Houston Office Market Report 1Q 2010

by CoyDavidson on April 19, 2010

Houston Office Space Market Shows Signs of Stabilizing

Houston’s office market closed the first quarter 2010 with encouraging signs it is nearing the end of the downward shift that began in late 2008, with current trends suggesting the suburban market may recover before the CBD. Positive net absorption, not expected until the end of this year, came early with 408,209 SF of first quarter gains in occupied space citywide. Boosting the overall net gains was Suburban Class A positive net absorption of 335,037 SF. This contrasted sharply with CBD Class A – the only property class citywide to post losses in occupied space – with negative net absorption of 200,377 SF. Likewise, the rate of decrease for major indicators, including occupancy and rental rates, slowed significantly for Suburban property classes on a year-over-year basis in the first quarter.

Houston’s CBD office market has shown strong resiliency throughout the current economic slowdown, with CBD Class A properties maintaining occupancy above the 90% mark consistently over the past 12 consecutive quarters. Year-over-year occupancy for all CBD property classes remained stable – with Class A dipping slightly to 91.2% from 91.5% – in the first quarter. Weak tenant demand for the available space on the market, however, continued to weigh on landlords who significantly reduced quoted rental rates by 8.5% and 11.5% for Class A and Class B buildings, respectively, compared to only a 0.8% and 1.0% decrease for Suburban Class A and B buildings. Even though CBD occupancy levels were significantly stronger than the combined Suburban market, the CBD closed the first quarter conceding significant rental rate cuts in order to hold ground, while the Suburban market avoided sharp rate drops due, in part, to a significantly slower rate of decrease in occupancy.

Overall Houston’s office market and economy remain among the strongest in the U S. In March 2010, Forbes ranked Houston fourth among U.S. major metros where the recession is easing, due primarily to a solid diversified base of growth industries. High oil prices are benefiting from global markets in recovery, and although decidedly low compared to previous expansion periods, Houston is expected to end the year with positive job growth. With commercial real estate a lagging indicator, however, the local office market recovery is not expected before 2011.

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