Houston Absorbs the Big Blow
from Oil in 2015:
Who Shares the Pain in 2016?
Robert W. Gilmer, Ph.D.
C.T. Bauer College of Business
May 17, 2016

 Overview of the Houston Economy
• We just finished what may be the worst quarter ever for
American oil, and the drilling rout continues. In important
ways the drilling downturn is worse than 1982-87.
• As a result, any recovery in oil markets and in the Houston
economy will begin from a lower point and start later than
previously anticipated.
• If we want to avoid significant job losses in Houston, it is
growing late. Oil prices must stabilize soon. This year will
probably see small job losses, where we previously forecast
small gains.
• But in 2017, eastside petrochemical construction winds
down rapidly. If upstream E&P is not back and hiring again,
the downstream construction layoffs will bring a growing
chance of moderate 2017 recession. Job losses of one or
two percent become more probable.

 Oil Makes the Difference in Houston
Spot Price of WTI in $/barrel
$120
$110 $104
$100
$90
$80
$70
$59
$60
$50
$40
$30
$20

$51

*Through May 4, 2016

$54

$60
43

46

37

32

38

 How Did 2015 Turn Out?
Very Slow, But No Recession …
So Far

2012
2013
2014
2015
Spring 2015 Forecast

December to December
Changes
Jobs
Change
118,600
4.3%
89,800
3.2%
117,800
4.0%
15,200
0.8%
12,900

Texas Workforce Commission, seasonal adjustment by IRF

0.5%

 Job Losses Are Driven By Energy
(Net Change in Jobs)

Sector

Since Oil Bust
Began
Dec 14 – Mar 16
New Jobs Percent

So far in 2016
Dec 15- Mar 16
New Jobs
Percent

Total Payroll
Mining
Construction
Manufacturing
Machinery
Fab Metal

10,300
-19,200
4,200
-25,500
-13,500
-13,000

0.4%
-17.3%
2.0%
-9.8%
-20.5%
-21.6%

-4,400
-1,600
-8,300
-1,700
-1,700
-2,900

-0.1%
-1.7%
-3.7%
-0.7%
-2.8%
-5.3%

Wholesale Trade
Prof/Buss
Services

-1,400
-12,500

-0.8%
-2.6%

-1,300
-5,800

-0.1%
-1.2%

Job gains of 38,550? Concentrated in Healthcare, Leisure and Hospitality, Retail
Trade, and Local Government

 Houston Employment:
Percent Change By Year
6
4.0

4

0.5
-0.1

2

-4
-6
Note: December to December changes, except 2016 which is year-to-date,
annualized and seasonally adjusted

2016

2015

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

-2

2014

-

0

 Houston’s Job Growth Machine
Broke Down in Early 2015
(3-month percent change at annual rates)

8

Houston

6
4
2

-2
-4

Jan-07
May
Sep
Jan-08
May
Sep
Jan-09
May
Sep
Jan-10
may
sept
11-Jan
may
sep
12-Jan
may
sept
13-Jan
may
sept
14-Jan
may
sept
15-Jan
may
sep
16-Jan

0

U.S.

-6
-8
-10
Texas Workforce Commission and Bureau of Labor Statistics

 Purchasing Managers’ Index
U.S. and Houston Compared (s.a.)
70.00

Houston

65.00
60.00
55.00
50.00
45.00
40.00
35.00

Index > 50 means expansion
Index < 50 contraction

U.S.

30.00

National Association of Purchasing Management - Houston

 Houston Unemployment Now Rising
(percent unemployed, s.a.)

10.0

24,400 New Unemployed
Since December 2014

Unemployment Rate
At 5.0% in March

9.0
8.0
7.0
6.0
5.0
4.0
3.0

Bureau of Labor Statistics

Thousands

11.0

280
260
240
220
200
180
160
140
120
100

 How Are You Feeling?
• Many sectors of Houston have not felt much pain from
this downturn yet. What oil bust?
• How can this be?

