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How Low Oil Prices Hurt Houston Office Landlords

National Real Estate Investor (07/24/15) Carr, Robert

At a time when most office markets are seeing substantial rental increases due to high demand, Houston's office market has experienced its first negative absorption quarter in five years. Leasing activity, meanwhile, is down 67.5 percent year over year.  Office experts say the drop, and the vacancy increase to 14 percent, are due to both a new construction glut and continued fallout from the drop in oil prices late last year.  The Energy Capital's office market relies, to a large extent, on space demand from oil and gas companies. Such firms and their related businesses have experienced a significant amount of layoffs and mergers over the past year due to the topsy-turvy oil prices.  

Lisa Bridges, director of market research for Colliers in Houston, says the city and its suburbs have become a tenants' market.  But Bridges expects rents, which have stayed relatively flat as tenant demand disappeared and supply increased, will eventually crawl up over the next 18 months.  "The lag time will end somewhere around next quarter," she forecasts. "Landlords who have direct space have to also deal with the sublease space, which is being offered at more favorable rate. They're going to need to get a little more aggressive and lower their prices." According to the latest Savills Studley market study, Houston-area tenants are currently able to negotiate solid concession packages, lower starting rates, and shorter terms because of the shortage of demand.
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