BLOT - While we’re not necessarily “downers” or totally pessimistic about where our economy is headed now, there are hard facts and data that point to interesting few years ahead in our market. As always, please look at this at a macro level, as your particular community or industry (most notably medical) may have other trends.
For reference, CoStar is the gold standard on commercial RE data. They do try to track everything, and we use it heavily to research, market and list our properties as part of our strategy.
—————————
Houston’s economy is again decelerating, this time led by a renewed slowdown in U.S. shale, which may not bode well for the Bayou City's multifamily, industrial or office sectors.
In a recent report, Goldman Sachs forecasts U.S. energy industry capital expenditures declined 3% in 2019, will decline 8% this year and be flat in 2021 at 1% growth, followed by 7% growth in 2022. Over the next three years, this would collectively represent 0% growth. This is not nearly as bad as the 32% decline in 2015 and 48% decline in 2016. But this flat growth for Houston’s primary industry may negatively impact Houston's commercial real estate market.
The U.S. rig count has steadily fallen from a recent high of 1082 in November 2018, to 796 as of the third week in January, due to a pullback in investment from Wall Street.
Wall Street, which encouraged growth in U.S. shale for much of the past decade, and even through the oil downturn, has become frustrated with the sector’s lack of capital discipline and lower returns in comparison with other sectors, especially amid lower oil prices. As a result, the investment community is largely pulling back investments from North American energy, which could hurt many major and independent producers and oilfield services companies with operations in Houston.
As a result, the Houston Purchasing Managers Index registered 47.4 in December and 46.9 in November. Readings below 50 signal contraction in the economy.
Houston added 85,500 jobs over year-over-year as of November 2019, according to the latest Bureau of Labor Statistics update, but that number is likely overestimated. Oxford Economics forecasts Houston added 78,221 jobs in 2019. And in 2020, Oxford Economics’ Moderate Upside scenario forecasts that Houston will add 39,971 jobs — well below Houston’s historical average of about 50,000 new jobs per year. Meanwhile, in Oxford’s baseline scenario, the company forecasts that Houston will add just 25,606 new jobs in 2020, which is half of Houston’s long-term average job growth.
Houston had the highest office vacancy rate in the nation at 16.5% as of the first quarter of 2020 among all major markets that CoStar tracks. Houston’s multifamily vacancy rate was 9.3%, which tied with San Antonio for the highest multifamily vacancy rate among the largest 60 metropolitan areas by property value.
Houston's industrial and retail performed considerably better than office and multifamily overall, with a 7% vacancy rate in the market's industrial sector and a 5.4% vacancy rate for multifamily. However, Houston’s industrial vacancy rate was tied with Phoenix for the highest out of the largest 25 U.S. cities.
None of Houston’s vacancy rates are projected to rise much over the next five years, at least not within 100 basis points, with the exception of Houston's office market, which we forecast could compress by 200 basis points. However, the latter would depend on a resurgent energy sector or other office-using industries to bridge that demand, which, at least over the past five years, have both remained elusive.
With information from CoStar.