• Maybe they sell into strong national markets: United Airlines,
Sysco, AIG, HP, …
• Maybe they live in East Houston
• Maybe they are living off of past momentum. Houston added
680,000 jobs from 2004-2014
• Population stays strong for usually stays strong for several
quarters after job growth slows
• Most damage has been confined to oil producers, oil services,
and manufacturing … so far

• BUT another slow year in Houston gives time for the
slowdown to spread to many sectors that have felt
immune so far – healthcare, retail, restaurants, real
estate, leisure, and government

 Basic Jobs Still In Reverse, Non-Basic
Jobs Running Out of Momentum
(3-mo percent change at annual rate)

20
15
10
5
0
-5
-10
-15
-20
-25
-30

Basic
Non-Basic

 Non-Basic Jobs Still Growing -But the Rate Is Slowing
Index: Jan 2014 = 100

Percent Growth Non-Basic
Jobs at Annual Rates

108
4.5

106
104
102

Non-Basic
N
+6.7%

100

94
92
90

3.5
3

98
96

4

Base Jobs
-6.2%

2.5
2
1.5

 About Four Non-Basic Jobs in
Houston Supported By Each Base Job
5.0
4.8
4.6
4.4
4.2
4.0
3.8

Too many Non-Basic Jobs
as Base Shrinks Rapidly

 Oil Markets and Oil Price

 

Where Did the Oil Bust Come From?
How Did We Get Here?
• The Commodity Super Cycle Comes to an End

• Oil, metals, food, agricultural raw materials see price soar after
2004 and stay high for a decade
• Primarily driven by a surge in growth by emerging markets,
especially China
• $100 oil was the market signal to expand capacity, and as the Super
Cycle ended we returned to long-run price near $65 last spring and
early summer

• Overshoot $60, and wind up below $30 per barrel?

• In July, the Iran Nuclear Agreement is signed and promises a return
of quick 1.2 million bbl/d to export markets
• The August devaluation of the Chinese Yuan distills concerns about
China into fear about how bad things might be

• The last quarter was brutal for U.S. oil, with drilling falling to
record lows week after week.

 Is the Commodity Super-Cycle
Over?
600

(price index: Jan 2001 = 100)

500
400
Food

300

Ag Raw Materials
Metals

200

Crude Oil

100
0

International Monetary Fund

 Growth in the Demand for Oil Comes
From Emerging Markets
(million b/d)

20

17.4

15
10

Global

8.0

OECD
Non-OECD

5
0

1996-2003
-5
International Energy Agency

2003-2015

 Global Growth Sluggish
In 2015-16
(% GDP Growth)

2013

2014

2015

2016

2017

World

3.3

3.4

3.1

3.2

3.5

U.S.

1.5

2.4

2.4

2.4

2.5

Euro Area

-0.3

0.9

1.6

1.5

1.6

Japan

1.6

0.0

0.5

0.5

-0.1

---

---

China

7.7

7.3

6.9

6.5

6.2

India

6.9

7.3

7.3

7.5

7.5

Brazil

2.7

0.1

-3.8

-3.8

0.0

Source: IMF World Economic Outlook: April, 2016

 On Supply Side? U.S. Shale Reversed
40 Years of Declining Oil Production
11

(million barrels/day)

10
9
8
7
6
5
4

DOE/EIA, Seasonally adjusted by IRF

 U.S. Oil Production Finally Slowing
Million bbl/day, s.a. data
10
9
8
7
6
5
4

DOE/EIA, seasonally adjusted by IRF

Peak: May 2015
Down 300,000 bbl./d

 The Saudi Revenue Dilemma
• Raise price/lose market
share OR cut price/keep
market share

• Implement lessons learned
the hard way from 1980’s
• Force U.S. shale into the role
of the swing producer
• Defend their market share,
not the price

• Mix in an aggressive and
powerful new crown prince,
Sunni-Shiite politics, and a
healthy dose of Saudi
paranoia about their future.

