Commercial Property Sales in Houston Tumble 74%
An echo of the nationwide trend as lending norms stiffen and interest rates soar.
Commercial Property Sales in Houston faced a significant downturn in the first half of 2023, with sales dropping by 74 percent compared to the same period in 2022. This slump is reflective of a broader trend across major metropolitan areas in the US, a situation that a report by MSCI attributes to the double-edged sword of increased interest rates and stricter lending criteria posing hurdles for the commercial real estate sector.
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So why are many Houston commercial real estate and office properties dropping in value?
Financing is more expensive.
Financing property deals has become substantially more expensive over the past year, with the cost of borrowing more than doubling and interest rates hitting a 17-year high. The rise in capital cost and the implementation of more stringent credit terms for newly issued debt have created a difficult environment for prospective buyers to secure acquisition loans.
Adding to the challenges is the high office vacancy rate in Houston, which currently stands at almost 27 percent, according to Avison Young. Additionally, leasing activity decreased by 29 percent in the first quarter compared to the last quarter of 20221.
In a recent piece at real estate-focused news site The Real Deal, Ryan Barbles of Stream Realty Partners’ Houston office explained that lending institutions have a significant influence on many of these deals. However, they are not in a favorable position to lend money for commercial real estate due to higher vacancies and the ongoing banking crisis. The combination of these factors, along with maturing loans and a freeze in capital markets, presents a difficult scenario.
Why did First Republic Bank Fail? Find out here.
Office properties are seriously struggling.
Office buildings have been a significant contributor to the current downturn. The costs associated with acquiring such properties have deterred investors, leading to falling sales and prices1. Specifically, the sales volume for office spaces in Greater Houston plunged 56 percent year-over-year, dropping from $765 million in the first quarter of 2022 to a mere $333 million in the first three months of 20231. Investment sales have also dipped, reaching one of the lowest levels in year-to-date estimates since the 2016 oil bust. Despite these challenges, some contrarian buyers embrace a “Warren Buffett mentality,” seeing this as an opportunity to invest when others are fearful of the market.
Sale of San Felipe Office Building Exemplifies the Crisis
A prime example of the struggles of commercial property sales in Houston, and specifically Houston’s office sector, is the sale of the San Felipe Plaza office building in the Galleria by Parkway Property Investments. The building was sold for $83 million, a staggering 62 percent below its appraised value of $219 million.
High vacancy and age contributed to the depreciation in value, as the trend of favoring quality over quantity has led to increased vacancies in Houston’s office market. The distress in the Bayou City’s real estate market is also affecting owners of buildings with soon-to-mature low-interest loans or floating-rate financing, especially in the office and lodging market, as well as mid-class apartment properties. Houston brokers looking for loans are turning to traditional financing sources as well as new entrants to the market, with Finance Lobby offering commercial real estate financing– including office property financing- in all 50 states- including the Great State of Texas.
Houston CRE is far from alone.
However, the decline in commercial real estate activity isn’t exclusive to Houston. Nationwide, the industry has seen a slowdown compared to 2022, the most active year on record. While commercial sales declined by 56 percent year-over-year to $85 billion in the last quarter, this figure aligns with the pre-pandemic average of $88 million between 2005 to 20191. In Greater Houston, sectors such as retail, industrial, and multifamily have experienced minor reductions in new construction and investment sales, but they have largely remained stable year-over-year.
The recovery of the overall market and a rise in commercial property transactions will likely depend on the stabilization of interest rates. Once interest rates stabilize, potential buyers may regain their confidence, leading to a more stable market.
How to Defend Your Interests During a CRE Freefall
During a commercial real estate freefall, when commercial property sales in Houston are falling, brokers and lenders must be proactive to stay afloat. Firstly, brokers can focus on diversification, aiming to list properties across a variety of sectors to offset potential losses in one particular area.
They can also provide value-added services to clients, such as market analysis and tailored property recommendations. Lenders, on the other hand, can review and potentially adjust their risk assessment strategies, consider restructuring loan terms to aid borrowers, and ensure clear communication with clients about potential risks and mitigation strategies.
In uncertain times, one effective strategy is seeking out reliable financing options or brokers to assist with financing needs. Consider exploring Finance Lobby, the nation’s largest commercial real estate financing marketplace. With its extensive network and myriad of financing options, it serves as an invaluable tool in navigating the uncertainties of a real estate market downturn. Access the country’s largest pool of commercial real estate financing, purpose-built for brokers and lenders, here.
