Hurricane Harvey s impact on the Houston commercial real estate market

Transcription

1 Houston October, 2017 JLL Research Report Hurricane Harvey s impact on the Houston commercial real estate market Evidence gathered shows damage far less than initially forecasted

2 Contents Setting the stage 3 Ascertaining the impact A methodology note 3 #1 The office market 4-5 #2 The industrial market 6 #3 The retail market 7 #4 The multifamily market 8 Conclusion 9

3 3 Setting the stage H urricane Harvey made landfall northeast of Corpus Christi, Texas on August 25, 2017 with sustained winds of 130 miles per hour. The Category 4 storm was the most powerful to hit the United States mainland in more than a decade. The slow-moving system would quickly be downgraded to a tropical storm, but the initial damage caused by wind and storm surge was only the beginning. Harvey dumped an estimated 19 trillion gallons of water onto Southeast Texas in just four days. This deluge harmed vital infrastructure and inflicted untold billions of dollars in personal losses. Despite residential property losses not seen on a scale in the United States since Hurricane Katrina, the majority of the Houston commercial real estate market emerged relatively unscathed and is well on the road to recovery. Ascertaining the impact a methodology note Immediately following Harvey, the JLL Research team set out to quantify and qualify property damage wrought by Harvey with the goal of informing our investor and occupier clients. Given the massive number of commercial properties in Houston and the chaotic nature of assembling data in a post-disaster situation, great care and time was devoted to ensure the information was accurate and corroborated. Calls and inquiries went out to property managers, brokers, tenants, and research teams market wide. On a daily basis, the commercial real estate community traded data which detailed flooded properties, the extent of repairs needed, and the estimated time to return to operational status. Those results have been tabulated and were used to inform the findings of this report. Energy Corridor flooding (Source: Erich Schlegel, Getty Images)

4 4 The office market JLL tracks 167 million square feet of rentable office space in 870 competitive properties within the Houston metro area. This total includes only Class A and B singleand multitenant office properties greater than 40,000 square feet in size. Owner-user, medical, and government buildings are excluded from the statistical base. million square feet of office inventory was damaged in the storm; the majority is already operational of 9.8 percent of this inventory s total rentable area was affected. Thus, roughly 1.5 million square feet of interior space like lobby areas, firstfloor suites, grade-level building systems, and underground parking garages experienced flooding throughout the tracked market. Impacted submarkets Reservoirs. This drastic measure was required to preserve the integrity of the reservoir walls which, if breached, would have inundated large swaths of the city and destroyed commercial and residential space on an unimaginable scale. To be sure, the releases did their job, but many structures suffered because of it. Damage totals After accumulating data from multiple sources, the final tally of properties within this inventory revealed 57 office buildings totaling 15.5 million square feet sustained damage, some of it very minimal. This total represents 9.3 percent of JLL s tracked inventory far less than was expected given the scope of the flooding. Furthermore, as floodwater intrusion was confined to ground floor spaces, only an average Eighty-three percent of the flooded office properties were located in the Katy Freeway East & West, Galleria, and Midtown submarkets. These properties are located immediately adjacent to Buffalo Bayou which snakes through the city until its terminus in the Houston Ship Channel east of town. In addition to widespread drainage into the bayou system during the storm, the situation worsened days after due to controlled releases from the Addicks and Barker Of the impacted submarkets, nearly half of the properties reporting water intrusion were located in the Katy Freeway East and West submarkets, also known as the Energy Corridor. This submarket is home to headquarters operations for a number of Fortune Global 500 energy companies and represents one of the greatest concentrations of energy companies in North America. 83 percent of flooded office properties were located in submarkets adjacent to Buffalo Bayou (Source: JLL Research, Blackbird)

