Jobs and the Houston Office Market

by CoyDavidson on January 23, 2011

How Long will the Tenant Friendly Market Last?

The cost of office space is driven by supply and demand and a significant shift occurs when there is an imbalance in one of these two factors. Rents go up when demand for space increases faster than new supply can be delivered to the marketplace. Conversely rents go down when either demand drops off significantly or an oversupply of new space gluts the market. When both of these trends occur simultaneously it can get real ugly, as it did in the early 1980’s when Texas real estate got hammered after the oil business cratered at a time when a record supply new office space had been built.

The time frame to bring a new office development to market can vary from one to three years depending on the size of the project, location and market. For example a mid-rise suburban office project can be completed much quicker than a major CBD office tower. Furthermore the constraints on new development can vary from city to city. The barriers to new development in Houston are generally considered minimal compared to many major cities around the country.

The most recent downturn in the Houston office market as is with the case with most markets around the country was primarily demand driven rather than the result of an oversupply to the marketplace. However there was some impact from new development reaching the marketplace just as the city began to feel the impact of the recession.

Job Growth Turns Positive

Houston-area employers added 13,100 jobs from December 2009 to December 2010, the Texas Workforce Commission reported Friday. That represents a year-over-year gain of 0.5 percent. While this is certainly not robust job growth it is more compelling when compared to the 102,000 jobs lost in 2009.

Houston Job Growth & Office Market Indicators

Macro factors driving the absorption of office space ultimately ties back to job count (demand) and the volume of new office space delivered to the marketplace (supply). Houston recorded positive net absorption of 618,000 square feet in the fourth quarter of 2010 and ended the year with positive net absorption of 476,000 square feet. In 2010 only 700,000 square feet of new office space was delivered to the Houston marketplace.

Net Absorption & Supply

Source: Colliers International / The Tenant Advisor

Still a Tenant’s Market in 2011, but Watch for the Signs

The Greater Houston Partnership employment forecast calls for the region to add 23,300 private sector jobs in 2011, but the improvement will be tempered by the loss of 5,100 public sector jobs. The projected net gain will be 18,200 jobs.

Despite an increasingly optimistic economic outlook, Houston has yet to experience any significant growth in office using employment and the drag of an undefined volume of shadow office vacancy could likely push any significant shift of office market fundamental into 2012. The wildcard could be expanded and accelerated hiring from the energy sector due to elevated oil and gas prices.

Landlords are still 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. Rents have stabilized but remain flat.

There is a natural sequence of events in a market recovery. The first sign of an apparent 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 only seeing the early and sporadic signs of this trend in specific submarkets and among higher quality office assets where space demand appears stronger.

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