Deep Dive into Why Houston and Oil Tied at the Hip

HOUSTON (Houston Bisnow) – May 20, 2020 – Houston’s Energy Corridor experienced a major economic shock during the 2014-2016 oil downturn, when the energy industry shed more than 90,000 jobs and vacancy rates in that market went from around 5% to 21%, exacerbated by the delivery of new office inventory.

Not fully recovered from the last downturn, the submarket is now contending with the latest decline in crude oil prices, which could elevate the vacancy rates and dampen absorption in the Energy Corridor for the next two years.                                                                                                                                                                                                                                                                                                                      

“In our current forecast, so far, we have vacancies going up by the middle of 2021 to around 23%, from where they are at 21%,” CoStar Advisory Services Senior Consultant Juan Arias told Bisnow.

Including sublease listings, availability is already around 25% in the submarket, and likely to grow as absorption potentially turns negative this year.

Economists had already predicted a downturn in the energy sector, which was anticipated to dampen Houston’s economic growth this year. Those expectations have taken a sharp downward trajectory, reflecting the dramatic effects of the coronavirus pandemic and a price war between two of the world’s largest oil producers, Saudi Arabia and Russia. “This will likely hurt as keenly as any recession we’ve documented,” Jesse Thompson, a senior business economist at the Houston branch of the Federal Reserve Bank of Dallas, told Bisnow.

The energy sector is deeply tied to Houston’s office market, influencing both demand and rent prices. When there is a downturn in oil and gas, the office market is usually the first to reflect an impact. Last week, OPEC reached an agreement to cut 9.7 million barrels per day of global oil production. Many speculators hoped that by reducing production, oil prices might have a chance to stabilize — with less supply, pricing might increase. But while it may be a historic production cut, the reality of how the OPEC decision will affect oil prices is actually less significant. “They’re not cutting from where they were producing last month, they’re cutting from where they were producing at an earlier time,” Thompson said. “As far as the market’s concerned, the net cut will be smaller, somewhere in the order of between 7 and 8 million barrels per day, depending on compliance and a bunch of other factors.”

An even bigger problem is the global decline in demand. Global energy demand in April is expected to fall by 29 million barrels per day from a year ago, down to a level last seen in 1995, according to the latest oil market report from the International Energy Agency. For the entire second quarter of 2020, demand is expected to average about 23.1 million barrels per day lower than Q2 2019. That plummeting global demand for oil means that even with the major OPEC production cuts, oil prices won’t see much improvement. “You’re still in a dramatically oversupplied market,” Thompson said. “We’re actually physically running out of space to store excess crude very quickly.” The combination of a major oil downturn and the coronavirus pandemic doesn’t bode well for Houston’s economy. Though the city has made strides in diversifying its workforce across other sectors, energy is still a dominant force in Houston.

“Oil markets are always the differentiator between Houston and the rest of Texas, and Houston and the rest of the country,” Thompson said. “When oil markets are doing poorly, then Houston is going to underperform the rest of the country.” The timeline for the recovery of Houston’s broader economy is uncertain, but will be impacted by how quickly coronavirus-related shelter-in-place orders are rolled back so people can return to work. However, Thompson said that it could take as long as 18 months to two years for Houston to recover, even with the OPEC production cuts, as huge global inventories will continue to weigh on prices through 2021. “Any kind of recovery that we might see on the other side of the virus effects is going to be muted by that lackluster recovery, just off the inventory side,” Thompson said.

Houston Outlook – 4/19/2020

HOUSTON Outlook – (Wells Fargo) 

Nearly 380,000 Houstonians have filed for unemployment insurance between March 21 and May 2. Sectors with the most claims include full-service restaurants, offices of dentists, temporary help services, department stores, and limited-service restaurants. Local claims will likely top 400,000 by the end of May. Houston’s unemployment rate will mirror the national rate, hitting the mid-teens in April and possibly reaching 20 percent in May.


U.S. Trends

Baker Hughes reports the number of rigs actively drilling for oil or gas fell to 339 in mid-May, a 57.4 percent drop from since the first of the year. There are fewer rigs working in the U.S. today than there were at the bottom of the fracking bust when count fell to 404 rigs in May ’16.


