Strong Absorption & Rent Growth in Q1
Houston’s office market has undergone significant changes in the past twelve months benefiting from positive absorption, falling vacancy, and rising rental rates. Increased leasing activity has made it harder to find available blocks of quality Class A office space, creating a demand for new office construction. Both multi-tenant and single tenant users are spurring this new growth.
Expansion in the energy sector has spurred demand for office space. Anadarko has begun construction on a second office tower (550,000 SF) in The Woodlands and Phillips 66 recently announced to build a new headquarters in West Houston Energy Corridor. Houston’s office leasing activity reached 3.2 million SF in the first quarter.
Citywide, overall vacancy levels decreased by 90 basis points between quarters to 14.6% from 15.5% and by 130 basis points from a year ago. The most significant decrease in vacancy since the previous quarter is the CBD Class A vacancy rate, which decreased by a remarkable 300 basis points to 11.3% from 14.3%.
The average citywide rental rate rose between quarters by 1.5% to $23.56 from $23.20 per square foot and on a year-over-year basis by 3.3% to $23.56 per square foot from $22.81 per square foot. The largest quarterly rental rate increase was Class A suburban office rental rates which increased by 5.5% to $28.86 per square foot from $27.34.
Vacancy & Availability
Overall vacancy levels decreased by 90 basis points between quarters to 14.6% from 15.5%. The average suburban vacancy rate decreased by 60 basis points to 14.7% from 15.3% the previous quarter, while CBD vacancy decreased by 230 basis points to 14.3% from 16.6%. On a year-over-year basis the city-wide vacancy rate decreased by 130 basis points to 14.6% from 15.9%. The suburban vacancy rate decreased 110 basis points to 14.7% from 15.8%, and the CBD vacancy rate decreased 170 basis points to 14.3% from 16.0%.
The CBD Class A vacancy rate decreased by 300 basis points to 11.3% from 14.3% between quarters, while the CBD Class B vacancy rate decreased 50 basis points to 17.5% from 18.0%.
The suburban Class A vacancy rate decreased by 200 basis points to 12.4% from 14.4% between quarters, while the suburban Class B vacancy rate increased between quarters to 17.3% from 16.6%.
Citywide, a total of 39 office properties (7 less than the previous quarter) had a minimum of 100,000 SF available for lease in both direct and sublease space, and 12 of those properties have over 200,000 SF available.
Absorption & Demand
Houston recorded positive net absorption of 1,074,493 SF in the first quarter. Contributing to the first quarter’s positive gain was suburban Class A space with a positive net absorption of 964,119 SF, followed by CBD Class A space with positive net absorption of 239,148 SF.
The average citywide rental rate rose between quarters to $23.56 from $23.20 per square foot. The CBD Class A average quoted rental rate increased by 3.2% to $36.42 per square foot from $35.29, while the suburban Class A average rate increased 5.56% to $28.86 per square foot from $27.34. The CBD Class B average rate increased slightly to $23.81 per square foot from $23.65, while the suburban Class B average rate rose to $19.05 per square foot from $18.30 between quarters.
On a year-over-year basis the citywide average rental rate increased by 3.3% to $23.56 per square foot from $22.81 per square foot.
Read the full report here.