5 5 The office market, continued Recovery timeline Though not all survey results detailed operational recovery timelines, those which provided this information indicate a full 91 percent have reopened already or will be open for business prior to year-end. Thanks to the immediate response of property personnel, building systems engineered to withstand weather events, and contingency plans, the initial fears of a catastrophe in which large portions of Houston s office market were wiped out were largely overstated. Other notable flooding did occur outside of the metro core in areas like FM 1960, Greenspoint, and elsewhere, but like those mentioned above, most have been repaired already. Post-Harvey office tenant demand JLL has seen no reversal from the six million square feet of tenants in the market we were tracking prior to Harvey. Some deals were put on hold during the event, but most are re-engaging the market and negotiations have resumed as we move into the fourth quarter. A handful of immediate short-term space requirements emerged, but those were quickly settled into current vacancies or were pulled from the market as tenants buildings were repaired. A few requirements blasted out to the brokerage community were solely contingency plans as firms planned for the worst. All told, no needle-moving requirements have been reported. The Energy Corridor Looking ahead, and given where the majority of business-altering flooding took place, expect tenants in the market to scrutinize office space in the Energy Corridor much more closely. This may further compound the dramatic occupancy losses suffered in this area after the energy crisis: vacancy today sits at 31.2 percent in Katy Freeway West, the largest submarket in the Energy Corridor. Tenants in the market: Focus on: The Energy Corridor CBD 2,447,500 Recovery timeline Houston office properties with known repair dates (Source: JLL Research) Energy Corridor 979,000 9% 6% 55% Multiple 920,000 30% Within one month of event Prior to year end 2018 or beyond No interruption of service Galleria Northwest 293, ,000 Greenway 117,000

6 6 The industrial market 2 A 52 million square feet of Houston s industrial inventory is within the 100- year floodplain according to CoStar, which places the properties at heightened risk for a water incursion. Despite this danger, the industrial market emerged from the crisis largely unscathed, especially as compared to the office market. Only a handful of warehouse or manufacturing properties were materially impacted by floodwaters within the Houston area. Damage reported was typically a leaky roof or other minor event. Why was the industrial market spared? combination of geography and design spared the Houston industrial market There are many reasons the industrial market escaped the wrath of Harvey and the first is geography. The majority of business parks are located in areas not immediately proximal to the bayou system. These industrial parks are spread throughout the region and are much less dense than the areas which bore the brunt of the storm. The second reason is design. Most industrial developments have on-site water detention or retention which serves to absorb, store, and evacuate rainwater in such situations; truck courts and large lots help as well. Also owing to design, most modern warehouses are built between two and four feet above grade, with thick foundations. Taken together, the industrial market was fortified against widespread in-building flooding. Post-Harvey industrial tenant demand Unlike the office market, the immediate need of tenants looking for industrial space has already resulted in leases being signed thanks to a purported million square feet of new requirements. Building supply retailers are expanding to meet long-term demand for construction supplies as the city struggles to rebuild thousands of homes. Other retailers with significant warehouse footprints like furniture, appliance, and carpet/tile product will continue to expand into the new year. Thanks to this new demand coupled with the existing 11.4 million square feet of tenants in the market prior to Harvey, vacancy will continue to decline. The 4.9 percent vacancy rate enjoyed by industrial owners will likely decrease by basis points over the next four quarters. Submarket focus: North Houston The North submarket, which currently has the highest vacancy in Houston, will benefit greatly from this sustained demand; indeed this is already being seen today as 50 percent of signed third quarter deals occurred in that submarket. Looking ahead, 40 percent of the largest existing contiguous blocks are located in the North, so expect leasing activity to increase as new and existing tenant requirements look to this submarket. North submarket poised for growth: Deal activity up, vacancy down Direct vacancy 8.2% Q2 Q3 Q4 Q1 Q2 Q