The Economist, December 2014

 The Greatest Oil Boom
Is Over … Now Time for Recovery?
350
300
250
200
150
100
50
0

Drilling capital expenditures

Baker Hughes rig count

($2015 billion at annual rates)

(working rigs)

2300
2100
1900
1700
1500
1300
1100
900
700
500
300

Capital expenditures for E&P from Oil and Gas Journal, calculations of IRF

  

cuumn. :0
m5 238mm ?3034. 

$/bbl.

80

Recovery Needs Oil Price Near $65/bbl.
Long-Run Marginal Cost of Global Oil Production

70
60
50

3

40
30

4

5

6

7

10
9

11

8

2

20
1

10
0
0

5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100
Production (million bbl./d)

 Price of WTI Oil As Implied by
Valuation of the Stock of 40
Producers
$/bbl.

$63
$62
$61
$60
$59
$58
$57
$56
$55
$54
$53

62

62

62

60

Jan '15

Apr '15

Jul '15

56

56

Oct '15

Jan '16

Goldman Sachs Research, at first week of each quarter

Apr '16

 Where the Prior Forecast Went Wrong
We Still Are Looking for the Trough in U.S. Drilling Activity
2100
1900
1700
1500
1300
1100
900
700
500
300

Weekly Count of Working Rigs

2014-2015

2008-2009
765 Rig Count trough
in previous forecast

1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77 81 86
Weeks after peak in drilling activity

 Three Scenarios for
Recovery in Oil
• When will oil prices hit bottom?
• When will the rig count turn up?
• When do energy jobs begin to come back?
• How high will the rig count go in this
recovery?
• How long before the rig count reaches these
highs?

 Recovery in Rig Count After Oil
Market Improves

(working rigs by quarter after oil prices begin to rise, s.a.)
2,500
2,000

2008-09

1,500

2001-03
1982-87

1,000
500
0

1997-98

Quarters after recovery 

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47
Baker Hughes, calculations of IRF

 Drilling Recovery After the Price of
Oil Hits a Low
Past Recoveries
Quarters Until:

Forecast

1982-87 1997-98 2001-03 2008-09 High Medium

Low

Rig Count Bottoms
Out

0

2

2

1

2

2

3

Energy Jobs Make a
Low

2

4

4

3

5

6

7

Prior High Rig Count

never

8

8

11

10

11

12

Note: For the high, medium and low forecasts, it is assumed that the rig count returns
to 1650, 1500, and 1300, respectively.

 Other Key Assumptions
• Oil Price Bottoms Out?

• High Scenario: 2016 Q1
• Medium Scenario: 2016 Q2
• Low Scenario 2016Q4

• Rig Count Max After
Recovery?

• High Scenario: 1650
• Medium Scenario: 1500
• Low Scenario: 1300

• Return of Energy Jobs

• Follow the rig count
• Allow for complexity of
fracking, productivity trends
• Never returns to previous
highs in any scenario

 Rig Count Scenarios and the Return
of Oil Employment in Houston
Rig Count

Oil-Related Jobs in
Houston (000)

2500.0
315.0

2000.0

295.0
1500.0

275.0
255.0

1000.0

235.0

500.0

215.0

High

Medium

Low

High

Medium

Low

Jan-20

Jan-19

Jan-18

Jan-17

Jan-16

Jan-15

Jan-14

Jan-13

Jan-12

Jan-11

Jan-10

Jan-09

Jan-08

195.0
Jan-07

Jan-20

Dec-18

Nov-17

Oct-16

Sep-15

Aug-14

Jul-13

Jun-12

May-11

Apr-10

Mar-09

Feb-08

Jan-07

0.0

 What the Futures Market Thinks
About WTI Oil Price
$70

WTI, Price $/Barrel

$65
$60
$55
$50
$45

$48

$46

$49

$50

$50 $51

$40
$35
$30
$25

Jun-16

Nov-16

Apr-17

Sep-17

Futures
As of May 6, 2016

Feb-18

$60

Jul-18

Dec-18

May-19

 WTI Price: Historical and Futures
Price In April 2016
($/Barrel)

