Houston Office Market Report – 4Q 2011

by CoyDavidson on January 2, 2012

Houston’s Office Market Ends 2011 on a Positive Note

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 been the key factor to the year-end positive net absorption of 2.6 million square feet citywide. An important driver of these market trends has been a healthy economic climate conducive to increased business activity. The Houston metropolitan area has gained about 77,000 jobs through November 2011, representing a solid 3.0% growth rate.

Overall vacancy levels decreased by 50 basis points between quarters to 15.5% from 16.0%, which was also the city wide overall vacancy rate one year ago. The average suburban vacancy rate decreased by 30 basis points to 15.3% from 15.6% the previous quarter, while the CBD vacancy rate decreased by 100 basis points to16.6% from 17.6%.

On a year-over-year basis the citywide average rental rate increased by $0.12 per square foot to $23.20 from $23.08 per square foot. The citywide average rental rate also rose slightly between quarters to $23.20 from $22.93 per square foot.

Houston’s Office Investment sales activity decreased between quarters with only 10 properties changing hands, compared to 15 in the previous quarter. According to Real Capital Analytics, Houston office sale transactions had a total dollar volume of $732.9 million, averaging $406 per square foot with a 6.6% capitalization rate. The most significant sale was Trammell Crow JV’s sale of Hess Tower to H&R REIT for $442.5 million or $524 per square foot.

Houston’s office leasing activity reached 1.4 million SF in the fourth quarter, bringing the year-end total to 3.3 million SF. One of the most significant transactions that occurred in the fourth quarter was Shell’s renewal of 1.3 million SF in One and Two Shell Plaza in the CBD submarket.

With solid expansion in the energy sector and a strong housing market, (up 4.1% year-to-date through November), Houston’s economy is expected to continue outperforming the national economy over the next twelve to eighteen months

VACANCY & AVAILABILITY

Overall vacancy levels decreased by 50 basis point s between quarters to 15.5% from 16.0%.The average suburban vacancy rate decreased by 30 basis points to 15.3% from 15.6% the previous quarter, while CBD vacancy decreased by 100 basis points to 16.6% from 17.6%. On a year-over-year basis the city-wide vacancy rate decreased by 50 basis points to 15.5% from 16.0%.The suburban vacancy rate decreased 130 basis points to 15.3% from 16.2%, and the CBD vacancy rate increased 170 basis points to 16.6% from 14.9%.

Vacancy in CBD Class A properties decreased to 14.3% from 15.1% between quarters, while CBD Class B vacancy rates decreased to 18.0% from 19.5%.Although suburban vacancy rates remained in double-digits, Class A vacancy actually dropped between quarters to 14.4% from 15.0%.The suburban Class B vacancy rate decreased between quarters to 16.6% from 16.7%.

Citywide, a total of 46 office properties had a minimum of 100,000 SF available for lease in both direct and sublease space, and 13 of those properties have over 200,000 SF available.

Available sublease space totaled 3.1 million SF, including 1.7 million SF of vacant space and 1.4 million SF of subleases available for occupancy over the next 18 months. The largest available sublease space is Devon Energy’s 198,478 SF space in Two Allen Center in the CBD. Braeswood Tower II has the largest suburban contiguous block of sublease space available,146,392 SF.

ABSORPTION & DEMAND

Houston recorded positive net Absorption of 1,226,000 SF in the fourth quarter, bringing the year-end total to 2,643,000 SF. Contributing to the quarter’s positive gain was suburban Class A space with a positive net absorption of 631,000 SF, followed by suburban Class B space with positive net absorption of 269,000 SF, and CBD Class A space with positive net absorption of 175,000 SF. The majority of the CBD positive absorption was due to company expansions including Carrizo Oil & Gas, Burns & McDonnell and Eagle Rock Energy Partners.

RENTAL RATES

Citywide rental rates rose between quarters to $23.20 from $22.93 per square foot. The CBD Class A average quoted rental rate increased by $0.86 to $35.29 per square foot from $34.43, while the suburban Class A average rate increased $0.31 to $27.34 per square foot from $27.03.The CBD Class B average rate decreased by $0.04 to $23.65 per square foot from $23.69, while the suburban Class B average rate rose $0.08 to $18.30 per square foot from $18.22 between quarters.

On a year-over-year basis the citywide average rental rate increased by $0.12 per square foot.

Please click here to access the full Q4 Houston Office Market Research & Forecast Report.

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