Saudi Arabia Oil Turn & The COVID-19 Pandemic

[MidCenturyMoldy]

Saudi Arabia Stuns World With Massive Discount In Oil Sold To Asia, Europe And U.S.

 

Oil prices are down more than 30% this year.

 

 

Oil prices are poised to drop dramatically after Saudi Arabia announced a stunning discount in oil prices — of $6 to $8 per barrel — to its customers in Asia, the United States and Europe. 

 

The world's second-largest producer this weekend also said it will actually boost oil production instead of cutting it to stem falling prices, in a stunning reversal in policy from just two days ago. 

 

The benchmark Brent oil price already plunged 9.4%, to $45.27 per barrel, on Friday. The drop came after Saudi Arabia, the rest of OPEC and Russia failed to agree on production cuts to combat falling prices due to fears that the coronavirus epidemic will halt world economic growth.

 

https://www.npr.org/2020/03/08/813439501/saudi-arabia-stuns-world-with-massive-discount-in-oil-sold-to-asia-europe-and-u-

Edited March 8, 2020 by MidCenturyMoldy

[MidCenturyMoldy]

Then again, with lower gasoline prices, it'll be easier to drive around the country searching for pockets of population unaffected by Coronavirus. 😐

Edited March 8, 2020 by MidCenturyMoldy

[MidCenturyMoldy]

Well, maybe Russia will relent and things can go back to their pre-apocalyptic norms? Then again, a Saudi-Russian hot war might be fun! 😱

 

Oil plunges near $30 a barrel as Saudi-Russia price fight erupts

 

https://www.chron.com/business/energy/article/Oil-in-Freefall-After-Saudis-Slash-Prices-in-15115465.php?utm_medium=referral&utm_campaign=twitter&utm_source=twitter.com

[cloud713]

Yep.. oil is the real black swan for the next major recession, not the coronavirus. I wouldn't be surprised if any projects that aren't about to get out of the ground get put on hold/shelved. We had a good run..

[Montrose1100]

Well we haven't really had any oil related real estate go up? One Market Square might never get off the ground for a few years, or 6 Houston Center. Speaking of which, every time a rendering shows up for 6 Houston Center we seem to hit an economic slump. Coincidence? Cursed I tell you!

[Luminare]

I think it shows just how far our industry has come when the Saudi's have all but given up trying to take us out and instead are trying to hang on to the number 2 spot. I expect OPEC to break up over this. This decision effectively ends that enterprise if they aren't able to cooperate as a block. Russia will win out in the end because its simply a bigger and more diverse economy than Saudi Arabia. I'm sure things will slow down even more for the industry here, but if the Saudi's weren't able to push us out the last time when the home industry was in its infancy then I don't think they will be able to kill it off now that its more matured.

[H-Town Man]

11 hours ago, cloud713 said:

Yep.. oil is the real black swan for the next major recession, not the coronavirus. I wouldn't be surprised if any projects that aren't about to get out of the ground get put on hold/shelved. We had a good run..

 

Although oil is down because of the coronavirus, so it really is ultimately the virus. Things might get real slow around this forum for awhile. I hope that all the projects expecting financing decisions soon will get them (TMC3, Laneways, Block 98, etc.), but the economy is collapsing and credit could freeze up.

 

The silver lining might be that if fracking gets killed in a price collapse, that could open the door for a revival in offshore projects in a couple years, which fills a lot more office space in Houston than the fracking sector does.

 

[Luminare]

22 minutes ago, H-Town Man said:

 

Although oil is down because of the coronavirus, so it really is ultimately the virus. Things might get real slow around this forum for awhile. I hope that all the projects expecting financing decisions soon will get them (TMC3, Laneways, Block 98, etc.), but the economy is collapsing and credit could freeze up.

 

The silver lining might be that if fracking gets killed in a price collapse, that could open the door for a revival in offshore projects in a couple years, which fills a lot more office space in Houston than the fracking sector does.