U.S. Outlook

The U.S. is in a severe recession caused by the sudden shutdown due to the COVID-19 pandemic. Since the lockdown began, the nation has lost 21.4 million jobs. Employers cut 881,000 in March and another 20.5 million in April, the largest one-month loss in the nation’s history. Losses already exceed those of the Great Recession, in which 8.7 million Americans were laid off.


Texas Outlook

More than 1.8 million workers in Texas have filed initial claims for unemployment insurance since mid-March. Though claims peaked in early April, they remain elevated as the Texas Workforce Commission struggles to process a backlog of applications. Employment data for the state and its 25 metro areas won’t be released until May 22, but unemployment rates and job loss percentages will likely mirror that of the U.S.


Energy Outlook

The oil markets have begun the slow and painful recovery process from the collapse brought on by the COVID-19 pandemic. At the peak, 4 billion people lived under some form of restriction or isolation, according to the International Energy Agency (IEA). Since mid-April, 65 countries have reopened. IEA expects the number of people living under restrictions should drop to 2.8 billion by the end of May. Another 85 countries will ease restrictions in June.


Record US Canceled Deals Surge During Pandemic

UNITED STATES (CoStar) – April 23, 2020 – In the second month of the U.S. economic shutdown, commercial real estate buyers and sellers have canceled pending sales and contracts at a pace never before recorded by CoStar. More than 17% of deals that were scheduled to close in April were called off.

The canceled deals through the first three weeks of the month show the enormous impact the coronavirus pandemic is having on investor sentiment. And the percentage, not yet a reflection of a full month, is likely to increase. For comparison’s sake, the amount more than triples the previous full-quarter high of 5.6% in the first quarter of 2008 as the Great Recession was kicking in.

About 330 deals have been nixed for the month as of April 17, according to CoStar data, which shows asking prices for 289 properties that add up to about $506 million. Without all the prices listed, the total amount stands to be higher. Los Angeles saw the most deals called off, at $42 million, followed by Atlanta at $39 million, Chicago at $36 million, Boston at $31 million and San Diego at $24 million.

Individual property owners backed out of the largest percentage of deals — at least 40 of them totaling $137 million, or about 27% by dollar volume. Regional developers accounted for the second-highest total at $49.5 million.

“I’m certainly not surprised by how large these numbers are,” said Robert Calhoun, a managing director and senior economist for CoStar. “I don’t know how a buyer or lender could get comfortable underwriting any deal given the uncertainty on future cash flows.”

“We just don’t have any idea right now how bad the recession will be, how long it will last, and what shape the recovery will take coming out of it. And the effect on real estate cash flows is even more uncertain,” Calhoun added. “How will it translate to changes in occupancy and rents going forward when 25 million jobs are lost in a single quarter?”

By property type, hotels led canceled deals. Investors called off 32% of scheduled hotel property sales with asking prices totaling more than $41 million. The dollar volume of canceled deals was higher than the total of $29 million in sales completed so far this month. That is the only property category in which that disparity occurred.

The dropped hotel deals are just another sign of that sector being in the bull’s-eye of the impact from the spread of the pandemic, said Jan Freitag, senior vice president of lodging insights for STR, a CoStar Group company that tracks hotel data around the world. CoStar is the publisher of CoStar News.

“Corporate transient and leisure demand has almost completely dried up,” Freitag said. “Buyers are wondering what a new normal with regards to cash flow looks like and are deciding to remain on the sidelines until guests return.”

“It will be a while until buyers and sellers will be able to agree on how to underwrite the 2020 results into the future,” according to Freitag. Million-dollar deals continue to close, however, indicating that the market has not come to a complete halt, he added.

Notably, the value of dropped deals continues to rise. Since the totals were compiled, Xenia Hotels and Resorts said it terminated an agreement to sell the 492-room Renaissance Austin Hotel in Austin, Texas, for $100.5 million. The deal did not close by an extended deadline and was canceled. Xenia said it held on to the unnamed buyer’s $2 million deposit, which was previously released from escrow.

