions of dollars in projects. These projects will provide an influx of resources and capital to neighboring areas in the form of development of manufacturing and storage facilities, helping the real estate market.
Single-tenant crane-ready buildings, which typically support the upstream sector, seem to be the only chink in Houston’s industrial armor. This product type is experiencing relatively high availability.
Energy-related activity, however, is not a major demand generator of the industrial market overall, comprising just 14.8 percent of industrial transactions signed in 2017. The consumer goods and retail distribution sectors are what continue to drive industrial market dynamics across the metro.
For a comprehensive dive into how the energy industry is impacting North American commercial property markets, download our 2017 North America Energy Outlook.