MSA Snapshot: Exploring CRE Activity in the Houston Metropolis

Texas has been a frequent name in the news in recent weeks. A shock snowstorm shook the state to its core, causing widespread outages, food shortages, and an energy catastrophe - as some heating bills rose an astronomical amount in attempts to battle the freezing temperatures. The Houston-MSA, home to several energy companies, was subject to over twenty inches of snow, and some people are reporting bills as high as $9K. Additionally, Texas made headlines this week as Governor Greg Abbott announced he would be lifting the mask mandate, and opening all business to 100% capacity as soon as March 10th.

In this piece, using TreppInsights, we examine Houston's ties to the spotlighted energy sector and the state of its recent commercial real estate (CRE) activity.

Renowned for its strong ties to the energy sector and prominence as a destination for business conventions, the Houston-metro area has been a rapidly growing location for the past decade. It is home to a large swath of Universities, such as Texas A&M University-College State and the University of Houston, giving it access to an educated, highly-skilled workforce, and ranks fourth among U.S metro areas with the most Fortune 500 headquarters. Houston also benefits from lower costs and regulations compared to that of other Texan-cities like Austin and Dallas, while still maintains the advantages of no corporate or personal income tax at the state level.

Cushman & Wakefield reports that Houston gained 1.2 million residents from 2010-2019, the second-highest population growth among all U.S metros - a trend expected to continue into this decade. Additionally, Houston generated the second-highest number of jobs of any U.S. city since 2010 and is predicted to continue to do so between 2019 and 2025, according to PWC's Emerging Trends in Real Estate. In 2020, the city was ranked as the 13th most attractive metro for property investment inCBRE's America's Investor Intentions Survey,'Top-ranked Metros For Investment.' This marks its second year of declines in the rankings but shows that investors still find Houston to be a highly desirable location for investment.

Consumer Sentiment

In contrast to the area's rising population, job growth, and positive investor outlook, its heavy reliance on the oil industry may cause its economic progress to stall in the foreseeable future. Like many other areas in the U.S., Houston struggled in the face of the pandemic - which was exacerbated by reduced demand and contraction in the oil sector. Two years of falling oil prices had a significant impact on Houston, but due to the pandemic, oil prices dropped to below $20 a barrel in April, creating an even larger rift in the economic activity of the pandemic-stricken area.

Looking forward, the Biden Administration has also taken a stronger position on climate change than past administrations, with the oil industry at the forefront of proposed reductions. The President already revoked a permit for the Keystone XL pipeline, suspended oil and gas leasing on federal land, and is quoted as wanting to 'transition away from the oil industry.'

The economic shutdown and subsequent stay-at-home orders undeniably hurt Houston's overall job and thus its CMBS market. In December, the U.S Bureau of Labor Statisticsreported that Unemployment in the Houston MSA was 8%, down from its peak of 14.3% in April, but higher than the 3.6% during the same period a year prior.

Houston CMBS Market

In the non-agency CMBS universe, there is approximately $11.7 billion of Houston-backed debt across 811 loans outstanding. Distress rose across the board since March. Houston had 10.40% of its loans report as delinquent in February 2021, and almost 12% reported as having been sent to the special servicer, according to TreppInsights. These numbers represent slight decreases from the peaks of 10.95% and 12.43% in December and November of 2020, respectively, but indicate that distress rates continue to remain elevated.

In a statistic that became pertinent over the past year, Trepp tracked the number of loans that were flagged in our database as having requested or approved 'Covid-related forbearance.' As of this month, over $1.9 billion in CMBS debt filed for forbearance in the Houston area.

The pandemic also led to reduced issuance in the Houston-MSA in 2020. Issuance saw a 70% decrease in 2020 to $399 million, down from $1.3 billion a year prior, according to data from TreppInsights.

Distress in the Houston Lodging and Office Sectors

Breaking down distress across the MSA, the hotel and hospitality industry took the brunt of the impact of the pandemic. In 2020, distress in the lodging sector peaked in October at a rate of 76%, marking more than three-quarters of the hotel loans in the MSA as delinquent. Since then, the rate dropped slightly, to 72.83% in February.

For comparison, Houston has the current highest hotel delinquency rate in the Top-10 MSAs, followed by the Chicago-MSA at 57%, and the New York-MSA at 45%. The Houston office sector also faced higher distress in 2020, with 15.33% of loans reported as delinquent in December. That number dropped to 10.05% in January but has since climbed back to near its late 2020 highs - reporting at 14.45% in February.

In the graphics below, see the overall stats and distress rates for the lodging and office sectors in the Houston-MSA from TreppInsights.

Key Takeaways

What started as a strong decade in terms of population growth and investment opportunities stuttered as we reached the peak of the pandemic. Growth-first governance and low taxes will continue to drive the location's appeal as an investment destination, but significant distress in the hotel and office sectors is indicative of Houston's reliance on the success of energy companies to drive the local economy.

Some of the more harrowing impacts tie directly to Houston's CMBS exposure, through properties like Two Westlake Park and Beltway 8 Corporate Center I. Two Westlake Park is located in the Energy Corridor of Houston and was backed by the $87 million Two Westlake Park loan. The property saw a large drop in occupancy once natural gas company ConocoPhillips decided to vacate its 200,000 square feet of space in response to hardships during the last oil crisis in Houston. Occupancy at the office was below 6% in 2019 and the property sold in December for less than its most recent valuation.

Another example is the $14.4 million office property, Beltway 8 Corporate Center I, which was sent to the special servicer in February upon news that its largest tenant, oil and gas processing company Cameron International, would be vacating over 50% of the space in the office - leaving it vacant in the near term.

Houston's strong ties to the energy sector were once the foundation of the market but falling oil prices and a 'new normal' for business travel will likely be the driving factors in the recovery or continued challenges in 2021. Hopefully, through continued vaccinations and the Fed's commitment to 'easy-money' policies, the economy will recover, bringing some of its own energy to Houston.

Stay tuned for additional MSA snapshots, highlighting CRE and CMBS activity across the U.S.

Questions or comments? Contact Trepp at [email protected] or 212-754-1010.

Disclaimer: The information provided is based on information generally available to the public from sources believed to be reliable.

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