95% Confidence Interval

95 percent confidence

Energy Information Administration, Short-term Energy Outlook, April 2016

 U.S. Economy Continues to Work for
Houston

  
 
  

Good things
1;..le [x

I Scomefrom
"1.312 ls
    

 ESTABLISHED U.S. Economy Continues to Grow
Strongly and Create Jobs
• Assume in all scenarios that the U.S. economy has put
the Great Recession behind it
• Consumer has deleveraged; state and local
governments are collecting revenues at a healthy rate
and spending; the housing market has returned to close
to normal
• U.S. job growth is at 1.7 percent or about 200,000 jobs
per month throughout the forecast horizon
• Negative outlook of early this year behind us: China
and other emerging markets look better, dollar is
weaker, stock market correction behind us, leading
indicators point to moderate growth

 Smoothed U.S. Recession Probabilities
(percent chance of recession)

Percent

100
90
80
70
60
50
40
30
20
10
0

US Financial Crisis

2001 Recession

Subprime Blows Up

Currently less than 1%

Source: Chauvet and Piger smoothed recession probabilities, FRED, St. Louis Fed

 Futures Market Sees Fed Funds
Rate Rising Very Slowly
Percent Yield Fed Funds
1.2
1
0.8
0.6
0.4
0.2
0

• Virtually no chance before
of rate hike before
December 2016 says
futures market
• Not even one increase is
fully priced in before
November 2017
• Headed (someday) for fed
funds in a 3.0-3.5 percent
range
• With current 10-year
treasury yield near 2.6%,
market opinion is only 2.3%
by year-end 2017 and 2.6%
by year-end 2018

  Boom Offsets
Upstream Bust

    
 
 
  

 

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Low Oil Prices Keep Gulf Coast
Refining Margins Strong
30

($/bbl)

25
20
15
10
5
0
Pace refining margins, Oil and Gas Journal

margin
Six-mo avg

 Natural Gas Shares Oil’s
Hockey Stick Surge in Production
Marketed production, Bcf/mo, seasonal adj
2.45
2.25
2.05
1.85
1.65
1.45
1.25

DOE/EIA

 Natural gas prices collapsed

in late 2011


14
12
10

N-meO


a 0; a ?5
9% ?99 $90 "190 $908 $90 "99$164 Billion U.S. Construction
Boom is Based on Cheap Energy
• This $153 total includes many industries and all of the
U.S.
• New ethylene crackers, more ethylene-related
expansion in PE, PVC and other derivative plants
• LNG export terminals to sell surplus natural gas into
global markets
• Refiners have joined in with additional expansions
Note: The $153 billion figure is based on all U.S. shale-related expansion, estimated
by the American Chemistry Council in April, 2016

 Natural Gas Energy Content
Equivalent to $15 -$30 per Barrel
for Oil
160.00
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00
Jan-01 Aug-03 Mar-06 Oct-08 May-11 Dec-13
DOE/EIA and calculations of the author

oil $/b
nat gas $/b

 Ethylene Margins

(cents per pound)
70.00 

60.00 
50.00 
40.00 

30.00 

 

20.00 

 

10.00 1

 

0-00 

\91 ?99-10.00 

 

Large Projects Headline Over $50
Billion
in East Houston Construction
Company

Location

Project

Completion

Value ($ mil)

