April 29, 2016
While the deep oil downturn continues to be a governor for the local economy, the Houston metro led the nation in population growth for the second consecutive year, driving demand in consumer sectors such as healthcare and retail, according to Transwestern’s First-Quarter Outlook reports. The office and multifamily markets will see further softness this year due to weak job growth and additional supply. Industrial remains robust as strong distribution channels and investment in the Port of Houston provide a major competitive advantage.
Now seven quarters into an economic downturn, Houston’s office and multifamily markets are the hardest hit, while retail, healthcare and industrial are still performing well. This softness will likely continue through 2016 and 2017 as the true impact of the downturn becomes more evident.
- Payroll employment grew by just 0.3 percent, or 9,000 jobs, during the 12 months ending in February, ranking Houston last in both metrics among major metro areas.
- Positive job growth is still projected each year through 2018, putting the metro on better footing than in past economic declines.
- The office sector is experiencing the most fallout by far in the current economic conditions as workforce reductions, mergers and acquisitions, cost cutting and downsizing by energy companies further weakens fundamentals.
- Net absorption for all classes of space totaled 996,000 square feet during the first quarter, fueled largely by preleased deliveries.
- Total available sublease space continues to grow, adding more than 940,000 square feet this quarter to hit 8.7 million square feet on the market.
- Vacancy rose again during first quarter, coming in at 5.4 percent and 5.6 percent for direct and overall, respectively.
- Industrial vacancy is likely to continue climbing in the period ahead as Houston comes down from the high of the development cycle and low oil prices impact demand for space.
- There is currently more than $50 billion in investment being poured into downstream construction projects along the Texas Gulf Coast, effectively creating a new export gateway for LNG products.
- Shopping centers with a grocery component are still dominating retail development and make up approximately 75 to 80 percent of large projects in the pipeline across the metro.
- Retail vacancy continues to drop, ending the first quarter at 5.5 percent, down from 6.0 percent in fourth-quarter 2015.
- This is the sixth straight quarter that vacancy has declined, spurred by new restaurants and retailers grabbing market share in a competitive Houston market.
- Occupancy and absorption are dipping in Class A product as new units continue to hit the market, and apartment owners are offering additional concessions and lease-up specials to combat the oversupply.
- Class C properties recorded the highest occupancy, averaging 93.6 percent, followed by Class B assets at 93.0 percent.
- Performance in 2016 will vary widely by submarket and class as areas like the Energy Corridor and Westchase take a hit, while east side markets like Pasadena and Baytown thrive as they provide housing for downstream workers.
- Currently, close to $5 billion dollars in development is either underway or planned by major hospital systems, physician groups and in the life sciences sector across the metro.
- The dust has settled since the Affordable Care Act’s passing in 2010, leading to renewed confidence in the industry and a much-needed influx of construction activity.
- The sector has been robust, adding 22,100 jobs during the 12 months ending in February and is projected to be the largest job creator across the metro in 2016.