 

 

If its because of a virus I would assume anything medical related would get the green light as healthcare spending and investment would get a huge boost, or will be at the forefront of investors minds in the meantime meaning TMC3 should be safe, especially since this endeavor will have a huge focus on medical tech, and with China showing that they have no issue with stopping trading of medical supplies to direct them to themselves (not saying that is a bad thing for them, any country would do that in their situation) which means I foresee a huge push to start manufacturing anything medical at home which could be a huge boom for the local economy. Image if we really started throwing bets into medical manufacturing. Houston seems tailor made to be the epicenter of such an industry. Major US port for exports, and geographically centralized to reach most the nation in regards to supplies.

 

While the virus has triggered this price war, this was brewing for a long time. The Saudis just took this moment to act.

[jgriff]

34 minutes ago, H-Town Man said:

 

Although oil is down because of the coronavirus, so it really is ultimately the virus. Things might get real slow around this forum for awhile. I hope that all the projects expecting financing decisions soon will get them (TMC3, Laneways, Block 98, etc.), but the economy is collapsing and credit could freeze up.

 

The silver lining might be that if fracking gets killed in a price collapse, that could open the door for a revival in offshore projects in a couple years, which fills a lot more office space in Houston than the fracking sector does.

 

I would think pricing that kills fracking would super duper kill offshore.

 

The only silver lining I can think of, and this is a real reach, is that downstream could benefit from lower feed prices. 

[AREJAY]

1 hour ago, H-Town Man said:

 

Although oil is down because of the coronavirus, so it really is ultimately the virus. Things might get real slow around this forum for awhile. I hope that all the projects expecting financing decisions soon will get them (TMC3, Laneways, Block 98, etc.), but the economy is collapsing and credit could freeze up.

 

The silver lining might be that if fracking gets killed in a price collapse, that could open the door for a revival in offshore projects in a couple years, which fills a lot more office space in Houston than the fracking sector does.

 

Oil is drastically down because of the price war between Saudi and Russia, not so much because of the virus. Fracking / shale can react quickly and be started and/or stopped quickly, while offshore / deepwater is super slow to react. I'm afraid that offshore activity is going to be depressed for a long while....

[TheSirDingle]

The market is probably gonna rebound by the middle of the year, or later at most. Russia and Saudi aren't going to last long (no matter how much reserves they have) if oil stays below $40. Considering oil is 16% of Russia's GDP (52% federal revenue, and 70% exports), and 42% of Saudi's GDP (87% budget revenue, 90% export earnings) I would find it crazy if it doesn't rebound above the median later this year ($70 maybe even $80+). So I wouldn't worry to much about it, ultimately it might even help Houston in the near future. 

Going onto COVID-19 and how it effected the market. Overall, it's a general over reaction by the market which usually happens when a supposed big name disease comes around. When the cure is found the market, and oil will rebound like nothing we've ever seen before. it's going to make the previous gains looks like a bust.  

 

Now with the Development side of things. I could see the the developers who were skeptical before shelve their developments because they're scared of low demand/bad returns (which really shouldn't be a problem in this area, and isn't). But, the developers who know what they're doing are going to keep on building. During this mini-recession land/construction prices are going to go down, which tends to make it cheaper for big name construction companies to build larger developments.This also means that developers that are afraid of not having immediate returns will shelve their products, while the developers who can wait for a return will keep building. This is a full on recession i'm talking about, this thing we're seeing rn isn't anywhere near a full on recession, just a bs reaction by the market to a disease that has a mortality rate between .1% to 1% (reaching more towards .1%), but I digress. 

 

I could see some developments getting put on the back-burner, but the majority of them are staying on pace to start. We have to remember the current boom we're having isn't due to oil, it's do to other parts of the Houston economy. Oil has been in the shiter for the past 2 years, but Houston has been building more and more, while people just keep moving in and the the job market just keeps growing. I could see a slight hiccup in the 1st maybe 2nd quarter, but things are going to stay on track. Hell, they might even get better than pre-corona by the end of the year. 