Exxon

Baytown

Ethylene

2017

$5,000

Chevron

Freeport

Ethylene

2017

$4,000

Dow

Baytown

Ethylene

2017

$3,500

BASF

Freeport

Ethylene

2017

$3,000

Freeport
LNG

Freeport

LNG Export

2019

$3,000

Freeport
LNG

Freeport

LNG Export

2020

$3,000

Bayer

Baytown

PUR Facility

2021

$2,000

CPV

Freeport

Gas to Polypropylene

2017

$1,500

Freeport
LNG

Freeport

Methane to Propylene

2018

$1,400

 Projects Begin to Wind Down
Rapidly After 2017
(Value of Projects Completed, $ million)

$25,000

$22,706

$20,000
$15,000
$10,000

$8,319
$4,980

$5,000
$0

2016

2017

2018

$4,000

2019

$3,000

2020

$2,000
2021

 Projects Are Still Being Proposed and
Announced … But Tough to Replace
$50 Billion
Company

Location

Project

Completion

Value ($ mil)

Ineos
Dow
MEGlobal

Brazoria

Proposed Ethylene

2020+

$ 2-4,000 ?

Freeport

Monoethylene Glycol

2019

$1,000

BASF
Fund
Connell

Freeport

Proposed Propylene

?

$1,000+

Texas City

Proposed Methanol

Status?

$4,500

Air Products

Baytown

Hydrogen

2018

$400

BASF
Chevron
Phillips

Pasadena

Plasticizers

2017

?

Baytown

PAO

2017

$?

Various sources

 A Counterweight to Upstream
Damage Lost in 2017
• Jobs added up quickly given the number and scale
of proposed construction projects in 2015-2017
• These are temporary jobs, disappearing as projects
end and capital expenditures wind down
• Normally, downstream capital expenditures are
small compared to the upstream, move in a narrow
range, and create relatively few jobs. We have been
lucky, so far.
• What if the construction boom ends with oil
producers, oil services, machinery and fabricated
metals still struggling?

 We Are Running Out of Time
• Petrochemical construction begins to wind down in
mid-2017. The petrochemical construction
advantage enjoyed so far turns negative in the next
12 months.
• Count quarters and we needed oil prices to stabilize
in 2016 Q1 for rig count and upstream energy
employment to turn up in time to offset
construction losses.
• Even our high scenario means another slow year in
2017, and either the medium or low scenario could
bring significant job losses next year

 Job Growth in Houston
2013-2019
(000 Jobs, Q4/Q4)

Scenario

Year

High

Medium

Low

30/50/20

2013

90.3

90.3

90.3

90.3

2014
2015

112.1
23.4

112.1
23.4

112.1
23.4

112.1
23.4

2016

-7.4

-11.1

-13.5

-10.8

2017

10.3

-34.2

-57.6

-30

2018

97.2

65.8

20.1

62.9

2019

94

107.3

69.4

97.1

Calculations of IRF, based on drilling scenarios above

 This Forecast vs. November:
Recovery Delayed
(Thousands of Jobs)
2014
2015
2016
2017
2018
2019

Current
30/50/20
112.1
23.4
-10.8
-30.0
62.9
97.1

Last November
40/40/20
103.6
14.0
20.1
74.4
86.8
73.6

Calculations of Institute for Regional Forecasting

 Residential and Commercial Real
Estate: The View from the Back of
the Bus
• Residential and commercial real estate is the ultimate
NONBASIC industry. A follower that responds to
growth led by others
• When oil prices fell, the office market found itself in
trouble almost immediately. And apartments just kept
building, building, building … and now have made their
own problems
• Single-family statistics still look good for the metro
area. but beneath the surface, strains are showing up in
a number of markets
• Industrial and retail are in good shape, but caution is
warranted until oil markets finally turn

 Existing Home Sales Flat in
Houston Since 2012
(sales, s.a.)

