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    Coronavirus, Oil Prices Send Shockwaves Through Houston Real Estate

    Sean Pavone/Getty Images

    The Houston office market is poised to become the next commercial real estate victim of the economic shock waves from the coronavirus crisis.

    So far, most of the fallout in the commercial property world has been in lodging, malls and the other property types that have been hit the hardest by the evaporation of travelers and shoppers. Office-building landlords are relatively insulated because their tenants sign long-term leases.

    But Houston is dependent on the fortunes of the oil-and-gas industry, which has been sent into a tailspin by weakened oil demand combined with the failure of the Organization of the Petroleum Exporting Countries and Russia to agree on production cuts. Owners, brokers and others in its office market are bracing themselves for layoffs, bankruptcies and downsizings that will translate into lower rents, higher vacancies and foreclosures.

    “This coronavirus has really been a kick in the stomach,” said Bruce Rutherford, who heads the Houston-based global energy practice for JLL, the Chicago-based commercial real estate services giant.

    Houston’s energy sector could lose 8,000 to 10,000 jobs in the wake of the current turmoil, Patrick Jankowski, head of research of the Greater Houston Partnership, said Monday. “That could even nudge up to 12,000,” he said.

    Some of the world’s largest real-estate investors own property in the Houston office market, which includes more than 213 million square feet. Major players that could feel the pain include Toronto-based Brookfield Asset Management Inc., Invesco, Metropolitan Life Insurance Co., Nuveen Real Estate and Hines, Houston’s largest homegrown commercial real-estate firm.

    Houston’s problems also are closely watched along with other property markets because of broader concern that upheaval in the real-estate world may intensify the growing storm in the broader financial system. With some $3.6 trillion commercial real estate debt outstanding, a spike in defaults could further unhinge banks and other financial firms.

    Defaults in the Houston office market already are rising. Last week, data service Trepp LLC reported that a $69.7 million loan backed by a 471,000-square-foot Pinnacle Westchase office building in the Houston area was transferred to a special servicer because it was facing “imminent default.” A representative of the building’s owner, Interventure Advisors, couldn’t be reached for comment.

    Still, participants in the Houston market feel that it is positioned better to survive hard times now than in previous downturns. The city’s economy, which has weathered many an oil bust, has diversified in recent years adding tens of thousands of jobs in health care, global trade and other non-energy related businesses.

    Also, in past recessions, more buildings than today were owned by smaller investors and highly leveraged firms that didn’t have the capital to weather a lengthy disruption. “Most of the Houston buildings today are much more institutional with much more conservative capital structures,” said Mark Taylor, senior managing director of CBRE Group Inc. “That’s a big difference.”

    When the coronavirus crisis hit, Houston’s office market was just beginning to recover from the sharp decline in energy prices of 2014, which was triggered in part by an oil glut. The availability rate, which includes vacancy and sublease space, was beginning to decline after rising from 12% in 2013 to about 23% in 2018, according to CBRE. It was 22.4% at the end of the fourth quarter.

    Hopes that the recovery would continue were dashed when repercussions from the coronavirus crisis sent oil prices into a nosedive. “People are laying down rigs left and right and cutting capital budgets,” said Mr. Rutherford of JLL. “The first to feel this are engineering and services companies. And they are heavy office users in Houston.”

    This could be bad news for developers who have made big bets on Houston in recent years. For example, a venture of Hines and Ivanhoe Cambridge is developing Texas Tower, a 47-story skyscraper on the former site of the Houston Chronicle. Scheduled to be completed in late 2021, it is about 40% leased. A spokesman for Hines declined to comment.

    In December, Beacon Capital Partners purchased a 90% stake in Houston’s Bank of America Tower for $373 million. A spokeswoman for Beacon said in an email that the building will soon be 94% leased and is “as defensive an asset as you can possibly own today.”

    Some oil-patch cities are in worse shape than Houston because their economies haven’t diversified as much in recent years. For example, downtown Calgary is entering this crisis with about 11.5 million square feet of empty office space, according to CBRE, the equivalent of more than four Empire State Buildings.

    Unlike Houston, Calgary wasn’t seeing signs of a recovery. “It’s just bad,” said Greg Kwong, CBRE’s regional managing director in Calgary.

    The post Coronavirus, Oil Prices Send Shockwaves Through Houston Real Estate appeared first on Real Estate News & Insights | realtor.com®.

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