2011 Houston Office Market Real Estate Forecast

January 25, 2011

In a recent forecast for Houston’s 2011 office real estate market, Jay Nowlin, President and Founder of Nowlin Interests, expressed “cautious optimism” during a luncheon hosted by O’Connor & Associates on Jan. 12.  The following are highlights from the forecast:

  • Although Houston experienced significant job losses in 2009, job loss and job creation in 2010 were about break-even.  Positive job creation is anticipated for 2011, especially among larger companies.  Also, there was a near-doubling in 2010 of the active rig count in the United States, as horizontal drilling activities continued to increase.  This significant increase in drilling activity should generate additional business for oil service companies, which are a significant part of the Houston economy.
  • The Class A office market will perform better in 2011 than the Class B and Class C markets.  Large corporations, which are active users of Class A space, are sitting on large reserves of cash, waiting for the opportunity to expand.  Also, a limited construction of new Class A space means there is not a great need for absorption.  As such, occupancy levels are expected to increase in the future.  However, small businesses are still struggling to meet their capital needs.  Although lenders are starting to make more loans, lending is still selective and tight.  Vacancy rates in Class B and Class C buildings are expected to continue at current levels.
  • Active investors appear to be interested principally in acquiring core assets, even though these assets generally produce lower returns.  There is a perception of certainty with these assets, which makes acquisition loans more readily available.  Value-added assets, however, are still slow to move on the market because of a disparity between the pricing by sellers and buyers.  Sellers are asking prices that they hope will recover some of their investment, while buyers are offering much lower prices because the limited availability of ready, attractive financing makes it more difficult to achieve adequate returns.  Transactions involving “distressed” assets will eventually resume as sellers, buyers and lenders begin to acknowledge that we have reached the bottom of the downturn in the commercial real estate market.

Although the Houston office is not expected to return to the robust times occurring 5 years ago, it does appear that 2011 will be stronger than 2010, at least for properties that are well positioned in the market.