9500
8500
7500
6500
5500
4500
3500

Source: Texas A&M Real Estate Center

• Flat since 2012? Due to
lack of existing and new
home supply
• Median home prices
rose rapidly after 2011,
at 9.4 percent annually
from 2012-2014
• 2015 saw continued
high level of sales,
limited relief on
inventories, prices level
off since the spring

 Strong Growth and Lot Shortages
Distorted Single-Family Housing
Market
Median Price

Months Supply
Thousands

9
8
7
6

210
200
190
180

5

170

4

160

3

Source: Texas A&M Real Estate Center

Jul-15

Sep-14

Nov-13

Jan-13

Mar-12

May-11

Jul-10

Sep-09

Nov-08

140

Jan-08

Apr-16

Jul-15

Oct-14

Jan-14

Apr-13

Jul-12

Oct-11

Jan-11

Apr-10

Jul-09

Oct-08

150
Jan-08

2

220

 Ship Channel Cities

Baytown, Channelview, Pasadena
270

150

250

140
130

230

120

210

110

190

100

Inventory at 2.5 months
Thousands

Sales and Home Prices Rising
4
3.5
3
2.5

170

90

2

150

80

1.5

Sales

Price

Source: Texas A&M Real Estate Center, calculations of IRF

Inventory

 Close-In

Rice Military, Heights, Galleria
290

430

270

380

250

330

230

280

210

230

190

180

170

130

150

80

Sales

Thousands

Sales and Prices Sag in 2015

Inventory above 6 months,
as prices soften
6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0

Price

Source: Texas A&M Real Estate Center, calculations of IRF

Inventory

 South of I-10

Memorial and Energy Corridor

170
160
150
140
130
120
110
100
90
80

450
400
350
300
250
200
150
100
50
0

Sales

Price

Thousands

Prices hold up despite
sagging sales

Inventory now over 6
months,
growing pressure on price
7.5
6.5
5.5
4.5
3.5
2.5
1.5

Inventory

Source: Texas A&M Real Estate Center, calculations of IRF

 Woodlands in Retreat
Sales and price
crumbling quickly

Inventories on the rise

Sales

Thousands

390
370
350
330
310
290
270
250

270
250
230
210
190
170
150

5.5
5
4.5
4
3.5
3
2.5

Price

Source: Texas A&M Real Estate Center, calculations of IRF

Inventory

 Other Markets
Sales
Price
Inventory
South Houston
Flat
Up+
Low
North of I-10
Flat
Flat
Up+
Katy
Up
Flat
Low
Distant Suburbs* Down
Up
Low
*Distant suburbs are Kingwood, Pearland, and Sugarland

 Rising Land Prices Drove Cost of
New Homes
2.0

Spike in Land Prices Adds
$40,000 To Typical New
Home After 2013

(Index: 1999Q4 = 1.00)

Thousands

2.5

Land Drives Cost of
Houston’s New Home
Construction Since 2012

1.5
1.0

$250
$200
$150

0.5

$100

0.0

$50

Home Price

Land Price

Structure Cost
Source: Lincoln Institute of Land Policy

$0

Structure

Land

 Losing Our Affordability Edge?
Metro Area

Population
(million)

Share of Land Cost
in Home Price (%)

Affordability
% Potential Buyers

New York

20.1

47.4

22.0

Los Angeles

13.3

70.5

14.9

Chicago

9.6

15.8

67.3

Dallas – Fort
Worth

7.0

---

---

Dallas

4.6

28.0

54.0

Fort Worth

2.4

21.0

64.9

Houston

6.5

25.0

60.9

Philadelphia

6.1

22.2

68.9

Washington, D.C.

6.0

47.5

68.4

Miami

5.9

53.0

53.4

Atlanta

5.6

29.7

71.8

Boston

4.7

60.7

50.5

San Francisco

4.6

80.5

10.4

Phoenix

4.5

30.0

68.6

Red means the
market is
more affordable
than Houston

 Top-end buyers lost to oil bust,
bottom of the market wants back in
• High-end market for executives
and professionals is gone for the
next couple of years
• There are 2.3 million households
in Houston. Every time
affordability ticks up one percent,
it locks 23,000 families out of the
market.
• Affordability down 4-5 percent
means over 100,000 families
were pushed out since 2013
• They have household incomes of
$55-$65,000 and can qualify for
$200,000 product. Can we
deliver this price point?
Wells Fargo Housing Opportunity Index

Affordability Index:
Percentage of Houston
households that can afford
median priced home
80
70
60
50
40

 Single-Family Permits Stagger
Thousands

(monthly permits at annual rates, s.a.)