 

 

Edited March 9, 2020 by TheSirDingle

[august948]

2 hours ago, jgriff said:

I would think pricing that kills fracking would super duper kill offshore.

 

The only silver lining I can think of, and this is a real reach, is that downstream could benefit from lower feed prices. 

 

This part of downstream is definitely going to benefit...

 

[H-Town Man]

1 hour ago, AREJAY said:

Oil is drastically down because of the price war between Saudi and Russia, not so much because of the virus. Fracking / shale can react quickly and be started and/or stopped quickly, while offshore / deepwater is super slow to react. I'm afraid that offshore activity is going to be depressed for a long while....

 

Saudia Arabia and Russia were on the same page until late last week, but oil was already sinking due to the virus and its effect on global oil demand. Saudi Arabia and Russia's "price war" is the result of a disagreement about what to do about already falling prices due to the virus. Saudis wanted a big coordinated production cut but Russia wouldn't go along, so now there is a price war.

 

Yes, if fracking companies are killed, it will benefit offshore in a couple years because today's oversupply and lack of investment will produce tomorrow's undersupply. If fracking is severely damaged long term, then the next time there is an undersupply, offshore will reap the benefits. Even if the fracking industry can just be reduced to where there are not so many competing companies, that will help offshore in the next cycle since you won't have this ruthless fracking competition glutting the market.

[H-Town Man]

2 hours ago, jgriff said:

I would think pricing that kills fracking would super duper kill offshore.

 

Only in the short term.

[MidCenturyMoldy]

54 minutes ago, TheSirDingle said:

Going onto COVID-19 and how it effected the market. Overall, it's a general over reaction by the market which usually happens when a supposed big name disease comes around. When the cure is found the market, and oil will rebound like nothing we've ever seen before. it's going to make the previous gains looks like a bust.  

 

I wish I could be as optimistic. I tend to believe, however, that a market correction was coming anyway and COVID-19 just accelerated it. But more worrying to me is the damage done not just to the "market," but to the real economy. To businesses large and small and to actual people, especially people in the vulnerable "gig economy." I really fear this will be a huge all-around disruption.

[arche_757]

Its starting to look like a pretty terrible time to be any business in Midland, Texas!  I think overall the Houston economy will be ok -  not great, but not destroyed like the bust of the 1980s either.  I hope!  It is always a puzzlement to me that the medical and oil booms in this town don’t occur together.  We are all watching as the TMC is about to pop with development while O&G is about to tank...again.

[samagon]

On 3/9/2020 at 8:50 AM, Montrose1100 said:

Well we haven't really had any oil related real estate go up? One Market Square might never get off the ground for a few years, or 6 Houston Center. Speaking of which, every time a rendering shows up for 6 Houston Center we seem to hit an economic slump. Coincidence? Cursed I tell you!

 

it's Houston, everything is oil related.

 

granted, Houston is more insulated than it used to be, it's still tied to the hip with oil. 

 

I think the one saving throw here is that this probably won't be a protracted thing. hopefully.

 

remember a few years ago, Saudi decided to not turn off the pumps and kept oil at $30 a bbl for a long time, all this did was push fracking companies to become leaner and use more automation. when Saudi realized all it was doing was pressing innovations, they decided to slow their production. before that 'price war' it would take a month and 20 guys to set up a drill in west Texas, now it takes 2 guys and some automation software.

 

this might push for even more efficiency.

 

that's me being optimistic.

Edited March 10, 2020 by samagon

[arche_757]

We used to be tied to the hip, I would say we are more or less connected at the knee now.  Which is a big improvement. The oil business hasn’t exactly recovered from its previous slump.  What current growth is from oil related companies?  And I realize I’m oversimplifying things a tad - but we haven’t seen any developments locally in years from O&G companies.

[Montrose1100]

53 minutes ago, samagon said:

 

it's Houston, everything is oil related.

 

granted, Houston is more insulated than it used to be, it's still tied to the hip with oil. 

