Houston Commercial Rents Plunge As Vacancies Hit 22-Year High

Tyler Durden's picture

There is seemingly no end to the growing problem of commercial real estate vacancies across the country.  And while we've spent a lot of time talking about the largest markets of New York and San Francisco, Houston, one of the hardest hit markets from the collapse of oil prices, is also in the midst of its own real estate collapse.  In fact, per a recent Q1 market update from NAI Partners, commercial vacancies in Houston have just reached a 22-year high.

Houston’s overall vacancy rate rose to 20.0% in Q1 2017, an increase of 100 basis points quarter-over-quarter and 260 basis points year-over-year. Net absorption stood at negative 778,758 sq. ft. as of the quarter’s end—on the heels of the more than 1.4 million sq. ft. of negative absorption for full-year 2016. In addition, both Houston citywide overall rent and leasing activity are down from last quarter, as well as from Q1 2016.

 

Meanwhile, the Houston market ended the first quarter of 2017 with negative 778,758 sq. ft. of net absorption after a brief recovery in early 2016.

 

And, after averaging just 3.3 million square feet in 2014 before the oil bust, the amount sublease space up for rent now stands at over 3x that level, or roughly 11.1 million square feet.

The overall availability rate, which measures the total amount of space being marketed for lease, rose to 25.7%, an increase of 70 basis points from the previous quarter’s 25.0%. Available sublease space has dipped from a peak of 12.0 million sq. ft. in Q3 2016 to 11.5 million sq. ft. at the end of 2016 and now settling at 11.1 million sq. ft. as of the first quarter of 2017. Before 2014, available sublease space in Houston had been averaging about 3.3 million sq. ft. Since the oil downturn began to manifest in the office market in 2014, available sublease space in Houston has more than tripled. With everything considered, the sublease market seems to have reached its bottom; however, there is more than 4.5 million sq. ft. of sublease space that will be returned to landlords in the form of direct space through 2019. The large sublease market is a critical element in regaining positive momentum and could be viewed as beneficial as the big blocks become more competitive.

 

All of which has, of course, pushed rents lower...

 

...but, as usual, has had minimal impact on the willingness of builders to continue adding new capacity, with roughly 2.0 million square feet of new real estate currently under construction, and about half of that space available for lease.

 

But we're sure OPEC will save the day for Houston real estate developers any day now...

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MrBoompi's picture

The rich can only buy or rent so much and for the vast majority of the rest their wages have not inflated like the real estate prices have.  If we want a sustainable economy we need to increase the spending power of a lot more people.  The velocity of money is in the fucking pits.  

NidStyles's picture

Keep pushing those prices down, so I can get a warehouse for cheap...

 

Easier to secure than a house, and plenty of room to store goods for sale or barter...

are we there yet's picture

Warehouses are taxable. Detroit is giving them away for free almost, but taxes and crime make it hard to store anything of value. Plus, the Detroit economy is poor long term, and that will suppress land values for a very long time.

NidStyles's picture

Depends on your municipal codes and whether you're buying or leasing.

 

Buying, I wouldn't buy anything in Detroit without an army of dudes to go move into it with me. Leasing, Industrial Gross leases negate your tax liability. Your costs are one lump sum every month. Either way, buying is preferable, as the codes for the building are easier to maintain when you turn it into a fortress. No one will bat an eye about you having barrels of acid either.

Xatos's picture

The Springwoods Village job is mine. I did the steel out there. Crazy to see it on ZeroHedge!

847328_3527's picture

Drive along I-10 west of Houston (Katy Freeway---also called "the energy corridor") and you'll see hundreds of thousands of sf of emppy office space....yet nothing can stop those builders.

I notice the small strip malls can make a go of it by renting space for yet one more Starbucks, another nail place and one more pizza joint and perhaps squeeze in a tiny donut shop.

As long as interest rates stay manipulatedly low, I guess these people can afford the loan payments on the empty office buildings despite zero tenants and zero rent.

are we there yet's picture

Yes I know the energy corridor off I10 in Houston. The lush high priced office space was built during fraudulent Enron. Now, for years the offices have heavy vacancies rather than adjust to reality in pricing. The premium office space now is in the woodlands where all the brightest and best Caucasians have gone. As always in real estate follow the demographics.

countryboy42's picture

I had to go there a couple of weeks ago for a class. What a shit hole. I do not understand how people can live like that. It took me 2 hrs to go from the I-10 at Katy to the NW side of town. I live near San Antonio, but don't visit often, and Austin (traffic at least) can suck a fat babys dick.

FreeShitter's picture

Houston and L.A have the worst traffic on the fucking planet.

NidStyles's picture

So like stop and go traffic on the I-10 going west to LA in Phoenix in the middle of the fucking day bad?

 

You look in who is in those cars, it's all young people, and you wonder what sort of responsilities they are neglecting to be on that highway in the middle of the day.

Freddie's picture

Houston is such a shithole. 

Filled with Trayvon New Orleans hurrican free shit army refugees and a lot of white meth trash.

