5 Reasons Houston Commercial Real Estate Will Survive Lower Oil Prices
If oil prices and layoffs from energy companies have you down, there’s reason to cheer up. Panelists at Bisnow’s Impact of Oil and Gas Summit explained why commercial real estate won’t be as negatively impacted as you fear.
1, We Get Investors Either Way
The boom of the last few years has drawn a lot of international investment into Houston. And now that things are slowing…it’s attracting investors. JLL global energy practice leader Bruce Rutherford says people from all over the world are looking at Houston thinking they can get a bargain because of the downturn. So far there’s been no distress, but most investors believe in Houston’s future more than ever and won’t disappear, Bruce assures us. (Middle Eastern capital in particular understands energy cycles and isn't deterred by them.) Pictured is our panel: TNRG president Mike Spears, Skybox Datacenters managing partner Rob Morris, Thompson & Knight partner Bruce Merwin, Cushman & Wakefield executive vice chairman Tim Relyea, JLL global energy pratice leader Bruce Rutherford, and Hicks Ventures principal Pat Hicks.
2. Real Estate's Better Poised Than Before the Oil Bust
We added 72M SF (a 62% increase in the market) from ’82 to ’86, and only 33.3M SF (a 22% increase) in this last cycle, Greater Houston Partnership regional economist Patrick Jankowski says. We built 190,000 homes in that time frame, while laying off 221,000 people. This cycle, we added about the same amount of homes, but created 480,000 new jobs. We’ve got a 2.2 month supply of houses. (Six months is equilibrium.) CBRE Research director Sara Rutledge—here with the CBRE Houston research team, Angie Hamilton and Mark Reilly—says most sectors have historically high occupancy, and developers have built to demand with large amounts of pre-leasing, not speculatively like in the ‘80s.
3. We Aren't Commodities Traders
Hicks Ventures principal Pat Hicks (snapped with Brookfield’s Paul Frazier and Hicks’ Allison Knight) projects 12 to 18 months of difficult times ahead for developers. But never fear, developers underwrite 48 months out on the short end. He says landlords with good properties and good capital will do fine through a few bad years. And don’t worry too much about the spec projects delivering now, Pat says, because they’re from the big, smart, well-financed players (Trammell Crow, Skanska, etc).
4. Data Centers are Booming
Skybox Datacenters managing partner Rob Morris (left, chatting with the Greater Houston Partnership’s Jason Ford) says there will be $3.8 Trillion spent globally on IT next year, and oil and gas is the second biggest piece of that. (Government is the first.) Rob says the energy slowdown hasn’t impacted leasing; the last 30 days have been the strongest leasing activity he’s ever seen in Houston. Data demand is absolutely exploding, typically increasing 20% to 33% within a company each year. Houston added 825k SF of data centers last year, increasing our supply 36%, which is a big amount when you consider the average data center lease is 10k SF. Skybox signed its first Houston tenant around Christmas, a Fortune 250 firm that will bring its primary global production center here.
5. Industrial is Doing Well
TNRG president Mike Spears (snapped with our moderator Thompson & Knight partner Bruce Merwin) says bulk storage and transportation are doing great, and energy-related manufacturing isn’t down as much as you’d think from the news. He had some deals fall through, but says most have already come back, although they’re often asking for concessions now.