Houston Office Market Report | Q2 2017

by CoyDavidson on July 14, 2017

Houston Office Market Report

Houston office vacancy increases again over the quarter, now at highest rate since 1994

Houston’s office market continues to struggle as global oil futures trade below $50 a barrel. With no indication that prices will rise in the immediate future, it will take a while to absorb all of the space the energy industry has placed on the market over the last few years. The good news is most of the larger office projects that were started before the oil slump have delivered, and the projects that
were in the construction pipeline were put on hold. There are some tenants in the market with a preference for newer innovative space, and certain developers are willing to meet these requirements even in an oversaturated market. Skanska USA recently signed a deal with Bank of America to occupy 200,000 SF in a new building known as Capitol Tower in the CBD and broke ground during the second quarter with the building scheduled to deliver in 2019. This isn’t such great news for the rest of the submarket, as Bank of America will vacate approximately 400,000 SF in its existing Class A building at 700 Louisiana St.

Absorption remained flat, posting about 700,000 SF of negative net absorption. The average vacancy rate rose slightly by 40 basis points over the quarter, and by 240 basis points annually.

Available sublease space decreased slightly but this was primarily due to expiring terms and the space going back to direct marketing by the landlord. There were a few instances where the sublease space was withdrawn by the sublessor. The majority of the sublease space in the market now has 1-3 years of term remaining.

According to the U.S. Bureau of Labor Statistics, the Houston metropolitan area created 45,300 jobs (not seasonally adjusted) between May 2016 and May 2017. Most of the recent quarterly job growth occurred in employment services, public education, food services and drinking places, health care, and fabricated metal products.

Vacancy & Availability

Houston’s citywide vacancy rate rose 40 basis points from 18.4% to 18.8% over the quarter, and rose 240 basis points from 16.4% in Q2 2016. Over the quarter, the average suburban vacancy rate increased 40 basis points from 18.1% to 18.5%, and the average CBD vacancy rate increased 50 basis points from 19.3% to 19.8%.

The average CBD Class A vacancy rate increased 20 basis points from 17.1% to 17.3% over the quarter, while the average CBD Class B vacancy rate increased 100 basis points from 27.7% to 28.7%. The average suburban Class A vacancy rate increased 60 basis points from 20.8% to 21.4%, and in contrast, the average suburban Class B vacancy rate fell 30 basis points between quarters from 16.7% to 16.4%.

Of the 1,707 existing office buildings in our survey, 94 buildings have 100,000 SF or more of contiguous space available for lease or sublease. Further, 29 buildings have 200,000 SF or more of contiguous space available. Citywide, available sublease space totals 10.7 million SF or 4.7% of Houston’s total office inventory, and 19.7% of the total available space. Available space differs from vacant space as it includes space that is currently being marketed for lease and may be vacant or occupied with a future availability date.


Available Office Sublease Space Houston, Texas Q2 2017

Absorption & Demand

Houston’s office market posted 654,564 SF of negative net absorption in Q2 2017. Suburban Class A space recorded the largest loss, with 754,825 SF of negative net absorption, while Suburban Class B posted the largest gain with 336,469 SF of positive net absorption. Some of the tenants contributing to the positive absorption include Vantiv (46,777 SF) in the North Belt/Greenspoint submarket, Disa Global Solutions Inc. (34,865 SF) in the West Belt submarket and PSS Industrial Group (33,286 SF) in the South Main/Med Center submarket. Over the last two years, Houston’s office market has suffered due to downsizing by large energy companies, and some of these firms moved from leases in third-party buildings into owned property, thus creating a glut of vacant sublease space. However, available sublease space has decreased over the last three quarters, primarily due to lease expirations and space going back to the landlord.

Rental Rates

Houston’s average Class A asking rental rate increased over the quarter from $35.79 per SF to $36.12 per SF. The average Class A rental rate in the CBD decreased marginally over the quarter while the average Suburban Class A rental rate increased from $33.26 to $33.76 per SF. The current average rental rate, which includes all property classes, for Houston office space is $29.89 per SF gross.

Leasing Activity

Houston’s office leasing activity changed marginally between quarters. It increased by 100,000 SF to 2.6 million SF of transactions in Q2 2017.

Sales Activity

Houston’s office investment sales activity increased substantially over the year, increasing by 439% since Q2 2016. With most of the investor community believing the downturn in the energy industry has reached the bottom and has begun to rebound, they now see Houston as offering limited downside and the potential for healthy returns. The average sales price increased marginally over the quarter, but is still well below the historical average.

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