November 9, 2016
The election cycle that added the term “President-Elect” to Donald Trump’s name consisted of a long, drawn-out, nasty battle. As such, one question put to panelists at Connect Houston’s recent “State of the Market: A 2017 Outlook” was how the election might impact Houston’s commercial real estate sector.
“We can talk about the nightmare of this election, but the down ballot will have a larger impact on business in the United States,” said J. Patrick Duffy with Colliers International. He noted that both sides of the aisle are looking at capital gains taxes, as well as the Obamacare tax. And, if the 1031 exchange rollover provision goes away, “that will eliminate a huge source of income for retail development,” Duffy said.
Elections aside, oil price volatility has had – and continues to have – an impact on commercial real estate, especially office. Drew Morris with Savills Studley said downsizing is adding more shadow office space to the market. To top it off, landlords aren’t cutting lease rates. “Landlords can sustain 80% occupancy; they’re still making money,” Studley said. “So there is no reason for landlords to cut rates.” The higher rates are forcing tenants to either wait on the sidelines, or to take shorter-term leases.
Multifamily is also struggling, the victim of job reductions and many more deliveries. Yet Vic Clark with the Hunt Mortgage Group indicated that those deliveries are leasing up, if more slowly. “Houston is at the bottom,” he said. “We might stay there for another six months, then see an uptick.”
The story is a little different for industrial, with JLL’s Jeff Venghaus likening the market to a tale of two cities. “Northwest Houston is definitely softening, it’s challenging for energy groups,” he said. “But what you’re seeing on the east side is a run-up, because of the plastic and petrochemical industries.” Then there is e-commerce. “E-commerce has driven industrial, especially with the increase of discretionary income due to the low price of gas. But that will run out, over time,” Venghaus said.
Then there is retail, a sector in which space is at a premium. “The vacancy rate is 5.6%, and half of what we’re delivering in 2016 and 2017 is being absorbed in one quarter,” Duffy said. Though some spaces are difficult to fill, “retail is a happy place in the greater Houston market,” he commented.
Retail real estate might be a happy place for Houston, but sales did drop by 4% between 2015-2016. Duffy isn’t worried, however. “Retail sales are down to where they were in 2013,” he noted. “We’re back to normal. It just feels like we’re slower, because we were going so fast.”
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