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Lower Oil Prices Saved Houston Commercial Real Estate

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Forget just surviving a weaker oil market; the experts at Bisnow’s Impact of Oil and Gas on Real Estate event last week think we should thank it. One more year of $100-plus oil could’ve been the ruin of the Bayou City. Midway Cos chairman Brad Freels told our crowd: “I’m glad we’re going through what we’re going through.” He says nearly 20,000 multifamily units and 4M SF were set to break ground but went on hold when oil fell through the floor. That abrupt end of activity saved us from huge oversupply problems.

Brad’s second from the left here with our panel: Colvill Office Properties president Chip Colvill, Cushman & Wakefield executive vice chairman Tim Relyea, JLL global energy practice leader Bruce Rutherford and CBRE SVP Debbie Wilson.

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Tim fully agrees. His stats are even higher—he says the quickness of this downturn put 25M SF of designed space on the back burner. “12 more months of high crude would’ve turned Houston into a disaster,” he says. He says the boom over the last few years was a blessing—it created a quality of building that we didn’t have before—but it was time to stop. Plus, he says the down market will weed out the weak and incapable and leave the developers who really know commercial real estate and Houston. Tim’s here with his daughter and colleague Brooke Wommack, Devon Energy EVP Alan Marcum, Champion Technologies’ Craig McPhie and Debbie.

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The office market will bifurcate over the next two years, Bruce says. Some landlords are in good shape and will skate through this, others will really struggle. He predicts that 2016 will be worse than 2015 for office owners, 2017 will be a healing year and 2018 will be good for landlords. He expects a lot of new demand that year, including from energy, and says it should also be a strong year for the US economy. Industrial should be fine the whole time, although he thinks the next few years will be a little less robust than 2015. Here’s Bruce between JLL’s Louis Rosenthal and Lincoln Property’s Kevin Wyatt.

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If you’ve been concerned about sublease space, prepare to get even more worried. Chip is tracking 5.8M SF of Class-A and B sublease blocks larger than one floor, and Tim says that’ll double real soon. 58% of the existing availabilities are for less than five years, which Chip says is unappealing to companies on the market. Our experts had mixed opinions on whether the increasing sublease blocks are a significant problem; Bruce and Tim say they’ll add to our difficulties, especially with demand decreasing. Brad, on the other hand, says he’s got 50k SF of sublease in his portfolio but he still gets a check every month so it’s not affecting him. The market should be better by the time those short-term leases expire, and Brad says it’s good to have some inventory on the shelf anyway. He believes one reason Dallas has effectively attracted corporate relocations is because it maintains office vacancy in the teen—so companies have somewhere to move immediately. Snapped: HFF’s Susan Hill, Debbie, Chip and NGKF’s Philip Price.

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Office demand is undeniably decreasing—and will do so more over the next six to nine months as energy M&A and bankruptcies pick up, Bruce says—but leasing hasn’t entirely stopped. Chip says oil companies are on the sidelines, but 50% of Houston’s tenants are non-energy, and they’re on the market looking for better deals. There’s a lot of law firm activity in particular, especially in high-profile Downtown locations. He inked one at 609 Main at Texas recently and says that building is getting strong interest overall. He’s got 500k SF of proposals, all non-energy related. Chip thinks 2016 will be pretty flat (a good time to build relationships for the next cycle, he says), but so far he isn’t seeing rents dip.

Chip pulled Cushman & Wakefield vice chairman Lou Cushman up on stage to wish him a happy 75th birthday and to thank Lou for bringing him into the business in ’84. (He's a legend and Chip says his level of productivity at 75 makes him really think there's a lot of opportunity in real estate despite the oil downturn.)

Many thanks also to Debbie; besides moderating our panel, she hosted us at 2 Houston Center, which she’s leased for 29 years under 10 different companies.