The Office Market Recovery Begins, in the Suburbs
A couple of weeks ago I posed the question; When will the recovery begin in the Houston office market, or has it already? I predicted approximately 400,000 square feet of positive absorption for the 4th quarter at the time and left myself a little “wiggle room” since a couple weeks remained in the quarter and I had not investigated the leasing statistics in detail.
Well the preliminary numbers are in and the Houston office market ended the year recording 617,863 square feet of positive absorption in the 4th quarter, its strongest showing since the 3Q 2008. As a result, Houston’s office occupancy for all property classes averaged 84.0 percent at years end, compared to 83.5 percent this time last year.
Houston Office Market 4Q 2010
The Houston office market closes 2010 registering positive net absorption of 475,779 square feet for the year, as a result of escalating leasing activity in the suburban office market sector. While the CBD’s 2010 total net absorption was negative 592,867 square feet, the suburban markets’ combined net absorption was positive at 1,068,646 square feet. Even with weak pockets scattered city wide, the suburban market trends continue to indicate this sector has weathered the storm and is leading the office market recovery.
The suburban Class A vacancy rate now stands at 17.5% as compared to 19.7% a year ago. The CBD is still fundamentally the stronger market with a vacancy rate of 10.4% as compared to 8.4% a year ago.
If you have been reading this blog you will recall I poked holes in any notion that Houston was experiencing any trend of relocations to the CBD by suburban office tenants. One significant tenant relocation from the Galleria to downtown does not constitute a trend.
As expected the strength of the 4th quarter’s numbers appear in the Class A sector, as tenants continue the “flight to quality” and take advantage of attractive leasing terms. The suburban Class A office sector recorded 664,035 square feet of positive absorption in the 4th quarter alone as a result of stronger leasing activity in a few key submarkets.
The Energy Corridor is Hot
The absorption figures were mixed among various suburban submarkets. However, there were five submarkets that posted positive net absorption of six digits for the year. The big winner the Energy Corridor.
Top Performing Submarkets – 2010 Net Absorption:
- Katy Freeway | Energy Corridor: +700,549 SF
- Westchase: +271,470 SF
- Woodlands: +154,869 SF
- Galleria: +127,801 SF
- Northwest: +127,784 SF
The Sequence of Market Recovery
I should elaborate this does not necessarily mean rental rates will go up, at least initially. There is a natural sequence of events in a market recovery. The first sign of a recovery will be push back from Landlords in terms of the incentives or concessions packages (tenant improvement allowance, free rent, abated parking charges) offered to attract new tenants and even more so to retain existing tenants. We are seeing the early signs of this in key markets where leasing activity is stronger (see above).
There is no argument that it is still a tenants’ market characterized by excessive supply and downward pressure on rents. Landlords are generally very flexible on terms and remain aggressive both in their efforts to attract new as well as retain existing tenants, particularly those with solid credit. However, as the market improves the concession packages will only continue to get skinnier.
What the early signs of recovery means is the window of opportunity for office tenants while by no means shut, is starting to close, and could even more quickly for larger tenants and in specific submarkets. I really try to avoid using the terms “bifurcated market” or “the tale of two office markets”, believe me, you are going to hear it enough over the next few months. But you get my point.