Higher Oil Prices Spur Demand
For Houston's Commercial Market

Soaring oil and gas prices have sparked a robust economic rebound that is lifting the fortunes of Houston's commercial real-estate market.

The region's downtown office market has seen a dramatic recovery that has prompted some developers to jump-start plans for new projects. New leasing activity was led by San Ramon, Calif.-based Chevron Corp.'s decision last fall to occupy downtown Houston's 50-story Four Allen Center, about 1.2 million square feet in all. The tower previously housed the headquarters of energy trader Enron Corp. and was a poster child for Houston's previous woes as it has sat virtually empty since February of 2004.

The gleaming glass-clad icon is now a symbol of the Houston real-estate market's rising tide. "It was a catalyst for change. Now we're looking at the next development cycle," says Paul Layne, executive vice president and head of the Houston regionfor New York-based Brookfield Properties Corp., which last year acquired Four Allen Center for about $90 a square foot and now owns it through the company's joint venture with Blackstone Group. The lease helped central business-district office vacancies drop to the 12.4% in the fourth quarter from 18.8% last year, according to Property & Portfolio Research, a Boston real-estate research firm.

At the same time, the Bayou City's Texas-size pride was dinged last month when Houston's Halliburton Co. said it would open an additional corporate headquarters in Dubai. Asked how the decision will affect the company's Houston-area employees and real-estate needs, a spokeswoman for Halliburton writes in an email that Dave Lesar, the company's chief executive, is "the only employee who will move to Dubai to lead the company's efforts in growing Halliburton's business in the Eastern Hemisphere...No other employees are being relocated (or offices vacated) and no jobs will be lost as a result of opening the additional headquarters in Dubai."

Halliburton, which employs more than 5,000 people in the Houston area and has more than 3,000 employees in various locations throughout the Middle East, is still in the process of determining how many people will be located in Mr. Lesar's new offices.

Halliburton's position could change over time if Mr. Lesar feels he needs more staff familiar with the workings at Houston's headquarters, says C.K. Poe Fratt, senior oil-fields service analyst at A.G. Edwards. Mr. Fratt also says Halliburton's move reflects a trend in which oil-field service companies are following the world's energy reserves and building up operations outside North America. Decades down the line, such shifts could ultimately diminish Houston's role as a world energy capital, he says.

But the potential for a loss in energy-related status may be offset by the area's increasingly diverse economy. The energy sector as well as health-care and education and construction sectors pushed job levels up 4.2% In January from the year-earlier, well above the national rate of 1.7%, according to the Bureau of Labor Statistics. The National Aeronautics and Space Administration is also a major employer in the region. The region's economy, which suffered two straight years of job declines with the unwinding of Enron and the consolidation of other companies, has been on the upswing since 2004.

The economy has raiseded nearly all sectors of the commercial real estate market. Office, retail and warehouse markets all saw vacancies fall and rents rise in the fourth quarter, though rents and building values are generally still below national averages. The area's retail is also expanding, driven partly by the rising number of consumers in the region as its population rose at more than double the national rate in 2006 from the year-earlier to 5.5 million, according to Moody's Economy.com.

As is often the case in sprawling regions, the real-estate recovery has been somewhat uneven. Apartment vacancies have risen as some refugees from Hurricane Katrina have left the Houston area. Meanwhile, office vacancies are as high as 21% in such areas as the northwestern Houston submarket and speculative office construction in the so-called energy corridor of West Houston is expected to push vacancies up to 14.2%, PPR says.

Houston's historically volatile economy and the relatively few constraints on new building construction make some experts cautious about real estate investments there. Kenneth T. Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley, gives the short-term prospects for office and apartment investments in Houston an A and a long-term grade of B minus. "In the long run it's not as good because of its boom-bust nature," Mr. Rosen says.

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