Hard times hit the oil industry and the office space market in Houston at about the same time a year and a half ago.
Boosters deny that the sprawling Texas city is a one-industry metropolis. But they do acknowledge that a decline in the energy business quickly shows up in falling demand for office space. With 37 million square feet of offices on the market now, Houston has become a "great tenant's market," according to a commercial leasing specialist.
The competition for tenants is fierce, and companies looking for space can strike bargains for months or years of free rent, or for reduced rent during the entire leasing period, said Charles McArthur, corporate vice president in Julien J. Studley Inc.'s Houston office.
He said the Houston market "has felt the effects of the depressed energy business and the national economy as a whole. Demand is off and supply is enormous."
The coastal city's decline is most dramatic when compared with its own boom of recent years. By the standards of many other large metropolitan areas, Houston's annual office vacancy rate of 5.3 percent at the end of December is not alarming, although it is four percentage points lower than the rate of a year before. The figure pales, however, when compared with Dallas, where the annual vacancy rate is a hefty 14.4 percent.
Houston has 109 million square feet of net rentable offices, making it second only to New York in total amount of office space. During 1981 and 1982, the city absorbed--or leased to tenants--15.3 million and 10.1 million square feet respectively, according to a survey by the commercial real estate firm Coldwell Banker. Houston's earlier growth is due to expansion of the oil and energy business and to the city's growing importance as a finance and trade center, the company said.
With more than 35 million square feet of office space now under construction, the vacancy rates could rise while rental rates fall in 1983.
"Houston is still a dynamic city. It's just that it has experienced problems it has not experienced in the past," said McArthur. With the energy industry decline, "it's going to be an adjustment period in Houston for the next two or three years."
He said oil companies "that posted profits in 1981 are showing losses in 1982," with the result that "oil companies who have a lot of ancillary programs dealing with other industries, such as solar power, gas or coal, are postponing or abandoning those programs and that means they need less space.
As a result of these factors, many tenants can find excellent office leasing terms. "The published rate for space is frequently not the effective rate that can be gotten," McArthur said. "The amount of free rent varies, for a good tenant, anywhere from six months to 18 months. A year's free rent is common and in one case rental was abated for two years."
In the city's central business district where space is most expensive, the published rents range from $20 to $25 per square foot. Negotiations with the developer can bring the figure down to $18 per square foot, and if a year's free rent is also included on a 10-year lease, the tenant's effective rent is $16.20 a square foot, McArthur said.
The slowdown in the oil and energy business has produced "a ripple effect" in related industries, such as engineering, he added.
Some of the sweetest deals being made, from tenants' viewpoints, are subleases offered by companies that are retrenching.
"For the first time in Houston, over 3 million square feet of sublease space has come on stream during the last six months, primarily from energy companies which find their growth projections overstated," said McArthur.
The firms that are subleasing "are not interested in making a normal profit. They're interested in cutting losses and getting rid of space, so they're in direct competition with new space," McArthur said.
He cited the example of a firm that had spent about $80 a square foot to improve and decorate offices it wanted to sublease. Nevertheless, the firm was offering the space at about $5 per square foot less than the market rate for new office space. "So it was not only inexpensive but it's also beautiful space," McArthur said.
Houston's dramatic growth began in the early 1970s, after the city entered the decade with an estimated 27 million gross square feet of office space. More than half of it was located in the downtown central business district. Since then, the city has spread over more than 500 square miles of land, with business and retail growth clustered in eight areas ringing the downtown district.
The central business district, headquarters for many oil companies and financial institutions, has 30.6 million net rentable square feet of office space, 28 percent of the total in the city. In addition, nine buildings containing a total of 7.4 million square feet are under construction, with nearly a third of the space already leased, according to the Coldwell Banker report.
New construction in the outer areas far outstrips the downtown building, however, with nearly 30 million square feet of space going up in the suburbs. This construction, along with the building of shopping centers and hotels, is creating new downtowns in at least two areas, the prestigious Galleria/Greenway and West/Katy centers.
The Studley report notes that "in spite of the general decline, 95 new buildings of over 50,000 square feet have started construction in . . . Houston in the last 12 months, which accounts for the substantial rise in inventory."
In space leased during 1982, Houston was down 11 percent from 1981 to just over 12 million square feet.
Dallas has not weathered the recession as well as its neighbor to the south, and is burdened with a 14.4 percent vacancy rate in the 74.9 million square feet of space in the city's existing buildings, according to a spokeswoman for the Swearingen Company, which publishes a biannual analysis of the Dallas/Fort Worth office market.
In addition, 18.9 million square feet is under construction in Dallas, with about 6.8 million already leased, she said. The Swearingen study is based on a count of space in multi-tenant buildings and estimates of single-tenant structures, and does not include medical or office showroom space.
With a record absorption rate of 7.2 million square feet recorded in the year that began July 1, l980, the leasing rate dropped to 5.45 million square feet during the following six months, ending in July 1982.
Rents are "staying up pretty well" with a citywide average of about $18 per square foot, said the spokeswoman, Patricia Dajda. But developers are offering "inducements" to prospective tenants, including free rent and more money than is usual for "build-out"--the allowance builders give new tenants for improvements in their office space.
"The calendar year 1982 in Dallas did reflect the recession. Tenants are taking a wait-and-see attitude," said Dajda. "There was a lot of leasing in Class A new space. However, there was also a slowing down and in some cases shrinkage . . . Some companies contracted, consolidated and reduced space, mostly in energy" firms.
Subleasing also is a "new force" in Dallas, she said, with a "sublease market rapidly developing" in the central business district.
"There is a lot of beautiful new space on the market. Firms are going to better quarters because this is a good time for them to do so. The selection is good and they can make some pretty good deals," Dajda said.
Some of these good deals and beautiful space undoubtedly have been offered in the San Jacinto Tower, a 33-story, 900,000-square-foot office structure under construction in Dallas by partners in the Trammell Crow Co., according to the firm's manager, J. McDonald Williams. He said the building is 65 percent leased, in contrast to a 720,000-square-foot office tower being built nearby by the Canadian firm Olympia & York, where only about 20,000 square feet of the Canadian space has been spoken for, according to an agent of the leasing firm.