Houston Office Space Market Vacancy Up, Rents Down in 2009
Houston’s office space market posted weak fundamentals at the end of 2009 with year-over-year higher vacancy, lower rental rates, and negative net absorption ending the previous five consecutive years of gains in occupied space citywide. Against the ongoing uncertainty regarding the timing for recovery from the worst economic recession in recent history, office tenants continued to delay and/or indefinitely postpone leasing decisions while struggling to draw up new strategies for space requirements. For their part, landlords were once again forced to lower quoted rental rates across property classes citywide and increase lease concession packages by way of motivating tenants and boosting lease activity. At the end of the fourth quarter, CBD Class A quoted rental rates decreased 2 7% to 37.36 per SF, while suburban Class A rates fell 2.2% to 27.26 per SF.
Rising vacancy at year-end was characterized by large blocks of space – 100,000 SF or more – hitting the market, with both direct and sublease options available. Citywide, a total of 62 office properties had over 100,000 SF available to lease at the end of the fourth quarter. Sublease space on the market reached 4.7 million SF, with much of this space being marketed at significantly reduced rates and available on extended terms of five or more years, which will only further exacerbate downward pressure on direct rental rates over the next twelve months.
A severe contraction in the local employment sector over the twelve months ending in December 2009 was the single most important challenge to the office market this year. Following several years of strong job growth outperforming the national average, Houston’s employment sector contracted by nearly 3.5%, representing nearly 93,000 job losses, in 2009. Although well below the losses recorded by other major U.S. metros during the same period, for Houston the shock of even a late entry to the recession was nevertheless daunting on all fronts. Economists are forecasting an improvement, albeit meager, in the coming year with Houston’s projected net job gains between 2,000 and 5,000 in 2010. With commercial real estate a lagging indicator, office market fundamentals are expected to continue weakening for most, if not all, of 2010.
- Colliers International: Houston Industrial Market Report 4Q 2009