Houston Office Market Report: 3Q 2010

by CoyDavidson on October 12, 2010

Suburban Office Market Continues to Outpace CBD

Houston’s office market at the close of 3Q 2010 showed a slight improvement from the previous quarter, with a stronger performing suburban sector, compared to the Central Business District (CBD). Although leasing activity picked up, vacancy increased slightly. Year-over-year change in office occupancy citywide was moderate with 83.3 percent occupancy at the end of the third quarter compared to 83.8 percent in the same quarter last year. Quoted rental rates citywide for Class A space decreased 0.4 percent, with the CBD Class A decreasing 2.0 percent to $35.16 per square foot, while suburban Class A space decreased a minimal 0.2 percent to $27.30 per square foot. Net absorption also showed the combined suburban markets outperforming the CBD. While the CBD’s year-to-date net absorption was negative (553,516) square feet, the suburban markets’ combined net absorption was positive at 242,261 square feet. Citywide the Houston Office Market recorded (25,586) square feet of negative absorption in the 3rd quarter bringing the year-to-date total to negative (311,225) square feet. Even with weak pockets scattered citywide, the suburban market trends continue to indicate this sector will plateau sooner, and will likely lead the office market recovery.

Looking forward, several key events are contributing to a more cautious outlook for the local downtown office market over the next 6–12 months. The recently approved merger between Houston-based Continental Airlines and Chicago-based United Airlines expected to close by year-end will not negatively impact CBD Class A occupancy in the near-term.  According to a source close to the deal, Continental’s lease doesn’t expire until 2014 and the space will not be offered for sublease for 12-24 months. The top concern for the CBD Class A market is the completion of speculative new construction. Hines’ 972,474-square-foot MainPlace is currently 10 percent leased and expected to be completed by February 2011. Securing an anchor tenant before final delivery, however, remains a possibility as was the case with the only other new office building underway downtown—Trammell Crow Company’s 844,763-square-foot Hess Tower— which is 100 percent pre-leased to Hess Corporation.

According to the Texas Labor Market Review, Texas MSA’s have experienced job gains in six out of eight months so far this year. Although Houston isn’t the top performing MSA in Texas, Houston continues to be recognized as one of the strongest metros in the U.S. for business activity, with the employment sector reporting marked improvement from this time last year. In the 12 months ending in August 2010, Houston’s job loss totaled 18,300, significantly below the 100,000 jobs lost in 2009, with the local MSA projected to end 2010 with positive job growth. The area’s above-average population growth spurring the need for increased services is also a positive contributing factor in Houston’s strong long-term outlook.

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