Houston Office Market Review | 4Q 2010

by CoyDavidson on January 6, 2011

Houston skyline cbd

Houston’s Office Market Closes 2010 on a Positive Note…for Both Landlords and Tenants

On average, Houston’s landlords saw positive net absorption of office space during the fourth quarter, with the suburban sector outperforming the Central Business District (CBD).  As a result of the year-end push, vacancy rates decreased slightly, with the year-over-year occupancy rate increasing from 83.5% to 84.0% citywide.   Despite the overall net absorption gain, tenants were still able to take advantage of a drop in average CBD rental quotes for Class A buildings, which fell by 7.9% to $34.60/SF, down from $37.30/SF.  During the same period, Suburban Class A rates decreased by 0.6% to $27.11/SF.

Macro factors driving the absorption of office space ultimately ties back to job count.  According to the Texas Labor Market Review, total nonagricultural employment in Texas rose by 19,100 jobs in November, gaining jobs in eight out of eleven months.  At the local level, Houston’s MSA had the largest monthly job increase, with 10,900 jobs added in November.  Dallas followed with 5,200 jobs added.  Houston also led in the monthly growth of retail and government jobs, adding 7,400 and 2,300 jobs, respectively.

Looking forward, the outlook for the downtown office market reveals the potential for additional softness based on projected new vacancy in 2011, with approximately 1.2M SF of Class A space scheduled to become vacant during the next 12 months. This influx of new availability will add an additional 4.2% of vacancy on top of the current 10.4% registered for YE 2010. However, the majority of the additional vacancy will result from one of the city’s newest office towers , BG Group Place, officially coming on line during the first quarter. This 972,500 SF Hines development will carry a LEED Platinum pre-certification and approximately 480,000 SF of yet-to-be-leased Class A space.  Additional large blocks of space coming on line during the year can be found in One Allen Center with 438,000 SF available in the third quarter and approximately 130,000 SF in the Bank of America building available in February. The Continental / United Airlines merger is expected to reduce the need for the newly merged company’s 650,000 SF of downtown space.  With the company’s primary lease not expiring until 2014, it is expected that some of the Continental space may come to market as sublease space.  Stay tuned.

Vacancy & Availability

Vacancy levels were down overall for suburban properties and up slightly overall for CBD properties.  Houston’s citywide office vacancy for all property classes averaged 16.0% in the fourth quarter, compared to 16.6% this time last year.

Vacancy in  CBD Class A properties continued to soften reaching 10.4% compared to 8.4% a year ago. CBD Class B properties posted 21.5% vacancy, down from 22.8% 12 months earlier.

While the overall suburban vacancy rate remained in double-digits, Class A suburban vacancy actually dropped between quarters to 17.6% from 19.3%. By comparison, suburban Class B vacancy remained unchanged at 16.3%.

Citywide, a total of 53 office properties had a minimum of 100,000 SF available for lease in both direct and sublease space—16 of those properties have over 200,000 SF available—at the end of the fourth quarter. Sublease space totaled 4.3 million SF, including 2.0 million SF of vacant space and 2.3 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 and 121,000 SF in Three Allen Center (available for occupancy 4/2011) in the CBD. In Westchase, 3600 Briarpark has the largest suburban contiguous block of sublease space available, 160,000 SF.

Absorption & Demand

Houston recorded positive net absorption of 618,000 SF in the fourth quarter, compared to 46,000 SF negative net absorption at the same time last year. City-wide year-end net absorption was positive 476,000 SF with suburban Class A space contributing most of that total with  year-end positive net absorption of 748,000 SF, followed by suburban Class B space with positive net absorption at 191,000 SF. In contrast, CBD Class A and Class B space both reported negative net year-end absorption of 560,000 and 54,000 SF, respectively.

Rental Rates

Citywide rental rates have declined throughout the year. On a year-over-year basis, CBD Class A average quoted rental rates dropped by 7.9% to $34.61/SF (from $37.36), while suburban Class A rates decreased 0.6 % to $27.11/SF.  CBD Class B rates increased by 0.2% to $23.95/SF (from $23.91), while suburban Class B rates fell 5.7% to $17.11/SF on a full-service basis. Until demand outpaces supply, the current tenant-friendly market is expected to continue

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