According to a new report from CBRE Research, lower oil prices will have effects across the Houston commercial real estate market, but fears of broad-based decline are overblown.
The report finds that the degree of impact will vary based on the magnitude of change in employment, and by property type, with expected impact to the retail sector being negligible and the office sector, modestly negative.
"The outlook for Houston commercial real estate is less positive than a year ago, and certain submarkets and property sectors can expect to see at least temporary shortfalls in demand," said Spencer Levy, Americas Head of Research, CBRE. "However, we expect oil prices to slowly drift up over the next two or three years. That, plus strong growth in the U.S. economy will limit the impact of the recent drop in prices on the market."
Much has been written in the popular, economic and real estate press about the challenges the Houston economy may face due to low oil prices. However, in commercial real estate the story is more nuanced, with a number of considerations, including:
The U.S. economy will benefit on net from lower oil prices, with the positive impact to consumer spending potentially boosting real GDP growth by up to 0.7 percent in 2015, according to Moody's Analytics.
Houston's economy is entering this period from a position of strength, having gained four new jobs since 2009 for each one lost during the recession while experiencing income growth about the national average.
While energy is a key industry in the Houston economy, the sector has also diversified across the energy industry's three segments - upstream, midstream and downstream - and each is impacted by lower oil prices in different ways. Most notably, the negative impacts to exploration and production (upstream) will be partially offset by positive impacts on petrochemical manufacturing (downstream).
Retail is best positioned among the property types because the spending of Houstonians will benefit from lower gasoline prices, the occupancy rate is historically high and construction of new shops has been uniquely constrained in this cycle.
The office market is most exposed due to the Houston's concentration of upstream energy headquarters and major operations as well as the amount of new supply coming on line through 2017.
Impacts to industrial and multifamily will likely be limited to slower rent growth. Both sectors enter this period with strong occupancy and face offsets to weakness in the upstream segment from downstream expansion and, for multifamily, support for continued demand from a tight single-family market.
"Ultimately, the fall in oil prices results in winners as well as losers. The winners are broadly spread, the losers are usually in specific locations" added Mr. Levy. "Investors are acknowledging the changing global industry dynamics, including the U.S. push for energy independence, the decline in OPEC's power and growing political support for the international trade of domestic liquefied natural gas (LNG) and crude oil - all of which could potentially have positive implications for Houston and the U.S. energy sector."
CBRE Research's global perspective is that most of the oil-producing economies face a tough 18 months or so. "Russia, for instance, is expected to see its GDP decline in 2015 by 5 to 8 percent. However, led by the U.S., overall growth in the world economy is expected to pick up in 2015 and 2016. This will provide some support for oil prices, which we expect to drift up slowly from this point onwards as some production capacity comes out of the market," said Richard Barkham, Global Chief Economist, CBRE.
"It was always clear that the beneficial effect, on consumer spending for instance, would only show through in the medium term. The pain would be near term and localized in energy-centric markets, such as Houston and Calgary. Houston can at least look forward to some offset for falling energy-related investment from revived domestic demand growth across the whole of the U.S. The same cannot be said for Russia, Venezuela and Nigeria," added Mr. Barkham.