CoStar’s dropped deal count in April for other property types is as follows:

  • Multifamily: 57 deals, 19.1% by deal volume.
  • Miscellaneous: 21 deals, 18.4%.
  • Office: 59 deals, 13.9%.
  • Land: 70 deals, 13.1%.
  • Retail: 80 deals, 12.6%.
  • Industrial: 35 deals, 8%.

The dropped deals will likely further slow the volume of U.S. property sales in the second quarter. The number of new sales tracked by CoStar from county government offices across the country are only about a quarter of what was received in the first two months of the year.

Forecasting Commercial RE Winners & Losers In The Post-Pandemic World

HOUSTON (Houston Chronicle-Nancy Sarnoff) – April 3, 2020 – The effects of the new coronavirus on commercial real estate will be long-lasting, as restaurants close, retailers file for bankruptcy and companies that occupy office space rethink their entire workplace strategies.

Previous health-related downturns have been brief and followed by relatively quick recoveries, but the amount of time it will take for the economy to rebound from the coronavirus is less predictable, Ben Breslau, chief research officer of JLL Americas, said Thursday on a conference call to discuss the pandemic’s impact on commercial real estate leasing and the economy.

There will be winners and losers among, and even within, different property sectors.

How retail tenants have been affected by the pandemic has been sharply divided. Grocery, liquor, home improvement and other stores states have deemed to be essential are doing well. Restaurants, bars and mall stores are feeling the most pain as consumers stay home.

When dining rooms do reopen, it will take longer to get back to their previous sales levels. Many many are expected to return with 50 percent capacity to allow for safe social distancing, said Naveen Jaggi, president of Retail Advisory Services at JLL.

THE NEW OFFICE: What will the post-pandemic office look like?

Jaggi questioned whether the $1,200 stimulus checks going to many Americans through the government stimulus act would stimulate the greater economy if most retailers are still closed.

“There’s a limit to where it will go,” he said. “It’ll go to grocery stores or to pay off credit card debt, which is a good thing, but doesn’t do much to stimulate the economy.”

Technology will play an important role in the recovery of the retail sector. Initiatives like those by Nuro, a San Francisco-based company developing self-driving delivery vehicles, will likely be sped up because of the hesitance from consumers to return to pre-pandemic shopping habits. Kroger and Walmart are already on board with the technology, and other grocers are testing similar services.

Yet more retail space will become vacant amid a new wave of bankruptcies.

“For those retailers already under heavy stress, the ones that have gone through Chapter 11 reorganization multiple times, this may be the last nail in the coffin,” Jaggi said.

The trade group wants another of assistance that would allow business owners to retain and rehire employees and quickly reopen to spur economic activity.

“Although the loan programs instituted in the CARES Act provide a down payment on economic support for Main Street businesses, additional liquidity will be required for especially impacted industries and businesses to avoid an unprecedented economic crisis,” according to a letter ICSC is urging its members to send to their members of Congress.

Do we need offices?

The office market faces different challenges. Office tenants have spent years cramming more people into smaller spaces. COVID-19 could reverse that trend.

“We expect a lot of clients to consider less density in their workplace and examine the wisdom of shared desks,” Tom Maloney, an office tenant representative for JLL, said.

‘A VORTEX OF PROBLEMS’: Coronavirus fallout slams tenants and landlords

After discovering some of their employees can be just as productive at home, companies may consider letting them continue to work remotely two or three days a week, assuming they have the technology infrastructure to handle it. That may allow office tenants to reduce their footprints.

“In the short term, many of our clients were surprised by the ease of the transition and continued productivity of their people,” Maloney said.

Still, some remote communications tools are clunky and team collaboration has been missed.

“The work-from-home transition was smooth, but now people are recognizing some of the shortcomings of having a deployed workforce,” Maloney said.

Until the shape of the recovery becomes clear, tenants with expiring leases are asking their landlords for short-term renewals.

For those that had been looking for space, property tours have come to a halt and most non-critical leases are on hold. Property owners are turning to video tours to show space.

For tenants struggling to pay the rent, communicating with their landlords upfront could avoid problems later.

