by Joe Bright
Like most other Houstonians, I am all -too familiar with the peaks and valleys the energy industry creates in our city. I thought I was living the high life as a landman while oil was making its ascent from the low $50s in early 2007 to $145 in the summer of 2008. When it came crashing back down in late 2008/early 2009, I was fortunate enough to be enrolled in law school. However, many friends and former colleagues weren’t so lucky and found themselves scrambling for work.
As it always does, oil made a comeback and from 2011 to 2014 Houston enjoyed the fruits that naturally come from being the Energy Capital of the World during boom time. Hiring and employment skyrocketed, people moved to Houston in droves, property values and rental rates went up, and new bars and eateries emerged all over town. Businesses were flourishing and companies competed for office space that would reflect their success and accommodate their inevitable growth.
However, since late 2014 the prolonged downturn in the price of oil has caused a ripple effect throughout our great city that perhaps is most clearly reflected in our office market. City-wide vacancy has climbed to more than 20% and availability is over 26%, the highest it’s been since NAI started tracking in 1999.
For today’s tenant, one of the most common issues we hear is that a company’s occupancy costs are too high and/or they have too much space. More often than not, this is a result of a lease signed in 2014 when circumstances were a far cry from the present.
So how do you avoid falling into this pitfall and make sure that you’re staying ahead of the office market? Here are a couple of tips:
1. Transact when the market is down.- If at all possible, make your deals when the tenant has the leverage. Sounds obvious, but most leases are signed when occupancy and rental rates are high. If your lease termination occurs during a low point in the cycle your timing is fortuitous. If your expiration date is still a few years away, consider engaging the landlord in discussions to restructure your lease. Depending on the circumstances, there are several ways to achieve concessions in the short term while securing a more favorable rent schedule in the long term.
2. Be efficient with your space. Take advantage of today’s trends in space planning and be conservative when forecasting growth needs in the future. It is much better to be in the position of needing more space than that of the tenant who has unused space they can’t dispose of. Be sure to negotiate Right of First Refusals and Expansion Options instead of taking on space that you don’t need right away.
3. Whenever possible, negotiate a termination option and give yourself as much flexibility as you can. Longer lease terms typically result in more favorable rates and concessions, but it’s impossible to know what the future holds. Give yourself as many potential options and outs as possible so that you can adjust to future changes in circumstances.
Perhaps most importantly, have a broker representing your interests that will help you take advantage of the cyclical nature of the energy industry and Houston’s office market while also protecting you from it.