Energy Market, CRE at the Bottom
Participants at the recent Connect Houston conference weren’t under any illusions that things have been tough, especially for the energy industry. And Cushman & Wakefield’s Executive Vice President Christopher Oliver, in his presentation “Fueled Up: 20 Minute Energy Update,” didn’t sugarcoat the issue.
The downturn, he said, started the day after Thanksgiving, 2014. “If you’d said, two years ago, that crude oil would hit $40 a barrel, you would have been laughed out of the room,” said Oliver, whose specialty is tenant representation. “Today, if you suggest crude will hit $100 a barrel, everyone will laugh you out of the room.”
Perhaps so. Because adding to the issue was that, at the end of 2014, 80 office buildings were under development. With close to 40% of Houston’s downtown tenant base consisting of upstream and other energy companies, “the big negative impacts on real estate started to be felt in early 2016, and I think we’ll feel that through next year, at least,” Oliver said.
Another thing Houston will continue to feel in 2017 is more bankruptcies. “We’ll see round two,” Oliver said. “But it will be the tertiary companies, the smaller ones. The big stuff is behind us.” Still, with energy companies doing everything they can to cut costs, more shadow space is coming to the market, especially in the downtown submarket. Additionally, companies aren’t likely to start hiring until, at the earliest, 2019, that is, assuming $60 a barrel, Oliver said.
Though the oil price drop has benefited chemical companies on Houston’s east side, the sublet, shadow space and new deliveries will continue into various submarkets, leading to continued negative impact on office real estate.
Energy tenants, these days, continue to be studying the economics of their real estate very carefully, Oliver said. As such, his suggestion was that landlords cut tenants a little slack during this period. “Landlords that hold rates, or who are unwilling to work with tenants will have problems down the road” he said. “When you’re in a high-beta environment, it’s important to understand that tenants in your building will need help. Give them that help, and they’ll reward you on the back side, when the economy comes back.”
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