“If there is a way to negotiate this consensually, you want to go there,” said Eric Stern, partner and co-leader of the real estate practice with Morgan Lewis & Bockius in Philadelphia. “You don’t want to be necessarily staking out a position where a landlord is going to have an adverse reaction.”

Some landlords are offering relief in terms of parking charges and delayed start dates on leases due to stay-home orders. But in many cases, landlords can’t provide rental relief without getting their lender’s approval.

Governor Announces Real Estate is Essential

AUSTIN (Texas Realtors) – March 31, 2020 – Today, Gov. Greg Abbott issued an executive order setting a statewide standard for essential services that may continue to be provided, including residential and commercial real estate. Read Gov. Abbott’s order that utilizes the U.S. Department of Homeland Security’s guidelines for identifying essential services, which includes real estate highlighted on Page 13. Here are some key points:

·         Supersedes existing local orders only where those local orders may have previously restricted essential services or where they were more permissive on gatherings

·         Even for essential services, telework or online work should be used as much as possible, limiting in-person contact (following CDC guidelines) unless absolutely necessary

This is a positive step for Texas REALTORS®, as real estate professionals statewide may continue to serve clients while demonstrating care for the health and well-being of the greater public welfare.

Space City Retail Leasing Activity Drops 7%

HOUSTON (NAI Partners) (From Texas A&M Real Estate Center) – March 3, 2020 – Local retail occupancy was 94.3 percent in January, down 10 basis points from this time last year, according to NAI Partners.

Of the 3.2 million sf currently under construction, about 66 percent has been leased.

The market recorded 532,493 sf of leasing activity​​, 7 percent less than the year-to-date activity from January 2019.

Net absorption was 175,489 sf, with new supply delivering 557,197​ sf of which 72 percent is occupied.

The average asking retail rental rate was $17.92 per sf on a triple net basis, up 1.4 percent.​​

2019 Texas Economy

REAL ESTATE CENTER Texas A&M (Luis Torres, Wesley Miller, Paige Silva, and Griffin Carter) – Feb 14, 2020

Texas Population grew by 367,215 or 1.3% compared to 0.5% for the rest of the nation. Texas was 1st in the country in terms of absolute change.

Texas Non-Farm Employment added 309,700 jobs exceeding national groth by a full % point at 2.5%.

Center predicts decelerating job growth due to a slower national and world wide economy and a stagnant energy sector.

Texas commodity exports improved 5.5% after adjusting for inflation, setting new annual record and accounting for a fifth of the nation’s exports for the 1st time in series history.

West Texas Intermediate crude oil spot price dropped $8 from 2018 to just shy of $57 per barrel due to increased worldwide oil production and US-China tariff tensions.

Details Link Below

Foreign Investment in US Falls to 5-Year Lows

US (CoStar) – February 13, 2020 –Foreign investment in U.S. real estate dropped significantly last year, falling to its lowest level in five years.

Foreign investors participated in $37.8 billion in deals in the U.S. last year, down 42% from 2018, according to CoStar data. Foreign investor purchases accounted for just 5.4% of last year’s total volume — that is off from highs of 11.4% in 2014 and 2015. 

The drop-off comes as foreign investors sat on the sideline for almost half the year due to the prospects of rising costs for capital and properties in the U.S.         In addition, the flow of money from Asia shifted from major buyers in Singapore and China to emerging buyers from South Korea, Japan and Hong Kong.

Investors from Singapore, which had acquired more than $5 billion of U.S. properties in 2017 and again in 2018, completed only $1.87 billion in buys last year. Moreover, Singapore-based Global Logistics Properties sold off its U.S. industrial portfolio to U.S.-based Blackstone Group for $18.2 billion, making Singapore the largest net seller of U.S. properties last year.

Investments from U.K.-based buyers shrank both here and across the pond in their home market, while U.S. investors stepped up both here and in the U.K. In addition, capital from Germany continued to flow to both markets, with investors from Germany being the largest net buyer of U.S. properties.

Richard Barkham, global chief economist and head of Americas research for CBRE, said in an interview with CoStar that there were three reasons for the drop in U.S. activity by global investors.