 

I think the one saving throw here is that this probably won't be a protracted thing. hopefully.

 

remember a few years ago, Saudi decided to not turn off the pumps and kept oil at $30 a bbl for a long time, all this did was push fracking companies to become leaner and use more automation. when Saudi realized all it was doing was pressing innovations, they decided to slow their production. before that 'price war' it would take a month and 20 guys to set up a drill in west Texas, now it takes 2 guys and some automation software.

 

this might push for even more efficiency.

 

that's me being optimistic.

I was talking about "spec" offices. The Energy Corridor has never truly recovered from the glut back in 2014-2016. The new stuff in Downtown has been United Airlines, BOA, and who knows what will go in the Texas Tower.

 

I'm not saying we won't hurt. But the recovery won't be as long... maybe. The Corona Virus scare is really screwing up a lot of industries short term. Korea Air having temporary layoffs. Italy basically shutting down. I hope that panic doesn't come here. Everyone will be screwed, not just Houston.

[H-Town Man]

37 minutes ago, arche_757 said:

We used to be tied to the hip, I would say we are more or less connected at the knee now.  Which is a big improvement. The oil business hasn’t exactly recovered from its previous slump.  What current growth is from oil related companies?  And I realize I’m oversimplifying things a tad - but we haven’t seen any developments locally in years from O&G companies.

 

The office market is tied to them. If oil companies are contracting, it will hurt new office development. They may not be the ones signing leases in the new office buildings (except for Marathon at City Centre), but if they start vacating large blocks of Class A office space, office rents will tumble and there will not be any new buildings.

 

[H-Town Man]

New article today in Costar on Houston. Short version: everything is bad.

 

Oil Price Wars, Coronavirus Threaten to Rattle US Commercial Real Estate

Houston Could Be Hardest Hit as Energy Stocks Drop

 

The coronavirus is slashing demand for oil as businesses and consumers reduce travel, cutting demand for fuel from flights and transportation. (Getty Images)

By Marissa Luck
CoStar News

March 09, 2020 | 06:30 P.M.

 

U.S. markets nosedived as oil price wars and concerns about the coronavirus outbreak sent shock waves through the global economy, sparking concern about an economic downturn that could deflate consumer confidence, curb business spending and dent revenue for commercial real estate companies.

Houston, known as the world's energy capital, is especially vulnerable because oil makes up about one-third of the economy. Analysts are predicting that a potential period of sustained low oil prices could lead to thousands of job losses, lowering demand for retail, apartment and office space.

Talks between the Organization of the Petroleum Exporting Countries and its allies crumbled last week with Russia refusing to cut oil production and Saudi Arabia responding over the weekend with historic price cuts that pushed down oil markets. The production decreases were expected to help the industry, which was teetering on the edge as the coronavirus slashes demand for oil because businesses and consumers are traveling less, cutting demand for fuel for transportation.

The effects could reverberate throughout the commercial real estate sector. On Monday, all four of the major publicly traded commercial real estate brokerages suffered blows to their stock prices, with CBRE seeing shares slide more than 9%, JLL’s stock was down over 5%, Cushman & Wakefield’s was down more than 10%, and Colliers International's stock was down more than 7% as of Monday afternoon.

The apartment market could be disrupted by any drastic changes in job growth that could stifle demand. Houston’s population is growing, but at a slower rate, with most of the population growth coming from new births and international migration instead of domestic migration. Amid the uncertainty, businesses may decide to delay signing new leases for retail and office space.

“The apartment market is already overbuilt and landlords are having to offer concessions and incentives. They may have to boost those,” said Patrick Jankowski, an economist at the Greater Houston Partnership. “It will affect real estate in the broad sense that with the collapse in the stock market, weakness in oil prices and coronavirus crisis, that could affect business confidence and when the business community is concerned about the outlook, they’re less likely to lease additional space.”

