Houston’s Office Market Invigorated By Energy Giants’ Growth!

by CoyDavidson on July 11, 2013

Houston city skyline

Houston Office Market Research Report – Q2 2013

Houston’s strong job growth spurred by growth in the energy sector, continues to boost Houston’s office market in Q2 2013. Although leasing momentum slowed in the first quarter due to a lack of quality inventory, absorption increased in the second quarter as new construction was delivered. Houston’s office market posted 286,000 SF of positive net absorption in the second quarter, much less than the 688,000 SF posted in the same quarter one year ago. Absorption will pick up momentum again later in the year when a portion of the 9.4 million SF of office space under construction is delivered. Additionally, energy giants such as Chevron, Apache, BHP, and many others have announced plans to build new office buildings to accommodate growth. Approximately 9.9M SF of office space is either under construction (ExxonMobil and Anadarko) or planned over the next two to three years.

pump-jack group

The Houston metropolitan area added 91,600 jobs between May 2012 and May 2013, an annual increase of 3.4% over the prior year’s job growth. Further, Houston’s unemployment fell to 6.4% from 6.8% one year ago and Houston area home sales increased significantly over the year by 28.0%. 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 overall average vacancy rate increased 10 basis points between quarters, as well as over the year from 14.8% to 14.9%. Between quarters, the average CBD vacancy rate increased by 30 basis points to 14.1% from 13.8%, as additional sublease space was added to the market. On a year-over-year basis, the average CBD vacancy rate increased by 10 basis points from 14.0%. Between quarters, the average suburban vacancy rate increased by 10 basis points to 15.2% from 15.1%, and increased 20 basis points from 15.0% over the year.

The CBD Class A vacancy rate increased by 50 basis points to 11.7% from 11.2% between quarters. The CBD Class B vacancy rate decreased 30 basis points to 15.1% from 15.4%. The suburban Class A vacancy rate decreased by 10 basis points between quarters to 11.8% from 11.9% and suburban the Class B vacancy rate increased by 10 basis points to 17.7% from 17.6%.

Of the 1,285 existing office buildings in our survey, only 46 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 4.0 million SF or 2.3% of Houston’s total office inventory, of which 1.5 million SF is currently vacant.

Absorption & Demand

Absorption increased in the second quarter as new construction was delivered and tenants expanded into new space. Houston’s office market posted only 286,000 SF of positive net absorption in the second quarter, less than the 688,000 SF posted in the same quarter one year ago.

CBD Class A space posted the largest loss, with 154,500 SF of negative net absorption, mostly due to the addition of sublease space. Suburban Class A space posted the largest gain, with 517,000 SF of positive net absorption.

Some of the larger tenants that moved into new space or expanded into additional space during the second quarter include Wood Group Mustang, moving into 170,000 SF in Westgate 3 located in the Katy Freeway submarket; Baker McKenzie, moving into 50,000 SF in Bank of America and Rosetta moving into 93,000 SF in Heritage Plaza, both buildings in the CBD submarket; Parsons moved into 25,200 SF in 2200 West Loop South located in the West Loop/Galleria submarket.

Rental Rates

The average citywide rental rate increased to $24.26 from $23.98 per SF on an annual basis, and from $24.06 per SF between quarters. The CBD Class A average quoted rental rate decreased to $36.86 from $37.04 per SF between quarters, while the suburban Class A average quoted rental rate remained unchanged at $28.82 per SF. The average CBD Class B quoted rental rate increased to $24.79 from $24.78 per square foot, while the average suburban Class B quoted rental rate increased to $18.60 from $18.56 per square foot over the quarter.

You can download and view the entire report here.

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