Strong Q4 Helps Push YE-2013 Houston Office Absorption to 2.9M SF
Houston’s office market saw a remarkable year, spurred by growth in the energy sector. The Q4 net absorption of 1.9M SF, (not seen since 2007), pushed year-end office absorption to 2.9M SF. More than 1.2M SF was added to Houston’s office inventory and, at the close of Q4, 10.7M SF of new office development was under construction. Energy giants such as Apache, BHP, ExxonMobil, Phillips 66, and Shell, currently have expansion projects in the construction pipeline, and many others have announced plans to build new office buildings to accommodate growth.
The citywide average rental rate increased 3.8% from $24.25 per SF to $25.16 per SF over the year and 1.5% from $24.80 per SF between quarters. Citywide average Class A rents increased 3.0% and Class B rents increased 5.4% over the quarter.
The Houston metropolitan area added 86,200 jobs between November 2012 and November 2013, an annual increase of 3.1% over the prior year’s job growth. Local economists have forecasted 2014 job growth to remain steady, adding between 68,000 and 72,000 jobs. Further, Houston’s unemployment fell to 5.6% from 5.8% one year ago. Houston area home sales increased 19.4% between November 2012 and November 2013. Houston’s economy is expected to remain strong in 2014 due to steady job growth and continued expansion in the energy sector.
Absorption, New Supply & Vacancy Rates
Vacancy & Availability
Houston’s citywide vacancy rate fell 120 basis points between quarters to 14.0% from 15.2% and fell 50 basis points annually from 14.5% in Q4 2012. Between quarters, the average CBD vacancy rate decreased 30 basis points to 12.8% from 13.1% while the average suburban vacancy rate decreased 130 basis points to 14.4% from 15.7%.
The average CBD Class A vacancy rate decreased 50 basis points to 10.2% from 10.7%, and the average CBD Class B vacancy rate fell 20 basis points to14.9% from 15.1%. The average suburban Class A vacancy rate decreased 160 basis points to 10.9% from 12.5%, and the average suburban Class B vacancy rate fell 70 basis points to17.4% from 18.1%.
Of the 1,301 existing office buildings in our survey, only 44 have 100,000 SF of contiguous space available for lease or sublease. Further, only 17 have 200,000 SF of contiguous space available. Citywide, available sublease space totals 4.5 million SF or 2.5% of Houston’s total office inventory, but only 1.8 million SF of this sublease space is currently vacant.
Absorption & Demand
Absorption increased in Q4 as new space was delivered and tenants expanded. Houston’s office market posted 1.9M SF of positive net absorption, significantly more than the 656,00 SF posted in the same quarter one year ago.
Suburban Class C space posted the largest loss, with 37,349 SF of negative net absorption. Suburban Class A space posted the largest gain, with 1.4M SF of positive net absorption, mostly due to tenants expanding into new construction in the Katy Freeway and The Woodlands submarkets.
Some of the larger tenants that moved into new space or expanded into additional space during Q4 include Modec International (127,000 SF) and Atwood Oceanics (82,000 SF), both companies moved into Energy Crossing II, in the Katy Freeway submarket; Geico (136,000 SF) moved into Mason Creek Office Center, located in the Katy Freeway submarket; Subsea (96,300 SF) and Houston Offshore (62,147 SF) moved into Westgate I in the Katy Freeway submarket; and Anadarko Petroleum Corp. (550,000), began expansion into it’s newly constructed Tower 2 in The Woodlands submarket.
The citywide average rental rate increased 3.8% from $24.25 per SF to $25.16 per SF over the year and 1.5% from $24.80 per SF between quarters. Citywide average Class A rents increased 3.0% and Class B rents increased 5.4% over the quarter. The CBD Class A average rental rate increased 2.6% from $37.19 per SF to $38.16 per SF between quarters, while the suburban Class A average rental rate increased 9.9% from $29.79 per SF to $32.75 per SF. The average CBD Class B rental rate rose 1.0%, while the average suburban Class B rental rate increased 5.3% between quarters.
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