Houston Office Recovery Slows in Q2

by CoyDavidson on June 30, 2011

Houston Office Market Posts Positive Absorption in Second Quarter 2011

The Houston Office Market posted 81,091 square feet of positive net absorption during the second quarter with the majority taking place in the suburban sector. Year-over-year vacancy rates decreased from 16.5% to 15.9% citywide. Rental rates continued to decrease during the second quarter, with the citywide average rate dropping to $22.70 from $23.81 per square foot in the first quarter. Vacancy in CBD Class A properties continued to soften, reaching 12.5% compared to 9.0% a year ago. In contrast, Class A suburban vacancy decreased to 16.2% from 19.6% a year earlier. Leasing activity decreased between quarters, consisting mostly of renewals and/or expansions, suggesting tenants took advantage of more favorable lease terms.

Looking forward, the outlook for the downtown office market reveals the potential for additional softness based on projected new vacancy scheduled to become available over the next two years.. This influx of new availability will add additional vacancy on top of the current 12.5% registered in second quarter 2011. Additional large blocks of space coming on line during the year can be found in One Allen Center with 438,000 SF available and 164,000 SF in Continental Center I, both in third quarter. The Continental / United Airlines merger is expected to reduce the need for the newly merged company’s 650,000 SF of downtown space. The company’s primary lease does not expire until 2014, but it is expected that some of the Continental space may come to market as sublease space in 2011.

Houston Office Market (All Classes)

Vacancy & Availability

Overall vacancy levels remained unchanged between quarters, remaining at 15.9%. The average suburban vacancy rose by 10 basis points to 15.9% from 15.8% the previous quarter, while CBD vacancy remained the same at 16.0%. On a year-over-year basis, suburban vacancy decreased by 120 basis points to 15.9% from 17.1%, and CBD increased 220 basis points to 16.0% from 13.8%.

Vacancy in CBD Class A properties continued to soften reaching 12.5% compared to 9.0% a year ago. In contrast, CBD Cass B properties decreased to 20.0% vacancy, down from 22.8% 12 months earlier.
Although suburban vacancy rates remained in double-digits, Class A vacancy actually dropped between quarters to 16.2% from 19.6% on a year-over-year basis. By comparison, suburban Class B vacancy rose to 16.7% from 16.3%. Citywide, a total of 47 office properties had a minimum of 100,000 SF available for lease in both direct and sublease space which is 5 less than the previous quarter, and 14 of those properties have over 200,000 SF available, down from 25. Sublease space totaled 3.4 million SF, including 1.3 million SF of vacant space and 1.2 million SF of subleases available for occupancy over the next 12 months. The largest sublease space being marketed is Devon Energy’s space, 282,000 SF in Two Allen Center in the CBD and Braeswood Tower II has the largest suburban contiguous block of sublease space available, 146,392 SF.

Absorption & Demand

Houston recorded positive net absorption of 81,091 SF in the second quarter, compared to (316,519) SF of negative net absorption at the same time last year. Contributing to the quarters positive gain was Suburban Class A space with positive net absorption of 261,138 SF, followed by CBD Class A space with positive net absorption at 32,128 SF. Suburban Class B space had the largest amount of negative absorption in second quarter 2011 with (134,965) SF of negative net absorption followed by suburban Class C space with (64,587) SF of negative net absorption.

Rental Rates

Citywide rental rates continued to decline during the second quarter 2011. On a year-over-year basis, CBD Class A average quoted rental rates dropped $1.71 to $34.15 per square foot (from $35.86), while suburban Class A rates dropped $0.72 to $26.63 per square foot (from $27.35). The average CBD Class B asking rate increased by $0.49 to $23.44 per square foot (from $22.95), while suburban Class B rates remained the same at $17.95 per square foot on a year-over-year basis. Until demand outpaces supply, rental rates are expected to remain flat.

Houston Office Market Report 2Q 2011

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