Brent crude, the global benchmark for crude oil prices, was down more than 21%, trading at about $35 per barrel as of mid-day Monday. West Texas Intermediate prices, the benchmark for American crude, fell more than 20%, hovering around $32 per barrel as of mid-day Monday and was slated for its second worst day since it began trading on the New York Mercantile Exchange in 1983, according to media reports.

 

 

Goldman Sachs analysts are predicting oil could plunge to $20 per barrel, which is a sharp decline from the benchmark of $45 per barrel that most U.S. energy companies say is needed to be profitable. Globally, the energy analyst firm Wood Mackenzie said most oil companies need Brent crude to be about $53 per barrel to break even.

After trading opened Monday, the S&P 500 fell 7%, triggering a circuit breaker to stop trading for 15 minutes.

 

 

Investors are spooked by the threat of a pandemic hampering economic growth, shaking consumer confidence and upending supply chains. A 2005 study from Congressional Budget Office modeled the impact of a potential influenza that “could produce a short-run impact on the worldwide economy similar in depth and duration to that of an average postwar recession in the United States.” A severe pandemic could cut U.S. gross domestic product by about 4.5%, followed by a sharp rebound, the study found.

“Right now, we have no clue where we are in between two events" of either a mild outbreak or a severe outbreak, said Bill Gilmer, economist at University of Houston’s Bauer College of Business, in an interview with CoStar News. "The possibility of even a mild outbreak on the horizon ... [could lead to] a modest slowdown in the U.S. economy, if not a recession."

Nationally, lower oil prices are typically a positive for the economy as cheap gas prices and energy prices are a stimulus for manufacturers and consumers, but that is not expected to be the case for the coronavirus outbreak, known as COVID-19, that started in China and has spread to about 105 countries and territories across the globe, including the United States.

Business Investment Concern

Huge conferences across the globe such as IHS Markit’s CERAWeek in Houston, the South by Southwest arts and technology festival in Austin, Texas, and a real estate industry gathering in Cannes, France, have been canceled because of coronavirus concerns.

"With COVID-19 drastically reducing global travel, this stimulus [from lower energy prices] comes at the worst time, when conferences and major events are being canceled; airlines and hotels are struggling due to the decline in travel; and people are moving around less, especially in the most-affected cities and regions," said Justin Boyar, CoStar's director of market analytics in Houston. "With the stock market declining and fears of a recession on the horizon, consumers will be nervous to spend, even with lower oil prices. With a decline in consumer spending, business investment could decline as well."

Houston could be the hardest hit U.S. city by the triple whammy of lower oil prices, the coronavirus restricting travel and consumer spending and the potential for the U.S. economy to sink into a slowdown.

Big oil stocks sank as the oil price wars rattled investors. Chevron and Exxon Mobil, which both own millions of square feet of real estate in the Houston area and employ thousands of workers in the city, each saw their stock tumble between 10% and 15% on Monday compared to Friday's closing.

The last energy downturn started in 2014 and lasted until mid-2017 with oil prices plunging 75% from more than $100 per barrel to about $26 per barrel. The city of Houston shed about 93,000 energy jobs during that time and has only regained about 40% of those jobs since, Jankowski said.

Almost 500 North American energy companies in the upstream, midstream and services sectors filed for bankruptcy between 2015 and 2019, according to Haynes and Boone LP, a law firm that tracks energy bankruptcies.

Before coronavirus threats, economists already were expecting Houston’s economy to take a blow as the energy industry struggled with a shrinking availability of capital. Wall Street investors that helped fuel the U.S. shale boom have lost interest in the sector after more than a decade of poor returns. The Greater Houston Partnership forecasts there could be about 4,000 energy jobs lost in 2020 because of the credit crunch.

"Basically, we saw equity market and credit markets just turn their backs on the oil industry … oil companies were already cut off from credit and that basically meant they were dependent on cash flow and the price of oil,”"said Gilmer, the economist with the University of Houston.

Some oil producers may see their cash flows somewhat insulated for now if they had already locked buyers into contracts with oil set at higher prices.

