Texas Real Estate Business

OCT 2017

Texas Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in Texas.

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38 • October 2017 • Texas Real Estate Business www.REBusinessOnline.com H ouston's office market has slogged through three years of soft-to-negative rent growth compounded by a high volume of new deliveries. CoStar's second-quarter market report on the sector identified negative absorption and rent growth of 2,309 square feet and 3.4 percent, respectively. When Hurricane Harvey hit, many feared the fortunes of Houston's em- battled sector would go from bad to worse. Texas Real Estate Business contacted several brokers active in the Houston office market for more insight on the true extent of the damage. Among the participants were Rand Stephens, managing director of Avison Young's Houston office; André Granello, own- er of Cresa Houston; Blake Virgilio, vice president of brokerage services at Caldwell Cos.; and Patrick Duffy and Greg Cizik, president and principal, respectively, of Colliers Internation- al's Houston office. Their edited responses follow: Texas Real Estate Business: Can you connect the dots between Har- vey, oil prices and Houston's office market? Rand Stephens: Overall, the Hous- ton office market came through Har- vey with little flooding, so there hasn't been much of an immediate, significant impact on the office mar- ket. Or in other words, not enough in- ventory was affected on a broad scale to inflict major changes in rental rates or occupancy. As for oil, some traders may have thought the storm was go- ing to impact prices and made short- term trades based on that perception. André Granello: Oil prices only slipped in the five days following Har- vey, having since rebounded sharply. The disruption caused by Harvey relative to the refineries and pipelines has persisted, but these types of assets are slowly coming back on line. About 40 buildings sustained some level of damage during the hurricane and it has caused absorption to rise in anti- quated buildings willing to do short- term leases. Sublease opportunities have gone quickly to satisfy tenants and end-users' need for temporary space. Blake Virgilio: Refining was on hold for a few days, causing invento- ries and supply to increase temporar- ily. Some tenants took sublease space off the market as contingency plans. This kind of activ- ity, along with more short-term leasing activity, will help the market slightly in the short term. Patrick Duffy: It's a little early to connect those dots, but there will be a bit of a "broken- window" economy in Houston for a while. This will ben- efit properties not impacted by Har- vey at the expense of those that were impacted. Those looking for tempo- rary space will find it in short-term sub- leases, as well as through landlords' willingness to offer short-term leases while their building is being repaired and they search for long-term replace- ment tenants. Greg Cizik: Most leases give land- lords time to fix the premises before the lease can be terminated, so short- term subleases will work out well for those displaced. In the longer term, however, buildings with chronic flooding risk will be hard-pressed to recover. TREB: What are the most impor- tant elements to note when assessing water damage to an office property? Stephens: Most of the flooding was relatively minor, which would poten- tially impact garage basements and first floors in the main buildings. Most of the damage can be repaired quickly, so there shouldn't be any long-lasting ef- fects. In cases with extreme flooding, there could be long- term structural issues and mold, as well as electrical and telecom issues. Granello: The most important thing to consider when assessing water damage to an office property is struc- tural integrity. How many days did the property sit in water? Have the septic, gas or water lines or petrol tanks been compromised? Careful appraisals also need to be made of the basement, ga- rage and lobby of any buildings that might have taken on water. Virgilio: Usually it's the infrastruc- tural elements that require the most repairs: elevators, utilities and other mechanical systems. Duffy: The majority of office prop- erties hit by flooding — we believe the number is approximately 40 out of 1,200 office assets in the market — had issues with stairwells and elevator pits, as well as some flooding on the ground floors. But for the most part, the damage was minimal. Once water is removed and any damage repaired relative, a new inspection must occur before the buildings can be re-opened for occupancy. TREB: Pre-Harvey, the consensus was that stabilizing oil prices would cut into office vacancies and facilitate gradual rent growth in 2018. How has Harvey changed that outlook? Stephens: It's hard to imagine how Harvey could help the office market. A big concern lies in how corporations will perceive Houston going forward, and whether flood concerns will affect their consideration of Houston as a lo- cation for their businesses. Granello: That outlook hasn't changed very much. Harvey has defi- nitely helped the short-term office sublease market, but that space ab- sorption will be short-lived as build- ings reopen. The gradual rent growth forecasted for 2018 resulting from oil Dallas/Fort Worth 15455 Dallas Pkwy Suite 400 Addison, TX 75001 972.934.4000 Houston 9805 Katy Fwy Suite 800 Houston, TX 77024 713.744.7400 Visit us online to view 600+ available Texas properties. www.lee-associates.com $12+ BILLION Annual Transaction Volume 58 Lee Offices Nationwide 890 AGENTS Nationwide And Growing... Local Expertise. International Reach. W o r l d C l a s s . Rand Stephens Avison Young Blake Virgilio Caldwell Cos. Patrick Duffy Colliers HOUSTON OFFICE SECTOR CAN REBOUND QUICKLY Brokers in Houston are confident that Harvey's long-term impact on office market will be minimal. Interviews by Taylor Williams

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