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Houston’s Monthly Metrics: July 2015

The following article originally appeared in the July newsletter to clients of Kiley Advisors, LLC for the purpose of providing the latest leading indicators and industry issues to those clients. Reprinted with permission.

Has the bottom been reached for oil and gas?

Oil prices appear to have settled around $60/barrel and the rig count and well permits seem to have bottomed in April, showing positive signs in May, for the first time in months, that the decisiveness and deep cuts that quickly permeated the oil and gas industry earlier this year could be over.

Saudi Arabia has declared they will no longer be the swing producer, putting Texas and North Dakota in a precarious position of being at the mercy of the global oil market’s supply and demand; cutting back US production whenever needed. In fact, Saudi Arabia has increased their production to record levels, which continues to threaten the US energy market; dipping into their sovereign fund to make up for the lost revenue as they keep the price of oil low. This swing producer predicament is one that Dr. Gilmer, head of the University of Houston Institute for Regional Forecasting, called several months ago. And while he confesses that the downturn was much faster than he anticipated, the worst is still yet to come for Houston.

Most industries expect a slower 2015 than 2014 (an anomalous stellar year), but 2016 seems to be the real test. While many industries, including our own, are still very busy, the fourth quarter and beyond loom like a dark storm heading our way. Whether that storm will be more like Hurricane Ike or whether it will be like Tropical Storm Bill remains to be seen.

What we know today is that the market is still incredibly good. While City of Houston permits show a decline year over year, it is in about the range we expected (15-20%) after the all-star 2014. While construction employment has softened, that tempering may be due more to the wet weather that has been punishing contractor deadlines since February. Centerpoint Energy reports no drop in temporary customers, and CBRE’s Q2 preview shows the light industrial market remains strong, with vacancy at or below 6% for the 17th consecutive quarter, positive absorption and increased construction. Likewise, the retail sector is also ramping up, with increased construction, vacancy down and positive absorption, primarily due to several mixed-use projects breaking ground around the city. Multifamily, despite its risk for overbuilding, is still healthy overall. While construction is declining, occupancy and rates are up, with bigger concessions luring renters. The office market, however, is probably the hardest hit of the four, as sublease space continues to flood the market, particularly as Exxon finalizes its campus in Q3.

While the afterglow of 2014 will wear out by year end 2015, Houston is still on track for growth, albeit slow. 2016 may provide a much-needed breathing period as those markets that were accelerating too rapidly can regroup while those markets who were lagging can catch up.