Houston Economy Boosts Office Leasing Activity

by CoyDavidson on October 8, 2012

houston

Houston 3Q-2012 Office Market Research Report

Houston’s strong job growth has boosted office space leasing in 2012. Third quarter leasing activity reached 2.6 million SF, 1.5 million SF of which was in Class B product. The Houston metropolitan area added 89,500 jobs between August 2011 and August 2012, an annual increase of 3.5% over the years prior job growth. Further, Houston’s unemployment fell to 7.0% from 8.6% one year ago which has bolstered annual Houston area home sales by 20.0%.

Expansion in the energy industry has driven demand for new office development as tenants find it harder to locate blocks of quality office space. Currently, 4.1 million SF is in the office construction pipeline and 58.0% of the space is pre-leased. Houston’s office market posted 767,000 SF of positive absorption in the third quarter, pushing the year-to-date total to 3.2 million SF.

Houston’s overall vacancy levels fell to 14.2%, an annual decrease of 180 basis points. The city-wide average rental rate for office space increased from $22.93 per SF to $23.61 per SF over the year. With continued expansion in the energy industry and a strong housing market, Houston’s economy is expected to remain healthy for both the near and long-term.

Vacancy & Availability

Houston’s average vacancy rate and the average suburban vacancy rate both decreased by 30 basis points to 14.2% from 14.5% on a quarterly basis. The average CBD vacancy rate decreased by 50 basis points to 13.9% from 14.4% between quarters. On a year-over-year basis, the city-wide vacancy rate decreased by 180 basis points to 14.2% from 16.0%. The average suburban vacancy rate decreased by 140 basis points to 14.2% from 15.6%, and the average CBD vacancy rate decreased by 370 basis points to 13.9% from 17.6%.

The CBD Class A vacancy rate decreased by 30 basis points to 10.6% from 10.9% between quarters, while the CBD Class B vacancy rate decreased 120 basis points to 18.0% from 19.2%. The suburban Class A vacancy rate decreased by 30 basis points to 12.0% from 12.3% between quarters, while the suburban Class B vacancy rate decreased to 16.5% from 16.9%. Of the 1,709 buildings in the Houston office market, only 39 have 100,000 SF of contiguous space available for lease or sublease. Further, only 12 have 200,000 SF contiguous available. Available sublease space totals 3.2 million SF or 1.7% of total inventory, of which 1.1 million SF is currently vacant.

Absorption & Demand

Office Space in Houston recorded positive net absorption of 767,000 SF in the third quarter, pushing the year-to-date absorption total to 3,211,000 SF. Contributing to the third quarter’s positive gain was CBD Class A space with a positive net absorption of 292,000 SF, followed by suburban Class A space with positive net absorption of 281,000 SF. Some of the larger tenants that moved into their office space or expanded into additional space during the third quarter included Shell Oil relocating to 331,000 SF in 1000 Main from 250,000 SF in 2 Houston Center, Rosetta Resources relocating to 109,000 in Heritage Plaza from 70,000 SF in 717 Texas, and WorleyParsons moved into 130,000 SF in the Reserve at Park Ten.

Rental Rates

The average citywide rental rate remained relatively flat between quarters decreasing to $23.61 from $23.66 per square foot. The CBD Class A average quoted rental rate increased to $36.85 from $36.80 per square foot, while the suburban Class A average quoted rental rate decreased to $27.31 from $27.81 per square foot. The CBD Class B average quoted rental rate increased to $24.00 from $23.61 per square foot, while the suburban Class B average quoted rental rate increased to $18.74 from $18.54 per square foot between quarters.

Q3 2012 Houston Office Market Report

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