April 02 2020

Houston Office Market Report – First Quarter 2020

The Houston economy started 2020 on track for a year of moderate economic growth and employment gains. Local economists were projecting job gains in line with historical averages in the range of 42,300 to 60,900 new jobs. Since these forecasts were made, the global economy has experienced two shocks that will pull us away from those baseline projections (1) the onset and spread of COVID-19, the coronavirus disease caused by the SARS-CoV-2 virus and (2) a nearly 70% drop in oil prices since the beginning of the year from $61.14 to $19.27 at the intraday low reached Monday March 30th. A price which, when adjusted for inflation, is below lows reached during the oil crash of the 1980s.

As this quarter closes, there is still great uncertainty about the ultimate scope and severity of the human and economic toll that the coronavirus pandemic will inflict. Difficult policy choices like stay-at-home orders and travel restrictions are beginning to curb the rate of infection in the jurisdictions that have implemented them. Unfortunately, social distancing measures leave many retail-oriented contact-intensive service jobs like food service workers, hairstylists, and salespersons at the highest-risk of disruption. Headlines of record unemployment claims are certainly jarring to see, but the best medicine for our economy is to prioritize the health of our population.

With respect to office occupiers, all companies will experience stress in the coming months but small and midsize companies, who more often rent in Class B and C properties, will feel the impact more acutely. These firms often do not have substantial cash reserves or enjoy the same access to credit markets as larger companies. Landlords are already fielding numerous requests from existing tenants for rent forbearance and other concessions as companies try to keep afloat into the second quarter. The coworking market, with short term leases and open environments not conducive to social distancing, is likely to be hit hard in the short run. Strangely, this shock may push tenants to seek more agile workspace in the future as the ability to work away from a traditional office environment and shed excess capacity is crucial to weathering the current crisis.

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