Dore Law - July 2021

Dore Law - July 2021

THE D or É R eport

D ore L aw . com

JULY 2021

THE BOOM AND BUST IN REAL ESTATE LEASING

It was the best of times; it was the worst of times. Which statement is true for you depends on where your company is in 2021. Emerging from the pandemic economy, real estate in Texas is like “A Tale of Two Cities” — a “boom” in the industrial sector but a “bust” in office leasing. In the 1980s, a worldwide glut of crude oil seriously depressed our domestic oil and gas industry. In Texas, falling oil prices soon took real estate values down the same road. A few decades later, though, Texas is now much more than oil and gas. Real estate is big business here. INSIDE INDUSTRIAL LEASING Despite a recession in the energy industry for the past couple of years, industrial leasing has remained high. In 2021 and beyond, it shows no sign of slowing. Houston’s vacancy rate for industrial space is less than 10%. This is even more remarkable considering the amount of new ready-to-lease industrial space that came to the market last year was double that of the previous year. Some companies, such as those in the oil and gas industry, have transitioned from buyers to sellers as they decrease their real estate footprint. A record amount of space is now available for sublease. Nevertheless, the demand for industrial space has continued to grow from a combination of businesses migrating to Texas and the expansion of e-commerce businesses needing warehouse space. Even in oil and gas, the petrochemical industry at the Houston Ship Channel has shown strong industrial demand. THE REALITIES OF OFFICE LEASING While there are some signs of recovery this year, the market for office space leasing is still in a major downturn. In Houston, vacancy rates are around 20%, halting almost all new construction. Green energy, health services, and tech companies are expanding, while oil and gas companies shrink. Last year was the worst year on record — nearly 5 million square feet of negative net absorption in 2020 for Houston (double the previous low in 1987). As companies realign their real estate needs, the office leasing market has become a game of musical chairs. Many companies with long- term leases are offering sweetheart deals to sublease their excess space. Companies with expiring leases are shopping for discounted rates before signing new ones, and landlords are experiencing tenant relocations as larger tenants flee to quality spaces. These trends are bad news for some, but good news for others.

“By the end this summer, we should have a clearer picture as offices are being reoccupied and companies ‘right-size’ moving forward. We expect the oversaturation of sublease availability will pressure landlords to reduce rates to compete with the ‘fire-sale’ of excess space. If this holds true, you can expect this cycle to last well into 2022,” says Ross James, senior director in the Houston office of Lee & Associates, a national commercial real estate service firm. If your company is making a lease change, remember that it is always a good idea to discuss a new lease with your commercial real estate broker and your attorney, whether your company is moving or staying put. A knowledgeable broker can explain your options before opening any discussion with your landlord. GOOD NEWS FOR THE FUTURE After dropping to historically low levels last year, oil prices are recovering as economies reopen and demand picks up. Across the country, construction of office buildings, retail stores, hotels, and garages fell dramatically in 2020, but construction rose only for warehouses, public buildings, and educational buildings. Commercial construction in the south declined 25%, but residential construction remained a bright spot. Now that new construction is slowing and demand is increasing, a return to a better real estate market is only a matter of time. On top of that, the work-from-home phenomena and the rise of e-commerce will likely create a “new normal” for commercial real estate. Dodge >Page 1 Page 2 Page 3 Page 4

dorelaw.com

Made with FlippingBook - Online Brochure Maker