Office Market in Houston Melts Down…”Watch the banks.”
by Wolf Richter
WolfStreet.com
January 26, 2016
Commercial real estate is highly leveraged. Debt is everything. The entire math is based on high rental rates and low vacancy rates. Without them, the debts cannot be serviced. But now in Houston, both are shooting in the wrong direction.
OK, Houston’s economy is diversified, they say. The oil bust hurts, and there have been waves of layoffs of highly paid engineers, but it won’t hit the city as bad as the last big oil bust did, they say.
And yet, the amount of office space vacated by companies that are trying to slash their operating expenses and that is now on the market as sublease space has spiked 69% by the end of 2015, to 7.6 million square feet (msf), according to real-estate services firm Savills Studley. And they “continue to sit on the market.”
It’s going to get worse:
New sublease blocks are expected to hit the market in 2016, particularly in the CBD [Central Business District]. Shell is projected to vacate 250,000 sf in One Shell Plaza and EP Energy, likewise, is anticipated to leave 100,000 sf in the Kinder Morgan Building. Shell would likely also shed space at BG Group Place should its pending $70-billion acquisition of BG Group clear governmental hurdles and finalize.
Many large tenants who paid at the very top of the market in the last few years warehoused space in anticipation of continued headcount growth. As a result, many firms had surplus space even prior to the implementation of layoffs in the last year. In 2016, the office market should see more shadow space listings….
Occupancy, after five years in a row of increases, fell by 1.4 msf (“negative absorption”), the biggest decrease in occupancy since 2009. Going forward, M&A and bankruptcies “will contribute to additional negative absorption” and will hit the vacancy rate. It already spiked to 23.2%.
And it’s going to get even worse:
The Rest…HERE