"U.S. shale will certainly take the brunt of the pain, their production is unlikely to change quickly with much activity already committed and significant volumes hedged and protected," said Chris Midgley, global head of analytics of the energy analysis firm S&P Global Platts, in a note to clients. "However, some producers, who have used more sophisticated collars for their hedging strategy, could find themselves in all sorts of difficulty."

Job losses in the energy industry could impact demand for new office and apartment space at a time when Houston already was facing systemic high office vacancy rates and concerns of overbuilding in the multifamily market. Houston has the highest office vacancy rate in the country at 16.9%, according to CoStar analysts.

A sustained period of oil prices in the $20s to $30s per barrel range could be "devastating" for the U.S. energy sector, particularly oilfield services providers such as Halliburton, Schlumberger and Baker Hughes, CoStar's Boyar notes.

"At the very least, the recent price drop is assuring that growth in the energy sector will be stagnant for the foreseeable future — which could continue to cause stagnation in Houston’s office sector the most," Boyar said. "Combined with the spread of coronavirus and a faltering U.S. economy this late in the cycle, and candidly the picture for Houston’s economy hasn’t looked this bleak since the early 1980s."

[Luminare]

Seems like we have all fallen into a real logical-illogical hornets nest or some kind of death spiral of reason. I don't know how to describe it but as I keep reading everyones comments people bring up points that do make sense, but each time something is missing or just doesn't add up. I think a bigger issue is that we all seem to be starting with conclusions and then looking for evidence to back up each argument which seems to be causing a lot of friction.

 

Here is the assumption/conclusion which people are starting with and then it leads them off to find the evidence they want to see:

 

 

Houston is still an economy that is linked at the hip to the Oil Industry.

 

_____

Even a lesser stance with the assumption/conclusion:

 

 

Houston is still an economy that is linked at the knee to the Oil Industry.

 

 

______

 

Maybe these are true, but maybe they are not true. I don't know, and its clear nobody else knows either.

 

We definitely know that either of these was a truism for our economy in the past. Does this still hold up now.

 

Things which can't be ignored from this are:

 

1. New office construction has been continuing over the past several years

 

2. The demand for new office construction has not gone down

 

3. The office market even if you ignore new construction is oversaturated, and when you add in the new construction it looks bloated.

 

4. Even with a bloated office market the economy doesn't act or operate in a way that an economy operates in a bubble situation.

 

5. New office is being constructed even though Oil has been laying off even before the Price War and CoronaVirus.

 

6. Spec office construction is still being done, but just not for Oil companies. If Oil is still the most important part of our economy, why is this the case?

 

7. If Oil is laying off people or downsizing in big ways, and if they are still supposedly the most important part of our economy, the engine that drives this city supposedly then why are we seeing more and more people moving to this city and more residential under construction if Oil is downsizing / laying people off, and at the same time this downsizing / laying people off has not prevented or slowed residential growth.

 

These are some initial questions to ponder over. Don't think we can make any assumptions about Houston being linked to Oil like it was in the past in any shape or form. This doesn't mean that Oil plays a role, but the ole assumptions of the past clearly have not played a factor in this cities recent growth. Can we not start with a conclusion in this conversation and instead redirect it to FINDING a conclusion? A lot of stuff just hasn't been adding up for a long time. There are many more questions to ask, but the first 7 are immediate ones I can think of at the top of my head.

 

Once again if this exercise is interesting to anyone then start with these questions, or even propose better or more questions, but start with a question instead of a conclusion as if its a statement of fact because honestly its not getting us anywhere.

EDIT: @H-Town Man Really interesting article. Just wanted to remind people that my questions are for the trends which have been happening over the past several years. Lets remember that a price war / coronavirus panic isn't the norm. This is a panic sell off. I'm asking larger questions about how Houston functions as an economy. There will obviously be slow downs regardless because of this idiotic panic attack people are having for both of these situations, but my questions are about larger trends.

