COVID-19 IS CHANGING HOW WE WORK FOREVER AND HOUSTON OFFICE REAL ESTATE LONGTERM

By J.W.”Jay” Wall III

Houston Chronicle
April 17, 2020

My crystal ball is buzzing.

“Covidity” is defined by Urban Dictionary as “Following or observing all of COVID-19 self-protection protocols such as hand hygiene, respiratory etiquette, environmental cleaning and ventilation, practicing social distancing, self-monitoring, self-isolation, and mandatory quarantine.”

Covidity changed life as we know it and will change everything post-covidity.

With the twin pandemics of coronavirus and an oil crisis, bankruptcies in Houston industries are going to skyrocket. These twin pandemics will leave the “softest” office market in the U.S. considerably softer, as many companies simply won’t survive. These failures will bring wholesale shedding of office space. Here’s why:

Thanks to COVID-19, companies are discovering the merits of asking employees to work “virtually” from home, previously known as “telecommuting.” Employees who can work from home probably don’t need a dedicated office — hence, less office demand.

Zoom, Skype, Facetime, GoToMeeting, WORK and other collaboration technologies have lessened the need for in-person, “face-toface” interaction without sacrificing the interactive, real-time benefits. My bet is that post-covidity, many workers will be hesitant to get on a plane or drive across town for a meeting when a virtual meeting will suffice. Look for business travel, and the resultant airline, rental car, hotel and restaurant demand, to be depressed for some time to come.

Family time, once a desired ideal, is mandatory by default in isolation. Breakfast, lunch and dinner are all in-house. Gone are the days when people left for the gym early in the morning or shuttled kids to baseball or band practice in the afternoons or early evenings. Omnipresent family time is establishing new normals.

Covidity has most people cooking (or at least warming). Grocers are thriving, scrambling to stock empty shelves and staff Instacart. Amazon, who bought Whole Foods, has got customers coming and going and can’t hire workers fast enough.

Catering to covidity are Door Dash, Grubhub and Uber Eats. Restaurants, given the absence of in-house dining, are providing the takeout for them to deliver, but are typically hanging on by their fingernails. In Texas, the governor threw these purveyors a lifeline and allowed take-out alcoholic beverage sales. Cheers to you, Gov. Greg Abbott!

Which brings us to the service economy and its workers critical thereto: pilots, flight attendants, mechanics, ticket agents, baggage handlers, restaurateurs, bartenders, waiters, waitresses, busboys, dishwashers, cooks, hoteliers, maids, personal trainers, child care professionals, live entertainment musicians, concession vendors, barbers and hairdressers, are suffering mightily — and that’s just to name a few.

When “social distancing” officially ends, will people immediately want to sit cheek-to-jowl on airplanes, in restaurants, in theaters, in sports stadiums? No. Even if they did, many will no longer have the disposable income or the benefits of a gig economy to pay for it.

Covidity and post-covidity are bringing many component parts back to the U.S., re-shored and near-sourced. While we welcome them home, America will reverse the tendency toward lean supply chains with low inventory coverage. “Resilience” will become the new watchword. Companies will build in redundancy and start moving away from holding near zero inventories. This will positively affect warehouse demand, particularly with high-value and high-turnover goods post-covidity.

But alas, my primary focus is the Houston office market. Expect the bankruptcy of more under-capitalized oil service and E&P companies to hugely impact the office market climate. Owners/landlords will no longer have these tenants to pay the mortgage because E&P and service company tenants are no longer around, liquidated through Chapter 7, or they will have abrogated their leases through Chapter 11.

Fortunately, most Houston landlords are reasonably stable, and many are geographically diverse, guarding against widespread panic. This is opposed to the local merchant developer, bank, S&L and insurance company ownerships of yesteryear. Nevertheless, the forces of supply and demand are what they are — where there is excess supply and reduced demand, there is always price depression.

Eventually, there should be a flight to quality by surviving tenants as strength of building ownership and management’s ability to maintain their properties and fund improvements will prove to be pivotal.

Unfortunately, in the current business environment, much of Houston’s office inventory is “price inelastic.” That is, it will not lease at any price. There is simply no demand for it. Interestingly, many landlords and project representatives, have been in denial. Either they were blinded by rose-colored glasses, or perhaps they just haven’t weathered enough pandemics to anticipate or understand what is coming.

Though predicting oil prices (and office rents) is “voodoo science,” it looks to me like oil prices are going to stay depressed for a while. When has there ever been a bottom put into a market when inventories have not been liquidated and there have been no spectacular bankruptcies? The sobering answer, of course, is never.

Houston’s office market, affected by the twin pandemics of covidity and tremendously decreased oil and gas demand will surely follow the trend of severely challenged debt and equity markets.

Wall is a Houston real estate broker, specializing in tenant representation.