Q&A with Marty Hogan on the Houston office market

As the fourth largest city in the country, Houston is more than an oil town, but oil and gas companies still play a huge role in the commercial real estate market. After several volatile years for oil, oil prices that have continued to be relatively flat in 2019. Read below for insight on the Houston office market's recovery by JLL Senior Director Marty Hogan.

In Houston, the oil-driven economy touches commercial real estate in varying degrees. To what extent is the office sector benefiting from the rebound in oil prices?  

When compared to other product types, the office sector is probably the most tied to oil prices since many of our largest office using employers are oil related. After the recent price volatility, we’ve seen the benefits of stable oil prices in 2019, which is generating more onshore drilling activity. It takes time for companies to hire, expand and lease additional office space, which in turn helps office fundamentals. With the amount of vacancy still available (both direct and sublease), it will take time for the office fundamentals to return to pre-oil crash levels.

How would you characterize current investor demand for office and how has the buyer pool changed in recent years? 

Investor demand for office product in Houston is very strong. Most of the capital raised for real estate of all product types is focused on value-add profile investments. With Houston being the only major city in the country that experienced a downturn during the current economic growth cycle, and with the office sector the most impacted by that downturn, there is a unique opportunity to acquire value-add office assets in a market with strong population and job growth.

How would you describe the lending market for new office construction?

Construction financing for office is very difficult. An extremely strong balance sheet or a significant amount of pre-leasing is the only way a new office building will get built in Houston.

What are a couple characteristics of the Houston market that have changed since you started in commercial real estate?

1.  We’ve seen a significant rise in foreign investment, particularly from Asian and Central and South American countries.
2.  There is a greater focus from office owners and developers on creating more and better amenity packages for tenants, including tenant lounges, conference facilities, fitness facilities, etc. Several owners of older Class A assets are spending significant amounts of capital to replicate amenity packages in newer buildings in order to compete.

What industries that are experiencing job growth are you monitoring most closely?

Oil and gas

On the supply side, how high is the ceiling for new office development?

New office development will likely be very measured over the next several years, given the difficulty finding construction financing. The new (or recently completed) projects coming out of the ground right now are towers in the CBD or in mixed-use, in-fill locations in the Greenway/Galleria submarkets. Houston delivered 10.7 million square feet of office product in 2015, which was the highest mark since 1984. I think it’ll take a while to get back to that level of construction activity. As we all know, there is plenty of land in Houston, but it takes a unique site to develop office.

What would you say is the biggest positive and biggest cause for concern to continued growth for office properties in Houston?

With continued job and population growth, coupled with the lack of new construction, fundamentals should continue to improve over the next several years. As a concern, something out of our hands such as another national recession would impact the market, but that will impact the country and not just Houston.