Houston Office Market Report | Q1 2017

by CoyDavidson on April 12, 2017

Houston Office Construction Down 50% from One Year Ago

Houston’s office market has struggled over the past few years with rising vacancy and slower than average job growth due to a weakened energy market. However, as the office construction pipeline has grown smaller and most spec developments have been put on hold, the office market appears to be stabilizing.

Although the average vacancy rate in Houston increased 100 basis points over the quarter, 1.8M SF of new inventory delivered and 40% of that space was vacant. Available sublease space has decreased over the last two quarters and energy sector layoffs have declined. The market will most likely remain relatively flat, plodding through 2017.

Houston’s office market posted 0.7M SF of negative net absorption during the first quarter, which is only 0.3% of Houston’s total office inventory. Developers have been disciplined over the last few years as evidenced by the fact the construction pipeline has shrunk by 50% in just one year and by 65% in two years. The 1.8M SF of office space under construction is 43% pre-leased and the majority is scheduled to deliver within the next year.

Recent press announcements regarding tenants pre-leasing space in proposed buildings indicates a preference for newer innovative space. Although this will eventually add more vacant space to an already saturated market, it is a very small percentage overall.

According to the U.S. Bureau of Labor Statistics, the Houston metropolitan area created 19,300 jobs (not seasonally adjusted) between February 2016 and February 2017. Most of the job growth occurred in arts, entertainment & recreation, government, retail trade, and education.

Vacancy & Availability

Houston’s citywide vacancy rate rose 100 basis points from 17.5% to 18.5% over the quarter, and rose 320 basis points from 15.3% in Q1 2016. Over the quarter, the average suburban vacancy rate increased 70 basis points from 17.6% to 18.3%, and the average CBD vacancy rate increased 350 basis points from 15.6% to 19.1%.

The average CBD Class A vacancy rate increased 430 basis points from 12.7% to 17.0% over the quarter, primarily due to the delivery of 609 Main. The average CBD Class B vacancy rate increased 180 basis points from 24.6% to 26.4%. The average suburban Class A vacancy rate increased 80 basis points from 19.7% to 20.5%, and the average suburban Class B vacancy rate rose 50 basis points between quarters from 16.5% to 17.0%.

Of the 1,708 existing office buildings in our survey, 93 buildings have 100,000 SF or more of contiguous space available for lease or sublease. Further, 31 buildings have 200,000 SF or more of contiguous space available. Citywide, available sublease space totals 10.9 million SF or 4.7% of Houston’s total office inventory, and 21.2% of the total available space.

Absorption & Demand

Houston’s office market posted 745,413 SF of negative net absorption in Q1 2017. CBD Class A space recorded the largest loss, with 457,627 SF of negative net absorption, while Suburban Class A posted a gain with 334,148 SF of positive net absorption. Over the last two years, Houston’s office market has suffered due to downsizing by large energy companies and some of these firms moving from third party buildings into owned property, thus creating a glut of vacant sublease space. However, available sublease space has decreased over the last two quarters, indicating that Houston’s office market might be at a turning point.

Rental Rates

Houston’s average asking rental rates remained relatively flat over the quarter. The average Class A rental rate in both the CBD and Suburban submarkets decreased marginally over the quarter, as did the average Class B rental rates. The current average rental rate, which includes all property classes, for Houston office space is $29.59 per SF gross.

Leasing Activity

Houston’s office leasing activity decreased 27.8% between quarters from 3.0 million SF to 2.2 million SF of transactions in Q1 2017.

Sales Activity

Houston’s office investment sales activity soared over the year, increasing by 140% since Q1 2016. The average sales price increased from $183 to $199 per square foot.

Office Development Pipeline

Houston’s construction pipeline for office space contains 1.6 million SF of which 42% is pre-leased. Build-to-suit projects make up 43% of the pipeline, and the remaining 918,400 SF is spec office space under construction which is approximately 10% pre-leased. The table below includes office buildings with a RBA of 100,000 SF or more under construction.

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