Houston office market under continued strain: Moody’s

Damage from falling oil prices to the Houston, Texas office market has intensified, which could continue to deter lenders from America’s energy capital.

The office vacancy rate in Houston rose to 17.7 percent by the end of this June, compared to 12.2 percent by year-end 2014, driven largely by a surge in office construction caused by an energy boom that has since faltered, a new report from Moody’s shows.

“Sharp declines in crude oil prices, volatility in the energy markets and an increased supply of office space continue to negatively affect the Houston office market,” said Ranjini Venkatesan, a Moody’s analyst.

The report attributes Houston’s increasing office vacancy rate to oversupply issues associated with a construction boom that followed an energy boom that occurred in 2013 and 2014. By 2015, Houston had the highest number of new office space added of any US regional market, with 86 buildings totaling 12.1 million sq ft delivered.

But the energy boom peaked in summer 2014, and since then major employers in Houston downsized by tens-of-thousands of employees as volatility plagued the market, with newly built office buildings remained empty and lenders have backed off, particularly from office loans.

“There’s virtually no way to get a new office deal or multifamily deal done,” Jason Walker, senior vice president, commercial real estate lending, at Bank of Texas, told Real Estate Capital this May. “We’re glad we didn’t try to stretch and play in this space.”

The price of a barrel of crude has dropped dramatically from its peak at $105.54 in July 2014, sinking to $33.65 per barrel by January 2016, the second-lowest level since 1946, and only rising to $47.67 today.

Between year-end 2013 and mid-2016, the city’s office inventory rose by just over 8 percent, while office-using employment increased by less than 1 percent, according to the Moody’s report. The ratings agency expects vacancies and rents to deteriorate further, as demand for office space lags while supply is set to increase an additional 3.3 million sq ft by year-end 2018.

However, the ratings agency also noted that Houston’s overall economic activity and labor market remain strong, which may offset some of the damage.