HOUSTON — It’s much too soon to know the extent of the damage Hurricane Irma has inflicted on Florida and the Southeast, but a clearer view is starting to emerge with regard to the total impact that Hurricane Harvey has had on the Houston commercial real estate market.
Hurricane Harvey, a Category 4 storm that made landfall on Aug. 25 near Rockport, Texas, was the strongest storm to hit the Texas Gulf region since 1961, according to CBRE Research. The hurricane dumped more than 50 inches of rain across the region in a matter of days and caused extensive property damage due to flooding.
Moody’s Analytics estimates that the hurricane caused anywhere from $81 billion to $108 billion in property damage and economic loss, including the closing of Port Houston and many oil and gas refineries. If these estimates are correct, this would make it the second costliest natural disaster in the history of the United States, only trailing Hurricane Katrina in 2005.
Just a few weeks later, Hurricane Irma became the first Category 4 storm to make landfall in Florida since 2004. In its wake, the hurricane has caused severe damage in Miami, the Florida Keys and Naples, as well as flooding in several Southeastern cities, including Jacksonville, Savannah and Charleston. Several cities in Florida remain under flood warning from the National Weather Service as of this writing.
CBRE Research reports that Houston’s commercial real estate markets are showing resiliency in the wake of Hurricane Harvey, with some property types potentially benefitting from the disruption. The following is CBRE Research’s sector-by-sector breakdown of how the hurricane is impacting the region.
Office Market Mainly Unscathed
Nearly all of Houston’s office buildings escaped the worst flooding. CBRE Research estimates that of the city’s 1,200-building, 214 million-square-foot inventory, fewer than 40 buildings totaling approximately 9 million square feet sustained some level of damage.
Most of the office product impacted by flooding is in four areas to the west and northwest of the central business district — West Houston, Allen Parkway, West Loop/Galleria and FM 1960/Highway 249. These submarkets comprise 74.6 million square feet, or 35 percent of the total Houston office market, which was 84 percent leased at the end of the second quarter.
Displaced tenants are already actively searching for suitable, furnished and turnkey temporary space. Many of these tenants expect to return to their original locations as soon as next month.
Consequently, many will sign very short-term leases rather than long-term, direct leases. More than 11.1 million square feet of sublease space was available in Houston at midyear. As a result, CBRE Research expects to see a decline in sublease availability in the third quarter.
Some direct tenants previously marketing sublease space have removed their listings from the market for two main reasons: orchestrating an office move in the next several months will be difficult and office build-outs of their future space will face construction delays caused by a shortage of materials and construction workers.
Soft Multifamily Market Will Reverse
The Houston Apartment Association estimates that roughly 105,000 apartment units (or one in six units in the city) were damaged from the storm, and as noted by Norman Radow of The RADCO Cos., apartments not directly damaged by the storm could be indirectly affected by power outages and other storm-related issues.
According to CBRE Research, a small number of high-density submarkets sustained damage in as much as 30 percent of existing inventory, or approximately 22,300 occupied units, which is creating immediate leasing demand.
Apartments currently for rent that escaped the storm in west, northwest and northeast Houston should see sharp occupancy since the start of the third quarter.
The concessions and competitive move-in specials that characterized Houston’s multifamily market since 2016 are expected to quickly rescind, and CBRE Research says that renters with leases expiring in the next six months should not anticipate any type of renewal incentives.
Industrial Real Estate Occupancy to Rise
Labor and resource reallocation — along with short-term disruptions like lost productivity and interrupted supply chains — are some of the immediate pressures facing Houston’s industrial market. There were isolated instances of damage to dock-high, Class A product, particularly on the west side and along the I-10 corridor, but the majority of Houston’s industrial product weathered the storm with no major structural damage.
Houston’s largest industrial cluster, the inner Northwest and inner North/Northeast, reported few “major damaged” or “destroyed” properties, according to the Federal Emergency Management Agency (FEMA).
Moody’s estimates a loss of 6 percent to 8 percent of industrial value, or $2.6 billion, based on analysis and comparison to similar occurrences. The damage likely is greater within older properties and those located near Houston’s bayous.
Several national building supply companies are presently securing additional space for the extensive $100 billion rebuilding effort that will occur over the next year. A spike in requirements ranging from 20,000 to 500,000 square feet is expected to put downward pressure on industrial vacancy rates over the near term, driven by building suppliers, charities and distributors of consumer goods. Many non-flood-related industrial requirements will likely now go unfulfilled.
Houston’s massive reconstruction and repair project (including an estimated 100,000 homes) likely will fuel a significant increase in industrial occupancy, particularly in light-industrial space, which correlates highly with building and construction material distribution. Wholesale and retail distribution activity should also increase, as consumers replace damaged furniture and other household goods.
Affected Texans will also have to replace nearly 660,000 destroyed or severely damaged vehicles. This will help jump-start vehicle sales, which have been slowing in recent months, which should benefit multiple markets along the complex automotive and automotive parts supply chains.
Retail Leasing Market Will Tighten
Prior to Harvey, Houston’s Class A retail market was 97 percent leased in the second quarter, which is a record high, according to CBRE Research. Altogether the Houston retail market’s second-quarter vacancy rate was 5.8 percent.
Hurricane damage to retail properties was mainly limited to neighborhood and strip centers in the hardest hit areas, such as the suburban and mainly single-family residential neighborhood of Kingwood to the northeast, Cypress in the northwest and West Houston.
As a result, Harvey is not expected to impact national retailers’ expansion plans, although a market strained by limited availability will continue to hinder leasing. Displaced retail tenants have already begun searching for temporary space, with little success due to the tight market conditions. Home improvement and related retailers already active in Houston’s housing market are expediting their location decisions to capture demand for housing repairs.
Local retail sales will increase, especially for durable goods such as automotive, home improvement, furniture and appliances as residents begin to rebuild their homes. CBRE Research predicts that retail sales tax receipts will spike mainly in Harris, Montgomery and Fort Bend counties.
— John Nelson