COVID-19 and oil instability could hit the city’s office sector especially hard
Emptied of its office workers by efforts to limit the spread of COVID-19, downtown Houston was already a ghost town before new unemployment projections began making the rounds two weeks ago. Now, with job losses expected to top 200,000 in the city, attention is turning to the potential damage awaiting the city’s office sector.
On March 31, Patrick Jankowski, senior vice president of research for the Greater Houston Partnership, estimated the Greater Houston Area would lose 150,000 jobs in 2020. But during a webinar conducted on April 14, Jankowski upped his projection considerably.
“It won't surprise me if we see 250,000 people [in the Houston area] have lost their job in March and April as a result of the COVID-19 and the social distancing,” Jankowski told his audience, adding that 180,000 Greater Houston residents applied for unemployment insurance in the last two weeks of March and the first week of April, approximately 170,000 more than usual for that time of the year.
The increase in presumed job losses reflects the dual battles Houston is currently fighting against both the coronavirus and the ongoing disruptions plaguing the oil sector. The former is showing signs of being won. The latter, not so much.
Houston’s economy is more diversified than ever, but it still relies heavily on robust oil prices and steady demand to keep its office properties tenanted. With oil trading in the low 20s and the Energy Information Administration projecting that supply will eclipse demand by around 10MM barrels a day for the rest of the year, stability in the sector remains as distant a prospect as ever. A recent first-quarter report from Colliers International predicts office vacancy could rise to 24 percent by the end of the year. It was 20 percent at the conclusion of Q1.
‘[W]hen it comes to the office market, we are still very dependent on oil and gas companies, both directly in the space or businesses that are dependent on oil and gas companies as clients,” said Patrick Duffy, president of Colliers’ Houston office, in comments accompanying the report.
Houston’s office market experienced negative net absorption of 177,916 square feet in Q1, a colossal decrease from Q4 2019, when the city posted a positive net absorption of 837,872 square feet. Office leasing in the first quarter grew modestly from 3.4M to 3.6M square feet, but it decreased 31% on an annual basis.
Those are ugly indicators for sure, but Duffy expects an increase in sublease space to prevent office occupancy from plummeting. He sees occupancy falling by no more than five percent from current levels, buoyed by an increase in sublease space. A more pressing concern is whether or not office tenants in the city are able to pay rent.
“There is a potential domino scenario where rent payments are delayed or lost altogether,” Duffy continues. “Owners are then unable to cover their debt, and a loss of liquidity is created that could easily translate into owners being unable to fund tenant improvements and commissions for new leases.”
Houston’s office space isn’t the only commercial segment taking a beating from COVID-19 in Texas. An online survey conducted by the Texas Restaurant Association and the University of Houston found that 19 percent of restaurants in the city closed permanently between March 19 and April 6. More than half of the survey respondents predicted that it will take more than nine months for their restaurants to recover from their extended coronavirus shutdowns.
