Houston’s Recovery From Coronavirus Will Be Slower Than Other U.S. Metros
Houston's economy has been battered over the past month, as the coronavirus outbreak disrupted businesses and consumer spending and crude oil prices fell rapidly.
Disagreements over production cuts and a subsequent price war between Saudi Arabia and Russia led to West Texas Intermediate oil prices falling as low as $10 per barrel in recent weeks, an unsustainable price for any energy producer.
Under the weight of these factors, Houston’s recovery could take longer than other major metropolitan areas in the U.S., according to Greater Houston Partnership Senior Vice President of Research Patrick Jankowski.
"If this was just a COVID-19 outbreak, that's one thing. But this is a COVID-19 outbreak with an oil bust layered on top of it,” Jankowski said during a Bisnow webinar Thursday.
"Houston will probably struggle more than any other metro to recover from this. Because even once we recover from COVID-19, we're still going to be struggling with the downturn in the oil and gas industry."
Between 180,000 and 200,000 people in the greater Houston area have applied for unemployment over the last three weeks. That number could rise to as high as 250,000 in the coming weeks, Jankowski said.
Jankowski said this period could be worse than the Great Recession of 2008-2009, but potentially not as destructive as the economic downturn during the 1980s.
That prediction is largely based on comparing job losses during those periods. During the 1980s oil bust, Houston lost more than 220,000 jobs, or about 13% of jobs in the region.
Houston’s population has grown significantly since then, and the economy has also diversified. During the Great Recession of 2008-2009, Houston lost about 120,000 jobs, or 4.5% of employment.
If we reach 250,000 jobs lost now, that would be about 7.4% of Houston's 3.4 million employment number from the end of February.
Unlike in the 2008-2009 downturn, Houston will not have the benefit of new oil and gas drilling technology to give it a boost.
"We're not going to see the fracking boom pull us out of recession this time," Jankowski said.
"What we're looking at is a downturn that is worse than the Great Recession but probably not as bad as the energy bust."
Avison Young Managing Director Rand Stephens said the upstream energy sector can affect Houston’s office market more than any other, particularly when companies involved with exploration and production are suffering.
As more energy companies face bankruptcy, layoffs, wage cuts and consolidation, many white-collar jobs in Houston will take a hit, potentially reducing headcount and causing energy sector office usage to shrink.
The office market in Houston has struggled to recover square footage after oil prices plummeted in 2014, when surging production outstripped global demand. But that earlier downsizing could actually have some benefits.
"The good news is, it's not like we're at some peak and now we're going to come crashing down in the office market," Stephens said during the webinar.
Stephens noted that essential deals, like renewals, are still getting done. But many negotiations have been pushed, placed on hold or dropped altogether.
"We see that on the investment sales side of the business as well as the leasing side," Stephens said.
While it is still too early to know exactly how much Houston’s office market could contract, building owners could find a silver lining in the aftermath of the coronavirus crisis. Tenants will likely be more concerned with reducing density and embracing touchless technology, and landlords could pivot to offer better facilities that promote public health.
"There will be opportunities for new development, because I still think there's companies out there that are going to want newer, more efficient buildings that are also going to have the touchless elevators, all the latest and greatest filtration systems and things like that for overall health as well as amenities," Stephens said.
Normal usage of office space could still be a while off. Jankowski said better testing and reporting of cases in the greater Houston area would empower employers and workers to feel comfortable returning to the office. Until then, there could be some hesitancy.
Jankowski also cited a recent Wall Street Journal poll of economists around the country on when the U.S. could begin to recover. Many believe that while the second and third quarters of 2020 will retract, the economy could begin to rebound as quickly as the fourth quarter.
For Houston, that recovery will be slower.
"I don't think it's going to take us two years to recover, but I think it's going to take us more than 12 months to get back to where we were," Jankowski said.