Texan white males are usually scum who worship Trayvon NFL, NBA and NCAA rapists like sheep.

hendrik1730's picture

You just come over to Antwerp or Brussels ringways, Belgium. After 2 days, you run back home.

Déjà view's picture

Houston is the most diverse, rapidly growing major U.S. metropolitan area, and immigration has contributed greatly to its growth and diversity.

http://www.migrationpolicy.org/research/profile-immigrants-houston-natio...

If one likes Mexico...stray dog packs/dead dogs along motorways, litter/illegal dumps, crime, sticky stinky air filled with tons of mosquitos, cockroaches size of snickers bar and a troubled city pension system that considers an 8.5% return normal, then come on down...sit a spell...one will get used to it...DO NOT FORGET TO BRING SPANISH DICTIONARY!

Si Señor...my kind of place!

847328_3527's picture

Houston has gone down hill badly esp after Katrina.

Worse yet, the Sanctuary city of Houston now has yet another left wing pro-welfare Dem mayor, a soft-on-crime police chief (who was hired from Austin after he fucked that city up), and also now elected a Soros-funded DA. (Soros poured $500,000 to get this liberal DA elected and displace the tough on crime incumbent DA, Devon Anderson).

Property taxes are going to be increased in the Galleria area [get this] to support the FSA schools in north Houston around Spring Texas because their tax base in that diverse neighborhood is too low to keep schools running.

If you have to move to that area maybe think The Woodlands, Conroe, Sugar Land or Katy ... but stay away from Houston imo.

marathonman's picture

Moved out of Harris County 15 years ago.  So glad I left.

knarkworst's picture

Going to Antwerpen is like going back to a 1975 soviet City... Almost all of belgium looks poor BTW. 

wouldn't recommend. 

Pausebreak's picture

Lived in Houson in the 70s and the traffic was dreadful back then. For the past 35 years I  lived in Northern San Antonio and it is paradise compared to most big cities.

just the tip's picture

i had a solution for the traffic in houston, but they wouldn't do it.  one day, just before 5 o'clock rush hour, make all the roads in houston one-way north.  tomorrow morning it's conroe's problem.

Antifaschistische's picture

In California, before Political Correctness hit, they called it "white flight".   Which really meant decent people (both Mexican and Whitey) were leaving the "city" for the suburbs as "decent" living space got smaller and smaller.

Houston is the same.  There are some VERY nice parts of town...but they are shrinking every year.  Look at a Houston demographic map that shows English as a "second language" and you just say "holy shit!"   Combine that with the Katrina refugee's and you've got a giant ugly mess.

The "money" doesn't yet realize that it is being completly surrounded.  HISD is terrible.  Suburbia schools care WAY more about football than academics.  It's the perfect storm.  War may help oil prices...so Houston is one of those cities that may actually benefit in a mid tier SHTF.

Secret Weapon's picture

Our crime problem became significant after all of the Katrina trash brought their NOLA ghetto culture with them. 

countryboy42's picture

Hear ya. I remember the white flight in NOLA in the '70's.

As far as the sports in TX schools, one of the Comal HS STADIUMS has a jumbotron. Your team is the fucking UNICORNS! Jumping Jesus on a pogo stick. Did some other team already pick the Lemurs? The fighting LLamas? Well, guess i should not poke fun, my HS was the Gents. Our mascot wore a tux and top hat, lol.

Seems sports has gotten in the way of education, not to mention stupidity has taken over any semblance of learning.

A_V's picture

Lived in Houston for 40 years, retired nicely from O&G...in 2012

WHAT you see standing is a huge crap shoot...

Massive illegal population wondering if the exit (run back to the southern border) is not only really real, but possibly permanent, the real estate market (always the last real estate market to find a correction), is it just a product of the O&G market...or is it really tied to the overall market decline...

Houston has always seemed to slither by when the other states are adjusting to the true turmoil world wide.

Houston is the pulse...follow Houston for future success...

Déjà view's picture

O&G...

Elon Musk et al...

DoctorFix's picture

I remember going to Austin in the late 70's. It was actually really nice and easy to get around.  Now?   Hell no!

Rusty Shorts's picture

Didn't the .gov ship a bunch of New Orleans Black Matter to Houston after Hurricane Katrina?? I bet it's a charming place now,,,

Orly's picture

One hundred percent incorrect.

They came here, all right.  The murder and robbery rate spiked for three months, then went back to normal.

Most of the guys figured they didn't want to commit any more crime in Houston, Texas and went back home.  The good guys, who wanted to make something for themselves, are still here.

Katrina, I would say, was a win-win for Houston and a double-loss for New Orleans.

:D

hendrik1730's picture

Your analysis is correct and illustrates the effectiveness of a decent negative feedback response. Well known mechanism in e.g. process industry. You offend? Right, we kick your ass, and badly. Scumbags really quickly understand this.

