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Commercial
Texas

Distress a long-term trend in Houston 

Hybrid work has taken a toll, but vacancy was already high in 2019

(Getty)

(Getty)

How does Houston’s office picture compare with other major metros that are seeing distress?

A few CMBS loans have moved toward special servicing in 2023, and Houston’s office delinquency rate remains high compared to the top 20 markets, said David Putro, head of commercial real estate analytics at Morningstar Credit Information & Analytics.

“Some of the pain in Houston was already apparent before the last few months,” Putro said.

After energy prices collapsed in 2015, the city’s office market, which relied heavily on the oil and gas industry, struggled to maintain. Nearly one-third of all energy-related projects were canceled or postponed in 2015, according to the Houston Business Journal, and Houston-based companies like Haliburton announced layoffs of over 8 percent of its workforce. 

“Whereas the Bay Area, New York and Chicago are seeing these huge changes in the office market now, Houston was struggling before, and I think that’s why it looks like there’s less movement in that area,” said Sarah Helwig of Morningstar Credit Information & Analytics. “Vacancy in Houston is among the highest of the major metros.” 

Vacancy in the Houston office market hovered just under 26 percent in the first quarter of this year, an increase of 50 basis points year-over-year, as the Bayou City saw a fourth consecutive year of occupancy losses, according to JLL. The city’s vacancy rate was hovering just below 20 percent in 2019 and broke the 20 percent mark in 2020, according to reports from Colliers.

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One exception is office space in the Texas Medical Center, where remote work is less feasible. That submarket sees some of the lowest rates in the metro with 12 percent total office vacancy. 

Remote work has ramifications for commercial real estate as office-reliant businesses downsize in the wake of recalibrated work habits. It’s one cause of distress across the office market. In Houston, office buildings have sold for almost half their appraisal value, and foreclosures have shaken the market amid a 29 percent decrease in leasing activity. 

A 2022 McKinsey and Co. report found 66 percent of Houston workers were offered remote-optional schedules compared to 58 percent of employees nationwide. When Houstonians do go into the office, they prefer the middle of the week, according to a Placer.ai report that used location intelligence to gather demographic data in five metropolitan areas — Houston, New York, Chicago, San Francisco and Boston — during the first quarter of 2023.

“A full-blown return-to-office appears unlikely,” in all of the markets Placer.ai looked at, the report said.

A few other Placer.ai findings: Houston stands out as a hub for long-haul commuters, with about half of office workers driving 10 miles or more each way. One-person households are significantly overrepresented among on-site employees in all five cities, suggesting that multi-person households are likelier to work remotely.

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