Houston’s office market indicators continued to slip on both a quarterly and year-over-year basis as demand for office space eroded against the deepening effects of the global economic recession. With commercial real estate a lagging indicator, office market fundamentals are expected to continue weakening in the subsequent quarters even as some economists see a bottoming out of the global economic recession.
The primary challenge to the local office market remains Houston’s weakening job sector, with 95,100 jobs lost in the twelve months ending in August 2009, and the unemployment rate rising to 8.4%, representing severe losses that do not bode well for the office market’s quick recovery, as it is expected that once employers starting adding jobs maybe in the latter half of 2010, that hiring will be done conservatively and it could be a few years before Houston office employment reaches pre-recession levels.
Occupancy & Availability
Houston’s office occupancy continued to be challenged by weak market conditions and a bleak employment outlook as Houston job losses deepened through September 2009. Citywide, occupancy for all property classes stood at 83.9% in the third quarter, falling from 86.8% at this time last year. Although overall occupancy remained above 90% for Class A office properties in the Central Business District. Class A CBD office properties are currently 91.5% leased, a slight drop from the 92.8% occupancy level recorded a year ago.
By comparison, suburban Class A properties dropped to 82.5% occupancy-making the largest decline of all property classes citywide on a year-over-year basis-from 87.5% one year ago. Suburban class B office buildings also recorded a significant decrease to 82.4% from 85.3% in the third quarter last year.
Sublet space continued to increase in the third quarter with 2.4 million square feet of currently vacant sublease space, and an additional 2.2 million square of sublease space available at a later date, bringing the total to 4.6 millions square feet of sublease space currently being marketed.
Absorption and Demand
Houston’s office market posted 764,481 square feet of negative net absorption citywide in the third quarter, accounting for almost half of the 1.5 million square feet of the negative net absorption recorded year-to-date. With weak market fundamentals and a battered employment sector expected to extend into 2010, 2009 will likely post the highest negative absorption losses since 2002 when the market recorded 2.0 million square feet of negative net absorption.
Year-over-year office rental rate decreases prevailed citywide in the third quarter for all property classes, with the only exception being the combined suburban Class C rental rate. In addition to falling quoted rental rates, property landlords are are offering more generous lease concessions to both attract and retain tenants.
CBD Class A average quoted rental rates fell 2.3% to $37.45 per square foot (from $38.35), while suburban Class A rental rates slipped 1.4% to $27.31 per square foot (from $27.70). In contract, CBD Class B average quoted rental rates plummeted 15.6% to $23.62 per square foot (from $28.00), while suburban Class B rates fell 0.9% to $18.33 per square foot (from $18.49) on a full-service basis. Weak tenant demand for office space is expected to continue exerting downward pressure on rental rates.
View the Full Report: 2009 3Q Houston Office Market Report