As Hurricane Vets, Houstonians Are Good at Wait-and-See
After Harvey, Houston built a strong foundation with economic engines centered around energy and medicine, post-secondary education and an affordable cost of living, says Rand Stephens of Avison Young.
HOUSTON—Disruption to supply chains will impact the industrial and warehouse sectors, according to Avison Young. US industrial REIT prices have been hit hardest within the S&P 500 property sector, and demand prospects are generally lower in most markets and segments. Transaction activity of all kinds is likely to slow sharply for the duration of the COVID-19 crisis, reflecting practical constraints on deal completion as well as uncertainty about the longer-term outlook.
“However, supply chain reconfiguration and a shift towards regional or local suppliers could ultimately boost demand for warehouse and production space in some markets,” Nick Axford, Avison Young principal and global director of research, tells GlobeSt.com. “We expect a bounce-back in both investment and leasing activity once the immediate crisis dissipates.”
Moreover, underlying demand for real estate investments remains generally high, with multiple sources of capital active in the market. Longer term, the changes that businesses and individuals will implement during the crisis will accelerate some trends already evident in the market, including deglobalization of supply chains and a shift towards online retail and flexible working practices in the service sector.
“It currently remains impossible to quantify the likely impact on the property market with any reliability,” Axford says. “Comparisons with the Financial Crisis of 2007-2008 are not necessarily appropriate.”
As for Houston, this downturn is one of many interruptions throughout its history including Enron, Hurricanes Ike and Harvey, 911, and oil and gas downturns. But, after Harvey, Houston built a strong foundation with economic engines centered around energy and medicine, post-secondary education and an affordable cost of living, says Rand Stephens, principal and managing director of Avison Young’s Houston office.
“It’s not how we react that will define us, but how we respond,” he says. “Responding to the shortage and need for hand sanitizer, Houston-based Gulf Coast Distillers announced the production of hand sanitizer and rubbing alcohol as it also continued its core business of bourbon and vodka. Texas governor Greg Abbott responded to help the hospitality industry by allowing restaurants to deliver alcoholic beverages with food orders and also issuing a buy-back waiver which provides alcohol distributors and manufacturers the opportunity to repurchase excess inventory from restaurants, bars, etc. affected by event cancellations due to COVID-19.”
In Avison Young’s latest update, “COVID-19, Impacts on Real Estate,” the widespread imposed restrictions on population movement are having significant impacts on business activity. While a recession is anticipated, “it is unclear how deep and prolonged any downturn will be,” and real estate will experience secondary impacts from reduced economic activity, according to the report.
“Just as Houstonians are accustomed to waiting for flood waters to recede after a hurricane or a severe rainstorm, we are all in a wait-and-see mode,” Stephens says. “Due to social distancing recommendations, retail and hospitality sectors are facing the most challenging obstacles and, as mentioned, are already adapting. The Houston office market certainly didn’t need to have salt added to their already-wounded leasing activity. Given the symbiotic relationship that office leasing has with the energy sector, oil and gas prices are currently the greatest concern.”
Transactions are likely to be delayed for both office and capital markets out of concerns for the economic outlook. The industrial sector has long been on solid ground and has an abundance of newly constructed space. It’s possible that local suppliers will boost demand for warehouse and production and open the doors to fill those new spaces, he says.
“The ability and technology to work from home and to homeschool has been around for quite some time, but now we are all forced to do so,” Stephens observes. “Food/grocery pickup and delivery are not novel ideas, perhaps we will see a push for driverless deliveries, but those conveniences have quickly turned into necessities, for now.”