9000
8000
7000
6000
5000
4000
3000
2000
1000
0

Texas A&M Real Estate Center

 Multifamily Finally Overdoes It

Red? Where Apartment Units Are Built
or Under Construction After 2013

Epic Clara

 
   
     
 
 
 
 
 
    
  
   
   
 
  
  
      
  
 
 
 

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Light Orange Doubles Apartments In A
Local Market Since Early 2014, Medium
Triples, Darkest Quadruple or More

 Class A Apartment Market Suffering
from Self-Inflicted Wounds
Class A Rents and Occupancy Under Growing
Pressure
Stable

In Lease Up

All Class A

No. of
Units

118,922

23,498

142,420

Monthly
Rent

$1,434

$1,505

$1,464

Occupancy

91.3%

26.2%

80.5%

Apartment Data Services

• Occupancy still very high at
90+% for Class B,C, and D
• Class A is struggling with rent
under pressure from
widespread concessions and
falling occupancy rates
• There are 23,500 units in
lease-up with only 26.2%
occupancy, another 25,000
units still in the construction
pipeline
• Some parts of Houston will
get a couple of months of
relief from concessions as
flood victims seek new
housing

 New Product Puts Class A Under
Pressure, Others Okay … So Far
93

83

92

Apartment Data Services

91
90

Class B

Class C

Apr-16

Feb-16

Dec-15

Oct-15

Aug-15

Jun-15

87

Apr-15

79

Feb-15

88
Dec-14

80

Oct-14

89

Aug-14

Apr-16

Jan-16

Oct-15

Jul-15

Apr-15

Jan-15

Oct-14

Jul-14

81

Occupancy

94

84

82

Mo. Rent $

95

Jun-14

85

Apr-14

1,500
1,490
1,480
1,470
1,460
1,450
1,440
1,430
1,420
1,410
1,400

Occupancy Still high in Class B,C, and D

Apr-14

Class A Rents and Occupancy Under
Pressure

Class D

 Multifamily Permits Finally Turn
Down In Houston
6-month average

3,000
2,500
2,000
1,500
1,000
500
0

 These Multifamily Vacancy Rates Have
Been Seen Before
(percent)

10%
9%
8%
7%
6%
5%
4%
1995
CoStar, IRF

Forecast Vacancy Based
on 30/50/20 employment
Population

2000

2005

2010

2015

2020

 Office Market Deliveries Out of
With Local Economy

Office Market Swoons
• The worst damage was done with 14.5 million square
feet entering construction just before the bust begins,
from 2013Q2 to 2014Q1
• Much of the space was for corporate headquarters,
campuses, and otherwise preleased … but it opened
the door to at least 10 million square feet of sublet
space to return
• Oil bust arrives, and it leads to an all-to-familiar cycle
with office deliveries completely out of synch with the
local economy, with vacancies on the rise and rents
under pressure

 Office Vacancy Forecast
18%
17%
16%

Low

15%
14%
13%
12%
11%
10%
CoStar, IRF

30/50/20
Average =
13.2 %

High

 Vacancies Rise Through 2017 Mainly
Due to Continued Deliveries
5%
4%
3%
2%
Change in Vacancy

1%

% Change S.F.

