The Houston Office Market Begins the Pivot in the Landlord’s Favor
If you are a periodic reader of this blog you know that I have extensively chronicled Houston’s strong economic performance in comparison to other major cities around the country. Just about 14 months ago, I asked the question; “Just how long will the tenant friendly office market last for Houston?” In this post I made the point that given our city’s historical track record of experiencing rapid periods of economic and employment growth primarily driven by the Energy industry, it seems we are rarely at the point of equilibrium in the market cycle for long.
I also projected that the market dynamics for large Houston office space users will turn first. While that is not a terribly bold prediction the fact is that this has already happened as big blocks of quality space are quickly disappearing. The Houston office market has experienced steady improvement since emerging from the recession but in recent months leasing activity has really heated up driven by a notable number of large lease transactions by energy concerns. While we had seen some compression in quoted and strike prices for rental rates and less liberal concessions offered by Landlords, we had not seen much movement in terms of quoted rental rates.
It’s a Sign
So what signals the shift to a Landlord’s market from the previous tenant friendly market? There are really a few key indicators:
- We are now seeing some Landlord’s pull dated leasing proposals off the table and resubmit terms with higher rents particularly in the core submarkets.
- If your lease maturation is more than 12 months out many building owners are abstaining from any negotiations unless you are a major tenant of the project.
- Quoted rates have exceeded pre-recession levels in many Class A projects.
- Some major tenants are facing challenges in securing expansion space in their current buildings or projects.
- Office tenants with leases rolling in the next 12-18 months are to their surprise discovering a vastly reduced number of quality options available.
- Even the Class B market is firming in some key submarkets.
While the recovery is not completely uniform as there are still pockets of softness in some secondary submarkets in key clusters such as the CBD, Galleria, Greenway, Katy Freeway-Energy Corridor and The Woodlands leasing activity is brisk.
Having the “You Snooze, You Lose” Conversation
Having this conversation with our clients always leads to raised eyebrows at first but office tenants in Houston are rapidly realizing this is reality and as a result are pulling the trigger more quickly on lease decisions before they have to compete with another tenant for the space or the Landlord changes the terms. Office tenants that did not take advantage of the previous tenant friendly market are too late and while I still advocate moving prudently if the current trend continues, tenants will need to move more decisively on quality space options that fit their needs.