Houston Office Market Report | Q4 2016

by CoyDavidson on January 21, 2017

After several years of economic woes, Houston’s office market coasts into 2017

After several challenging years, Houston’s office market saw some improvement over the quarter. The market will most likely remain relatively flat, coasting through 2017. The citywide vacancy rate increased by only 40 basis points between quarters, and absorption, although negative, was only a third of the previous quarter’s total. Q4 2016 witnessed several energy companies remove available sublease space as they began to shift out of the contraction mode and begin looking forward again. Although leasing activity remained lower than normal, deals are getting done and some of those even include pre-leasing of proposed developments.

Houston’s office market posted 0.1 million SF of negative net absorption during the fourth quarter, an improvement from the 0.3 million SF of negative net absorption posted in the previous quarter. Houston’s citywide office vacancy rate rose significantly on an annual basis, increasing by 220 basis points from 15.3% to 17.5% in Q4 2015. As stated earlier, the vacancy rate rose by only 40 basis points over the quarter, much less than in previous quarterly comparisons during 2015 and 2016.

No new buildings delivered during Q4, however, 1.8 million SF of the 3.1 million SF in the construction pipeline is scheduled to deliver in Q1 2017. There have been several recent press announcements of tenants pre-leasing space in proposed buildings, indicating a preference for newer innovative space. Although this would appear to add vacant space to an already saturated market, it is a very small percentage overall.

According to the U.S. Bureau of Labor Statistics, the Houston metropolitan area created 13,400 jobs (not seasonally adjusted) between October 2015 and October 2016. Most of the job growth occurred in government, retail trade, education and healthcare, trade, transportation and utilities, and professional services.

VACANCY & AVAILABILITY

Houston’s citywide vacancy rate rose 40 basis points from 17.1% to 17.5% over the quarter, and rose 220 basis points from 15.3% in Q4 2015. Over the quarter, the average suburban vacancy rate increased 40 basis points from 17.2% to 17.6%, and the average CBD vacancy rate was unchanged at 16.8%.

The average CBD Class A vacancy rate decreased 10 basis points from 13.5% to 13.4% over the quarter, while the average CBD Class B vacancy rate remained the same at 26.9%. The average suburban Class A vacancy rate increased 60 basis points from 19.1% to 19.7%, and the average suburban Class B vacancy rate rose 20 basis points between quarters from 16.3% to 16.5%.

Of the 1,708 existing office buildings in our survey, 92 buildings have 100,000 SF or more of contiguous space available for lease or sublease. Further, 29 buildings have 200,000 SF or more of contiguous space available. Citywide, available sublease space totals 11.8 million SF, or 5.1%, of Houston’s total office inventory, and 22.1% of total available space.

ABSORPTION & DEMAND

Houston’s office market posted 142,249 SF of negative net absorption in Q4 2016, pushing the year-end 2016 total to negative 363,539 SF. Suburban Class B space recorded the largest loss, with 134,800 SF of negative net absorption, while suburban Class A posted a gain with 31,374 SF of positive net absorption. Over the last two years, Houston’s office market has suffered due to large energy companies downsizing and moving from third-party owned buildings into owned property, thus creating a glut of unoccupied and available sublease space. During the fourth quarter, available sublease space decreased for the first time since Q2 2014.

RENTAL RATES

The significant increases in vacancy rates in Houston’s office market have led to decreases in average asking rental rates. Although most average rental rates dropped slightly or remained relatively flat over the quarter, we witnessed several landlords with large blocks of space reduce rental rates by $2.00 to $6.00 per SF. The average Class A rental rate in both the CBD and suburban submarkets decreased over the quarter, while the average Class B rental rate increased slightly.

LEASING ACTIVITY

Houston’s office leasing activity decreased 38.1% between quarters, recording only 2.1 million SF of transactions in Q4 2016. Quarterly leasing activity has decreased by 53.3% in just one year when compared to the 4.5 million SF recorded in Q4 2015.

SALES ACTIVITY

Houston’s office investment sales activity picked up slightly over the past year, increasing by 4.0% since Q4 2015. The average sales price decreased from $227.00 per SF to $210.00 per SF.

OFFICE DEVELOPMENT PIPELINE

Houston’s construction pipeline for office space contains 3.1 million SF, of which 44.8% is pre-leased. Build-to-suit projects make up 24.5% of the pipeline, and the remaining 2.3 million SF is spec office space under construction, which is approximately 28.5% pre-leased.

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