CREJ - Office Properties Quarterly - July 2015
Houston. The Houston office market, which is comprised of 286 million square feet, currently has a vacancy of 11.6 percent. After experiencing banner years from 2012 to third-quarter 2014, the city may be at the tipping point of being a fundamentally stable environment to something less stable in the office sector, said Brandi McDonald, Newmark Grubb Knight Frank executive managing director in the Houston office. “The true story will come out in the Q3 and Q4 reports,” she said. “Companies are not making decisions right now if they don’t have to,” she said. “It is our prediction that our fundamentals will begin to decline severely when Q2 and Q3 numbers come out. And I believe they’re going to decline into the first two quarters of 2016. Then we predict an upturn by the end of 2016 and returning to a more healthy environment in 2017.” The city delivered 4.4 million sf in the first quarter and there is 14.9 million sf still under construction, said McDonald. The 70-plus proposed buildings will not have a shot at breaking ground on a speculative basis until the city records at least four consecutive quarters of substantial absorption, she said. In the 1980s, 85 million sf of office was delivered, but in the last 30 years, since the 1985 crash, Houston only built 102 million sf of office. “We have 11 corporate campuses under construction now, nine of which are energy companies,” she said. “Those 11 corporate campuses make up over 12 million sf coming on line,” she said. In the 1980s, oil and gas made up 80 percent of the office-user sector in Houston. Today, the industry makes up 50 percent. “I believe that we’re not going to see anything compared to the ’80s because our demographics have shifted and we have mature developers who remember lessons learned,” she said. Alberta, Canada. The Alberta office market consists of roughly 97 million sf, and most of the office spaces are in Calgary and Edmonton. Calgary has roughly 63 million sf of office, with 41 million sf located downtown and the rest in suburban areas, said Agron Miloti, president and broker of the Calgary Newmark Grubb Knight Frank office. New Class A product tends to have the city’s lowest vacancy rates. Since the drop in oil prices, Class A buildings are reporting 9 percent vacancy and Class AA buildings are at 7 percent. “The real vacancies we’re seeing are in B and C Class buildings,” he said. “Our C Class buildings are about 17 percent vacant, so overall vacancy downtown Calgary is right now roughly 11 percent.” Miloti says a healthy market is somewhere between 7 and 10 percent vacancy. In Calgary, oil and gas companies and related service companies account for roughly 75 percent of leased space. “So we really do depend on oil prices being up there,” he said. “The strange thing, and the positive thing for Calgary, is that the rates have not dropped that much,” he said. “They’ve dropped roughly between 8 and 10 percent. So the landlords are still holding onto the rates. If prices stay the same, it will be difficult for them to do that.” Calgary has about 4 million sf under construction and about 90 percent of that space is spoken for. Edmonton’s downtown is much smaller than Calgary’s, even though both cities have a population of about 1.1 million. About 16.7 million sf is located downtown and 10 million sf is located in suburban areas, totaling roughly 26.7 million sf of office property. Edmonton’s economy is more diverse than Calgary’s economy. There is a stronger government presence, which takes up roughly 25 percent of the office space. An additional 20 percent is used by other professional sectors. The rest is made up of oil and gas services companies, he said.