22 May Commercial real estate in Houston seen struggling for months to come
Houston’s already high commercial real estate vacancy levels will rise in the coming months as the market absorbs the impact of the COVID-19 pandemic, according to a briefing from the local office of NAI Partners.
While some deals are getting done, companies are slowing down the pace of office lease transactions for various reasons. Many are waiting to see how social distancing will affect their work and how they occupy their space, Dan Boyles Jr., a partner in the office properties group at NAI Partners, said at an online first-quarter press briefing Wednesday.
“Many of our oil and gas clients are hurting very badly and reevaluating what their needs are,” Boyles said.
One exploration and production company downsized from 150 people to 10 people in short order after shutting down production, for example.
The sector had not fully rebounded from the downsizing following the crash in oil prices in 2014. Houston’s office vacancy rate, already 21.5 percent, is expected to go higher as companies downsize, others put decisions on office space on hold and retailers struggle to pay rents.
“There’s only so much more they can do short of going out of business,” said Jon Silberman, managing partner of NAI Partners. “We’ll obviously see some going out of business, which will put more space on the market.”
Silberman stressed market dynamics today are not comparable to the dire situation of the 1980s: a decade when more office space was added to the Houston region than the three decades that followed combined. Most of the buildings under construction now have tenants lined up.
“We went into this in a rough office market and it’s going to get worse, but it’s not going to be an ’80s type situation,” Silberman said.
While people have been working from home for a couple of months and will continue to work remotely over the next 12 months, the impacts on employee productivity and company revenues have yet to be determined, Silberman said.
Houston could benefit from its sprawl and lack of reliance on public transportation such as dense cities of New York and San Francisco.
“Houston, for the first time, has the benefit of not having mass transit,” Boyles said.
On the industrial side, the vacancy rate for Class A industrial distribution buildings rose to 16.1 percent as concerns of an oversupply in the market mounted prior to the pandemic and recent drop in oil prices. Newly completed buildings pushed the overall vacancy rate to 7.9 percent.
Occupancy and rental rates for single-tenant buildings 40,000 square feet and under have remained healthy as owners of the new large buildings are unwilling to divide the spaces that small, said Travis Land, an NAI partner.
Despite government restrictions still limiting the number of customers at retail locations, businesses were signing leases this month, said Jason Gaines, senior vice president for retail. They do, however, expect landlords to work with them before committing to rent a space.
Businesses that need to build out their storefront before opening — meaning they’ll have to hire an architect, draw up plans and secure permits, a process complicated by the permitting center moving online — are asking landlords for a break to accommodate timelines made uncertain by the novel coronavirus.
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“All the landlords that we’ve worked with, for anything besides opening up a space that’s ready to go and will be open in two to three months without a permit, they’re willing to just write of 2020,” he said. “The idea being… I’m going to offer you some construction period here to get that lease signed now, get a commitment now and give you some flexibility here as thanks for taking on… an uncertain world.”
Some in the food and beverage industry have been able to secure longer-term accommodations meant to help them survive until business recovers.
According to Gaines, a general rule of thumb for landlords is to charge rent equivalent to about 10 percent of a restaurant’s gross sales. Since few restaurants could afford to pay 10 percent of their normal revenue during this economic crisis, some landlords are entering temporary arrangements in which restaurants pay only half their base rent, plus 5 percent of their gross sales for a number of months.
“There is more of a partnership attitude right now,” he said. “The name of the game in retail has been occupancy for years… and if it costs you three to six or even nine months of not getting as much rent — as long as you’re not up against some sort of lender pressure — it’s better to weather an undermarket rent for a period of time that’s relatively small in the scheme of things (to ensure) your project is gainfully occupied with long-term tenants.”