The first has to do with what happened in 2018. The previous year included a couple blockbuster deals involving giant retail-oriented real estate investment trusts. Unibail-Rodamco SE, Europe’s largest commercial property owner, bought Westfield Corp. for about $15.8 billion in the biggest property acquisition since 2013. Westfield was the 12th largest U.S. retail property owner at the time. In addition, Toronto-based Brookfield Asset Management paid $15 billion to acquire another retail giant GGP.

Big deals like that didn’t happen in 2019.

Also, 2019 kicked off with the markets expecting additional interest rate boosts from the Federal Reserve. The prospects of higher interest rates coincided with the value of the U.S. dollar rising. The combination would have driven up acquisition costs for foreign investors, which kept them on the sidelines for the first half of last year, Barkham said.

However, by mid-year 2019, the Federal Reserve reversed course and started lowering interest rates. That prompted a return of foreign capital in the second half of the year with volume in the second half 24% higher than in the first half.

Thirdly, Barkham said China’s decision to place restrictions on commercial real estate investments in the U.S. and other markets meant one of the largest players in the past had largely left the field.

In late 2017, China’s government announced efforts to restrict outbound investments in foreign real estate and redirected investors to different world destinations in Europe and Asia.

With no signs on the horizon that the Federal Reserve could start raising interest rates again, “we expect to see Asian capital return to the U.S. this year,” Barkham said, particularly from investors in such markets as Singapore, Hong Kong and South Korea.

By dollar volume, Canadian firms were both the largest buyers and sellers of U.S. properties among foreign investors. But overall, their volume of activity was relatively flat as there was a lot of profit taking occurring last year, according to Amy Erixon, principal of and managing director for Investments of Canada-based Avison Young.

“Some of the big plans like [Public Sector Pension Investment Board] were harvesting some gains because they went early into New York and tripled their money. So they sold and rotated into other property types,” Erixon said.

Texas 2nd Most Popular State in 2018 For Relocating-Houston 1st in Texas

​​​​AUSTIN (Texas Realtors) – January 25, 2020 – Texas ranked second in the nation for relocation activity in 2018, according to Texas Realtor’s 2020 Texas Relocation Report.

According to UHAUL,  Houston holds steady as the No. 1 U.S. Destination City according to the latest U-Haul migration trends report, staking its claim to the top spot for the 10th consecutive year. (

“For the sixth year in a row, more than half a million people chose Texas as their new home,” said 2020 Texas Realtors Chairman Cindi Bulla. She cited the state’s business-friendly environment and diverse culture as primary drivers.

According to the report, which analyzes the latest migration data from the U.S. Census Bureau and U-Haul, Texas welcomed 563,945 new residents in 2018.

The net gain of out-of-state residents increased 78.1 percent from 57,173 in 2017 to 101,805 residents in 2018.

Among U.S. states, the highest number of new Texans came from California (86,164), Florida (37,262), and Louisiana (29,108). The number of people who relocated from California to Texas increased by 36.4 percent compared with 2017.

At the metro level, Los Angeles-Long Beach-Anaheim, New York-Newark-Jersey City, and Chicago-Naperville-Elgin produced the highest volume of residents relocating to Texas​.

At the county level, Harris County led the state with a net gain of 80,572 out-of-state residents.​

The Lone Star State also welcomed 201,559 new residents from OUTSIDE the United States in 2018.

Texas ranked third nationally for the number of residents moving out of state (462,140) in 2018. The most popular out-of-state relocation destination for Texans was California (37,810), followed by Oklahoma (31,551) and Colorado (26,930).​​

The 2020 Texas Relocation Report was based on data from the 2018 American Community Survey 5-Year Estimates by the U.S. Census Bureau as well as the 2019 U-Haul National Migration Trend Report.

Houston Industrial Construction At Record High

HOUSTON (REBusiness Online) – January 10, 2020 – At the end of the year, a record-high 19.1 million sf of industrial space across 112 buildings was under construction in the metro, according to Avison Young.  Year-end vacancy stood at 6 percent, and two​​ million sf was absorbed in the fourth quarter.

Four of the five largest projects are build-to-suit developments totaling almost 3.9 million sf.

The largest of those, Medline’s 1.3 million-sf project off I-10 in Katy, broke ground during the fourth quarter.​