7 7 The retail market 3 Retail real estate market largely unaffected by storm waters and flooding Challenges faced by retailers Houston s retail inventory was minimally affected by Harvey according to our research. Some onsite flooding was recorded, but the primary issue facing retail tenants was disruption of sales due to store closures. Reasons for these closures include: resident curfews, supply chain interruptions, access difficulties for customers due to impassable roadways, and employees not being able to get to work. These challenges, by and large, were very short lived, and most retail sales resumed days after the floodwaters receded. Some retailers even reported spikes in sales, especially those that sell food, gas, and home improvement supplies. How will Harvey affect retail CRE fundamentals looking ahead? Like the industrial market, vacancy in Houston s retail sector pre-harvey was very low at 5.4%, and recent demand has been heavy in most retail settings throughout the region. Because of all this demand, both new and existing, vacancy is forecasted to diminish by basis points in the fourth quarter. This will spur simultaneous increases in rental rates and likely additions to the development pipeline. A tight retail market + more tenants = pricing premiums Tenants looking to expand in the fourth quarter because of the storm, like those in the home improvement sector, coupled with existing retailers in the market means few will be able to find viable options. Expect rents to increase in lockstep. Focus on: The auto industry Automobile retailers saw the most dramatic effects of Harvey. First, car lots and inventories were inundated by the storm, as over 350,000 new vehicles on dealership lots were flooded according to Edmunds. Added to this total were the personal vehicles of countless Houstonians: some estimate the final tally will be a million vehicles taken out of service. As the water receded and demand for replacement vehicles skyrocketed across the car-dependent metro, dealers were forced to truck in new inventory from all over America. The immediate outcome for automakers and retailers will be a reversal of the recent slowing sales trend, as Harvey and, more recently, Hurricane Irma will eliminate much of the supply overhang seen earlier in 2017.

8 8 4 Multifamily by the numbers Forecast The multifamily market Damage to multifamily inventory less than expected, supply overhang likely absorbed Houston s multifamily market consists of just over 600,000 units and was expected to fare very poorly in the aftermath of the hurricane. However, data gathered by the multifamily research group Apartment Data Services, who reached out to thousands of owners and managers, proved otherwise. The latest information released shows that only 10,600 units - representing 1.7 percent of the inventory took on water or were otherwise damaged. To put this in context, the number of affected units was surprisingly less than when Tropical Storm Allison hit in 2001: 20,000 units were damaged in that storm. When combining the units removed from Houston s multifamily inventory due to flooding with a spike in demand from the thousands of residents seeking housing, a continued decline in overall vacancy which sat at 11 percent prior to the storm will be seen in quarters to come. Also contributing to the forecasted vacancy diminishment is the relatively light development pipeline the region is facing, with just over 7,000 new units under construction. Because of the stronger demand and moderation of new supply, rents will climb and free rent concessions will likely disappear. Expect multifamily vacancy to contract by basis points in the immediate future and come to rest firmly in the single digits in Hurricane Harvey flooding in Southeast Texas (Source: Daniel J. Martinez)

9 9 Will Houston ever be the same? Will the impact of Hurricane Harvey fundamentally alter the attractiveness of Houston as the Energy Capital of the World? Will the largest known concentration of healthcare providers in the Texas Medical Center pack up and head for the hills? Will the hundreds of thousands of residents who have descended upon Houston over the last decade cut their losses and move on to greener pastures? The short answer is no. The same factors that caused the massive expansion of the Houston metro area will be the reason it continues to thrive. The intellectual capital. The enormous concentration of key industry clusters. The business friendly climate. The people, the diversity, and the dogged spirit of the Wildcatter, still seen today. Houston s not going anywhere we re just getting started. Houston evacuees (Source: United States Department of Defense)

10 About JLL JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. A Fortune 500 company, JLL helps real estate owners, occupiers and investors achieve their business ambitions. In 2016, JLL had revenue of $6.8 billion and fee revenue of $5.8 billion and, on behalf of clients, managed 4.4 billion square feet, or 409 million square meters, and completed sales acquisitions and finance transactions of approximately $145 billion. At the end of the second quarter of 2017, JLL had nearly 300 corporate offices, operations in over 80 countries and a global workforce of nearly 80,000. As of June 30, 2017, LaSalle Investment Management had $57.6 billion of real estate under asset management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit ir.jll.com. About JLL Research JLL s research team delivers intelligence, analysis and insight through market-leading reports and services that illuminate today s commercial real estate dynamics and identify tomorrow s challenges and opportunities. Our more than 400 global research professionals track and analyze economic and property trends and forecast future conditions in over 60 countries, producing unrivalled local and global perspectives. Our research and expertise, fueled by real-time information and innovative thinking around the world, creates a competitive advantage for our clients and drives successful strategies and optimal real estate decisions. About this report In addition to the efforts of dozens of commercial brokers, property managers, researchers, property owners, and tenants that contributed to this report, third-party sources used include the National Hurricane Center, Apartment Data Services, Reuters, Edmunds, Business Insider, and The Washington Post Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.