Edited March 10, 2020 by Luminare

[H-Town Man]

Luminare,

 

From 2012-2014, we had about 18 million SF of office space begin construction. From 2015-2017, we had about 0 SF of office space begin construction. From 2018-2020, we've had 2 or 3 million SF of office space begin construction. Oil prices were high in 2012-2014, low in 2015-2017, and mediocre in 2018-2020.

 

Has the 2-3 million SF built in 2018-2020 been leased primarily to non-oil companies? Yes. Does this mean that our office market is no longer tied to oil? No, it is still tied to oil. Would those 2-3 million SF have started construction if oil prices were low and companies were laying off workers? No, probably not. You're saying that even though the leases in the new buildings aren't for oil companies, those buildings still wouldn't have been built if oil was doing badly? That's what I'm saying. Developers need to know that the other buildings are somewhat stable before they build new ones.

 

[arche_757]

57 minutes ago, H-Town Man said:

 

The office market is tied to them. If oil companies are contracting, it will hurt new office development. They may not be the ones signing leases in the new office buildings (except for Marathon at City Centre), but if they start vacating large blocks of Class A office space, office rents will tumble and there will not be any new buildings.

 

We have it now!  The office markets are a shell of what they were.  Big oil has contracted.  That is why we’ve seen so many empty older (circa 70s/80s era) being renovated and updated.

 

If these companies go under - then yes, yes we will see trouble.  I’m trying to be optimistic and reason that many of the companies are already lean and mean, there will be losses but does it get as bad as 5-6 years ago?  I’ll wager it will not.  SA and Russia can’t sustain a price war for the sake of their own already shrunken economies.  It’s not like oil rebounded and they’re both flush with money.  Don’t get me wrong things could get very bad, but I’m trying to be optimistic since the health of the local economy determines whether people build stuff - and as an architect if people don’t build then I’m out of a job too.

[Houston19514]

14 minutes ago, H-Town Man said:

Luminare,

 

From 2012-2014, we had about 18 million SF of office space begin construction. From 2015-2017, we had about 0 SF of office space begin construction. From 2018-2020, we've had 2 or 3 million SF of office space begin construction. Oil prices were high in 2012-2014, low in 2015-2017, and mediocre in 2018-2020.

 

Has the 2-3 million SF built in 2018-2020 been leased primarily to non-oil companies? Yes. Does this mean that our office market is no longer tied to oil? No, it is still tied to oil. Would those 2-3 million SF have started construction if oil prices were low and companies were laying off workers? No, probably not. You're saying that even though the leases in the new buildings aren't for oil companies, those buildings still wouldn't have been built if oil was doing badly? That's what I'm saying. Developers need to know that the other buildings are somewhat stable before they build new ones.

 

 

Developers build buildings when they can sign sufficient leases for the new building to make the financing work, regardless of the stability or instability of other buildings in the market.

[arche_757]

All of this is pure speculation by everyone.

 

How many of the 75,000+ who were let go in ‘15-‘17 have been rehires in the oil industry?  A continued downturn will hurt, but it won’t be the end of the city.  Of course the depth and size of the global recession we are seeing signs of will ultimately determine how bad things get all over.  Interestingly this is all occurring in an Presidential election year here in the States.

 

the TMC and tech incubator projects aren’t going away, and they have funding regardless of what oil does.  If anything this virus may spur investors into medics/bio-medical more than tech or other industry?

 

...that said, I guess we will all see.  For once I’m going to try and be optimistic since s&?* could get REAL bad if Covid-19 mutates into a higher mortality rate virus, or another flu strain comes about next fall!  Ironically it was just a tad over a century ago when Spanish Influenza wrecked havoc, of course there aren’t many parallels to that since we don’t have a global war and famine caused by blockades.  Imagine how bad this would all be if MERS was running amok!!!  30% mortality rate.

[H-Town Man]

1 hour ago, Houston19514 said:

 

Developers build buildings when they can sign sufficient leases for the new building to make the financing work, regardless of the stability or instability of other buildings in the market.