0%
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
-1%
-2%
-3%
CoStar, IRF

 Local Office Markets With Vacancy
Rate Already Above 16 Percent

 

 

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Industrial Thriving in East,
Pauses in the West

Industrial Buildings Delivered After
2010: East vs. West

 
  
    
   
   
  
  

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Deliveries: West Now Holds Steady
While East Ramps Up
Year

RBA Delivered
East

RBA Delivered Percent
West
West

2010
2011
2012
2013
2014
2015
2016 (Includes
Under
Construction)

559,217
380,214
1,738,112
1,566,298
1,940,699
3,349,933

2,003,106
1,864,422
2,848,026
6,320,350
6,754,671
7,736,091

78%
83%
62%
80%
78%
70%

7,297,404

7,169,949

50%

Grand Total

17,041,877

35,526,615

68%

CoStar, IRF Geography

 11%

Vacancy Rates Trend Up in West
and Down in the East

10%
9%
8%
7%

East
West

6%
5%
4%
3%
2%
1995

2000

CoStar, 2016 YTD

2005

2010

2015

2020

 Industrial Rents Pause in West
and Rise in the East
(NNN Overall)

$7.0
$6.5
$6.0
$5.5

East
West

$5.0
$4.5
$4.0
$3.5
$3.0
1995
CoStar, 2016 YTD

2000

2005

2010

2015

2020

 Retail: Ready for the Recovery
• Retail missed the boom of recent years after delivering 16
million square feet in 2006-07, just in time for the Great
Recession
• It has been relegated in recent years to following the
grocery store anchored shopping centers, chasing new
home construction around the Grand Parkway
• Vacancy rates turned healthy and rents began to rise – but
just in time for the current oil bust
• Retail sales continue to grow slowly, but is the market for
new product is diversifying from grocery stores.
• The current construction pipeline is no threat to the market,
growing more slowly than population. But definite signs of
weakness are now showing up in some housing markets,
and retail sales growth cut by half through 2015.

 Consumer Taxable Sales Still Grow
Slowly, Business Sales in Full Retreat
Billions

$ Billion Taxable Sales
11
10
9
8
7
6
5

Texas Comptroller, data for City of Houston

Consumer
Business

 But Rents and Vacancy Turned Just in
Time for the Bust
10%
9%

Rent $/ft.sq.

$15

8%

$14

7%

$13

6%

CoStar, 2016 YTD

$16

Vacancy Rate

$12

5%

$11

4%

$10

 20%

Retail Growth Will Continue to Lag
Population Based on Current
Construction Pipeline

15%
10%

Population
Retail

5%
0%
2016

2015

2014

CBRE, Texas A&M Real Estate Center, IRF Forecast

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

-5%

 Thank You for Attending
Please Join Us for Our Next Symposium on
Thursday, November 10, 2016
Registration Information in September

 South Houston

South Belt, Clear Lake, League City

Inventory loosens

450

220

400

200
180

350

160

300

140

250

120

200

100

Sales

Thousands

Sales flat, prices rising
4.5
4
3.5
3
2.5

Price

Source: Texas A&M Real Estate Center, calculations of IRF

Inventory

 South of I-10

Memorial and Energy Corridor
Prices hold up despite
sagging sales
500

160

400

140

300

120

200

100

100
0

80

Sales

Thousands

180

Inventory rising steadily,
growing pressure on price
5.5
5
4.5
4
3.5
3
2.5
2
1.5

Price

Source: Texas A&M Real Estate Center, calculations of IRF

Inventory

 Katy

Katy North and South
Sales and price holding on
310
290
270
250
230
210
190
170
150

370
350
330
310
290
270
250

Sales

4
Thousands

390

Inventories still low
3.5
3
2.5
2
1.5

Price

Source: Texas A&M Real Estate Center, calculations of IRF

Inventory

 Other Distant Suburbs
Pearland, Sugarland, Kingwood
600

340
320
300
280
260
240
220
200

550
500
450
400
350
300

Sales

Thousands

Sales sag, price strong

Inventories remain very
low
2
1.5
1
0.5
0

Price

Source: Texas A&M Real Estate Center, calculations of IRF

Inventory