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Oily Impacts

Dallas-Fort Worth
Oily Impacts
Marcus & Millichap managing director Brent Smith
Four months after the Gulf oil explosion, uncertainty over the future of deepwater drilling is softening office fundamentals. Marcus & Millichap managing director Brent Smith tells us the largest impact will be in Class B properties. Class A landlords are usually capitalized and can survive but are setting a roof on what Class B landlords can ask in rent. Cutting quality will likely send tenants to Class A space made unusually affordable by the recession. Brent believes the moratorium is also increasing tenants' power in the market. Big picture, job loss could be serious—conservative reports predict the drilling moratorium could cost Houston 12k jobs; Brent's heard as high as 50k. (In the energy sector, Chevron and HighMount Exploration & Production have already laid off  employees in Houston and Halliburton and Baker Hughes relocated workers.)
oil clean up efforts
The uncertainty is especially bad timing in Houston as it comes off the eighth straight quarter of negative absorption  in the office market, and Brent says “this is just one more factor in an already tough story.” There's a silver lining in companies benefiting from the cleanup efforts—Brent says Marcus & Millichap has a company under contract to buy an extra warehouse, and hotels on the Gulf are doing well because of visiting workers. The worst effect on CRE could come after the cleanup is over and even those groups are negatively impacted. In Dallas, the office vacancy rate will end 2010 at 23.7%, up 50 bps from last year, when vacancy increased 160 bps. Brent may have his attention elsewhere—his wife is expecting the couple's third girl  any day now.
Related Topics: Brent Smith, Baker Hughes