Houston CRE Companies Eye A Brighter 2022 Despite Setbacks

Though the omicron variant is once again delaying the plans of some companies still considering sending employees back to the office, Houston commercial real estate experts say they are largely no longer feeling weighed down by the pandemic. 

Going into 2022, the commercial real estate industry is cautiously optimistic about the year ahead, predicting even the lagging office market will see improvement, with some already seeing activity reach 2019 levels or better. Experts are also predicting 2022 will bring the continued revival of retail and a new focus on green building and technology to attract and retain talent.

In a rapidly changing market still dealing with Covid-19, Bisnow spoke to several real estate professionals in Houston to get an idea of what they might be expecting coming into the new year.

Office

While the Houston office market appears to be stabilizing somewhat, CRE professionals predict its growth may still be flat for the next two years. Charlie Neuhaus, a partner specializing in office tenant representation at NAI Partners in Houston, calls the issues in the Bayou City three-pronged: the market is dealing with the uncertainty of Covid-19 variants, the demand for working from home and a general local reliance on a lackluster oil and gas market.

Those landlords with lower-level Class-A or Class-B properties will likely pay the price for offering fewer amenities, Neuhaus said. Landlords offering good amenities to incentivize tenants has always been common, but he said landlords are now offering astounding tenant allowance packages to attract companies.

Going forward, west may be best for office tenants looking to move closer to their employees.

"There's a segment that still want to be downtown. I think one thing we've learned throughout this is Zoom and conference calls is a pretty good way to hold meetings," Neuhaus said. "I don't think that necessarily you have to be in really any [one] submarket. If you look at where the new rooftops are and the affordable rooftops are, it's continuing to move west."

White-collar employees, bolstered by new options for work in or out of an office and negotiating with companies that are increasingly changing to fit their needs, are driving employers to areas like Interstate 10 and the Energy Corridor.

Neuhaus supports the idea that work-from-home flexibility will be key to how office tenants select their space moving forward. If workers aren't taking their in-person lunch meetings in a downtown tower, a pricey office there may not be so appealing.

Retail

Early reports of retail's death from Covid-19 seem to have been exaggerated. Even supply chain snafus did not mar a bustling holiday season that tied a bow on a record-breaking Q3 for retail sales, according to the Texas Real Estate Research Center.

But as retail improves, exactly which retail properties will bounce back is  dependent on the type of real estate. Property owners that have heavily invested in indoor shopping malls are still trying to catch up, with Simon Property Group stating last year that it may not return to pre-pandemic occupancy until later this year or 2023. Simon owns a number of Houston-area malls, including the Galleria. 

Property owners are diversifying to combat that slow recovery: Last year, for instance, Brookfield participated in an $11M funding round in London-based gaming retailer Electric Gamebox. The company is expected to expand into The Woodlands Mall near Houston.

Aj Jennings, senior general manager at REIS Associates, manages Rice Village, which has been undergoing heavy cosmetic makeovers in past years as it brings in new tenants. At Rice Village, at least, she's seen a more successful 2021 than 2019. She credits Rice Village's ability to nab new leases from being choosey in which brands to bring on.

"I think that's been helpful in the retail market. The landlords that, through [Covid-19], worked closely worked their retailers are the ones that I think are reaping the benefits going forward for successful improvements in sales, traffic and business," Jennings said. "For us, that has been the focus: ensuring our retailers are healthy, that they are able to find workers. I think that's, going forward in the future, [going to be our biggest challenge]."

Sustainability, Talent And Technology

Technology, talent and sustainability will be buzzwords in 2022.

A national outlook from Deloitte, published in November, talks about recovery and emerging employee expectations their employers will adopt new technology, take on social issues and address the climate.

"The CRE industry is positioned at the forefront of [economic] recovery [post-pandemic]: Office employers are balancing productivity and safety; retailers face critical turning points in an evolving industry," the report states. "Meanwhile, companies face increasing demands to prioritize environmental, social, and governance (ESG) issues, aging technology infrastructures, a tightening labor market, and increasingly differentiated competition."

Renea Burns, a partner at Deloitte and based in Houston, speaks of a CRE future with companies using technology like digital twins, which in real estate's case could be a virtual copy of a property, where companies can simulate operations, finances and other variables. But for those companies still working with outdated programs and hardware, their eyes for new technology may be bigger than their stomachs. It's a long road to get to something that will stick, she said.

"I wouldn't say most companies are doing [this technology] yet, but it seems like your bigger real estate companies are starting to look into this," Burns said. "Typically, you see real estate companies invest in just their real estate. We're seeing a lot of vertical integration between some of the bigger technology, where they're actually investing in partners and property technologies that can help bring some of this. It's believed that it's going to give some of them a competitive advantage in the future."

Companies are also coming up with sustainability plans, but with a lack of a framework to follow in the U.S. compared to Europe, for example, many U.S. companies are in the dark. Yet a younger, greener working generation, hungry to work for companies that are environmentally conscious, will drive companies to adapt, experts say.

Burns called the talent climate a chicken-and-egg situation, with the desire for new employees and those employees' desire for different office environments feeding into each other to create new modes of work and new priorities. 

"It's a shifting dynamic that's impacting multiple things, whether it's talent and how to attract talent; it's [environmental, social and governance criteria], sustainability, creating smart buildings, being a bit more environmentally friendly; and the technology," Burns said. "Commercial real estate overall is an older workforce. To attract this new talent in a tight employment market, you have to invest in the technology to take your company to the next level."