 

No Houston 19514, I assure you, the vast majority of developers look at things like market occupancy and projected occupancy when deciding whether to build new buildings. The "anchor" lease that you try to get signed before starting construction is a factor, but it usually only fills less than half of the building, and for the rest, you have to know what the market's doing in order to project how long it will take to stabilize. This is certainly true when you go to get financing, no matter how much magic you might think you have. I guarantee you no financing decision gets made on a new project without people on both sides of the table scrutinizing the occupancy numbers and trends, unless the project is 100% pre-leased, and even then they'll still at lease glance at the occupancy numbers in order to get an idea of what will happen if the leases expire or a tenant defaults.

 

Edited March 10, 2020 by H-Town Man

[arche_757]

But not all construction financing for a office space requires 250,000 SF from one company to work.  If you’re saying - and I believe you are - that we won’t see another 609 Main or the likes till we see some additional office vacancy rates drop, then yes, you’re right.  A lot of projects going up right now are infill projects.  We have 1 trophy tower under construction.  The rest aren’t all dependent upon oil and gas.  If they were then they wouldn’t have begun construction, or secured financing 12-24 months ago as it is.  Considering how long it takes to put these sort of projects together (2-5 years) many were dreamt up during the height of the last oil bust.

 

We have a glut of office space downtown, Energy Corridor and elsewhere because Oil was on a building spree from 2013-2016.  The market crashed and many of those same companies either do not exist any more or they cut thousands of jobs; the economy that is building in Houston currently isn’t one tied to oil like in the past century.

[H-Town Man]

11 minutes ago, arche_757 said:

But not all construction financing for a office space requires 250,000 SF from one company to work.  If you’re saying - and I believe you are - that we won’t see another 609 Main or the likes till we see some additional office vacancy rates drop, then yes, you’re right.  A lot of projects going up right now are infill projects.  We have 1 trophy tower under construction.  The rest aren’t all dependent upon oil and gas.  If they were then they wouldn’t have begun construction, or secured financing 12-24 months ago as it is.  Considering how long it takes to put these sort of projects together (2-5 years) many were dreamt up during the height of the last oil bust.

 

We have a glut of office space downtown, Energy Corridor and elsewhere because Oil was on a building spree from 2013-2016.  The market crashed and many of those same companies either do not exist any more or they cut thousands of jobs; the economy that is building in Houston currently isn’t one tied to oil like in the past century.

 

No, that's not what I'm saying. What I'm saying is that the projects that started the past 2 years wouldn't have started if the O&G sector wasn't stable, regardless of whether it was O&G companies who eventually signed leases in those projects. If O&G was contracting, you would not have seen those projects start. To your point about the oil bust, some projects might have been "dreamt up" during the bust, but they didn't start at that time because market conditions were bad. They started later. Case in point - Hines bought the Houston Chronicle land as oil was collapsing, but waited a couple of years for the office market to right itself before pushing ahead with a project. They had initial plans for a project when they were buying the land but those plans were scrapped when it was apparent how far things were falling.

 

Developers' decisions are tied to investment capital, which was frozen in Houston from 2015-2017 amid the carnage. New projects were not funded, buildings were not even purchased until late 2017 when things settled and the price of oil had somewhat recovered. Everyone waited to see what would happen. That is generally how it goes when a city's major industry is in turmoil.

 

[arche_757]

Then I misunderstood you.

 

To your other point then - it is interesting that work continued for architects.  Things didn’t get dicey, or even bad.  Go back in time just on this board and you’ll see that while there was a slow down (certainly Houston was in a boom cycle for 4 years) nothing stopped.  In the 1980s things stopped.  Oil & Gas was a much larger percentage of the economy than it is currently.

 

The fact the city did not stop - even a little - is to me, interesting.  And projects of any scale take years.  Literally. Years to come to fruition.  I can name 6 I’ve worked on that didn’t materialize overnight, they took years.  I’m sure the other architects on here can do the same.