Antifaschistische's picture

I personally don't know where the refugee's went.  But I do know, during that time there was new "section 8" (sorry if I'm using the wrong terms) property opening up in NICE parts of Houston.  (Check:  Memorial City Inn/Suites on I-10 just east of Bunker Hill)...and it NEVER went away.  I don't know where the people came from, but it aint your grandma.   And it makes no damn sense at all to stick no-income people in a neighborhood where lots (77024) are selling for $2 million an acre.  But...that's political correctness for you.

847328_3527's picture

Motel 6 and Extened Stay hotles also filled up with them and really turned to roach hotels and fairly unsafe. Austin also took in about 25,000 and never recovered ---crime there astronomical now with a killing and/or rape every day.

A murder in Austin in the 1990s was so rare. Now weekly.

WakeUpPeeeeeople's picture

I think this would be a wonderful opportunity to pause for a moment and pay tribute for the bounty of contributions the Black community have given society. Their peaceful and generous nature make them ideal neighbors. Their exceptional family values and parenting skills are unrivaled by any other race or culture. Their commitment to academic excellence enriches our schools and serves as an example to all who hope to achieve prominence as a people. Real estate values are driven up when the mix of African Americans into an area increases due to their caring and respectful nature. The Black community serves as an example of what can be achieved through enthusiasm for self improvement, hard work and a self-reliant can-do nature. Without their industrious and creative drive, we would be poorer as a nation. In fact, it is fair to say that the country couldn't survive if we did not have the Black community to support the other races.

Pausebreak's picture

Added to that is 100K of Africa and the West Indian's finest.  

Déjà view's picture

Houston has largest Nigerian community in U.S.

LetThemEatRand's picture

I spent three weeks in Houston for business a while back.  That was a long year.  

Orly's picture

Try to put things in perspective: this place is huge.  It's like the size of New Jersey.

I used to believe they would never be able to pave over the whole thing but now that they're getting close, it is going to be interesting to see what actually happens.

Peak concrete!

:D

LetThemEatRand's picture

They would pave the Gulf of Mexico if they could figure out a way to do it.  And I'm pretty sure someone is working on it.

Antifaschistische's picture

funny that you mention that....we have had "RECORD" flooding.   not because of "RECORD" rainfall, but because there's so much concrete now, and every single new piece of development over the last 20 years has started by hauling in 4 feet dirt to make run-off everyone elses problem.  lol...so, if you haven't been raised...you're out of luck.   We do have cool storms...but now, 5 inches of rain in two hours just can't drain off fast enough.

A_V's picture

I lived in Oak Forest (near Peyrol Station) for many years...survived all the 100 year floods...on my original 1940's plat...however the rice fields (aka subdivisions) have not fared well...

Déjà view's picture

Concrete Jungle...

Figure wasting half of a day running errands to 3-4 places around town...IF one can avoid road debris and broken down vehicle hazards...rubberneckers...accidents...

Mongoose's picture

Flooding actually happens. It's that yet to be understood, by many folks, phenomenon that concrete just won't absorb very much of the 3" Houston rain showers that happen fairly regularly.
As the sprawl continues, the flood control district feebly attemps playing catch up.

Back to killin' snakes

SanJoseMutza's picture

In Silicon Valley where I live commercial real estate projects are growing like mushrooms after a wet winter. However, increasingly the new office buildings are sitting vacant for long periods of time...for years in some cases. Other buildngs are only partially occupied, with entire floors vacant. In my 30+ years here I've seen this before. Hubris leads to over-building leads to collapsing rents leads to economic downturn. As 2017 continues it is a near certainty that layoffs will mount in the Valley.  

Freddie's picture

I recall going to San Fran and north bay probably before 1999 and it was a bust time.  Lots of vacancies.  I think just before the Internet took off.

Layoffs in the valley?  Is this when the fraud of the of social media scam companies finally implode?

Kamehameha's picture

Houston TX == SHIT HOLE!

Freddie's picture

LOL!  Who is the ass who down voted you?  Houston is a shit hole.

Moe Hamhead's picture

Wow! Houston---we have a problem! I recall Houston had a "last one out turn-off the lights" moment about 30 or 40 years ago. Or was it maybe even further back?

countryboy42's picture

Happens every few years. Boom/bust oil cycle. The port and med center seem to keep the lights on. At 47, this is the trird, maybe fourth time I have seen this happen.

Moe Hamhead's picture

Well the cancer center will always be a growth industry in Houston.

847328_3527's picture

East Houston [near those refineries] has some of the highest rates of retinoblastomas, liver cancers and lung cancer types in the world.

That's odd.

DoctorFix's picture

Correctomundo.  I've worked in the oilfield for decades and have always been amazed at the cancer rate amongst field hands.  Can't tell me something isn't going on there.  Probably due to all the chemicals used.  Got out.  Don't want to go back

Orly's picture

It was the late '70's/early '80's when the fallout from the OPEC oil fiasco and Jimmy Carter crashed real estate big time.  There are a lot more industries here now than just oil.

:D

Moe Hamhead's picture

That's the one I remember. People just walking away!, handing the keys over and saying "so-long"!