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The overall vacancy rate in the Houston office market was up 50 basis points quarter-over-quarter, and up 70 basis points year-over-year.



Vacancy rate at 22.3%

The overall vacancy rate in the Houston office market was up 50 basis points quarter-over-quarter, and up 70 basis points year-over-year. The vacancy rate for Class A properties is at 23.1%, and Class B at 22.7%. In the second quarter, overall net absorption totaled negative 852,000 sq. ft.—Class A represented negative 479,000 sq. ft. and Class B corresponded to negative 306,000 sq. ft. Of the 4.1 million sq. ft. currently under construction, 52.8% of that space has been spoken for. Of the nine properties completed in 2020, totaling 750,000 sq. ft., 65.9% of that space is leased. The overall Houston average asking full-service rent is at $29.39 per sq. ft.—down from one year ago at $29.55 per sq. ft.—while Class A space in the Central Business District is averaging $42.61 per sq. ft.


Houston economic indicators

According to the Greater Houston Partnership, Houston’s economy continues to struggle and likely will for the foreseeable future as it continues to grapple with the effects of the COVID-19 pandemic and the collapse of the oil market. Altogether the Houston region lost 350,200 jobs in March and April and gained back 73,800 jobs in May. Global oil demand remains weak and may have to look as far as 2022 to see demand for crude reach pre-pandemic levels. U.S. crude production has dropped by 2 million barrels a day while the domestic rig count sits at 266, the lowest it’s been since the 1930s. On a positive note, Saudi Arabia and Russia reached a truce on output to OPEC agreeing to hold 9.7 million barrels per day off the global market.



It’s safe to say none of us will forget 2020 any time soon. Between the COVID-19 pandemic, social unrest & protests, a global economic slowdown, and the ongoing decline in the oil patch in pricing and activity, the first six months of the year have created a perfect storm that continues to wreak havoc on the Houston office leasing sector. Throw in the fact that this is a presidential voting year, and we have all of the ingredients for perhaps the most turbulent marketplace imaginable.

The Houston office market has continued to slide downward since the Oil Crash of 2014/2015, with all-time highs in sublease inventory coming to market over the past 6-plus years as well as overall negative office space absorption in the millions of square feet over this same timeframe.

The silver lining over the past six years is that many companies leasing office space across Houston have secured favorable lease or sublease terms. The Houston office leasing sector’s availability rate (combined vacant and for sublease) is above 26% citywide (up slightly from a year ago), and absorption continues to slide further into the red in the office space sector. With these trends, we continue to be fully in a “tenant’s market.” Companies evaluating their office leases today have numerous options, significant negotiating leverage, and creative options to structure

Given the tumultuous nature of the economy at large, it would be reasonable to inquire whether there are property types that are doing well in Houston right now. Interestingly, the Houston industrial sector continues to experience strong positive absorption (going on 10 straight years), a single-digit vacancy rate, and a pipeline of new developments under construction citywide. Additionally, demand from buyers to acquire quality commercial real estate properties of all types (office, industrial and retail) for investment purposes or their business use continues to be strong, keeping sale prices inching upward each year on a price/square foot basis. In fact, there has been relatively little if any pullback in the sold comps data (i.e., price per sq. ft., total sale price) in recent years. Thus far into the first six months of 2020 we have not seen much in the way of distress from sellers of commercial real estate, but we anticipate this could change over the next 12-18 months if the events referenced above do not start to subside or change direction. The other CRE product type that seems to be full speed ahead is most anything in or around the Healthcare sector.

The above chart highlights the differences in the last 10 years comparing the overall office sector in Houston vs. the industrial and retail sectors. And while the retail sector has not suffered for as long as the office sector across Houston since the onset of the 2014 oil crash, it too is feeling the impact of the pandemic and overall hesitancy (if not restrictions) on customer capacity and dining out generally.

What will the remainder of the year hold for the Houston office leasing market? Most definitely it will continue to be a “tenant’s market” with plenty of options, especially for those companies willing to seriously consider relocating. While 2020 thus far has not provided a great path for the Houston office leasing sector to bounce back, we believe 2021 will be a year of recovery on many fronts, both locally and nationally. And with the pro-business attitude in Houston overall, we are optimistic that the Houston office leasing sector will improve as local businesses recover and bounce back—hopefully in the not-too-distant future.

Stay safe and well.

Griff Bandy
NAI Partners



Increased negative net absorption in Q2 2020

During the second quarter, Houston’s office market saw over double the amount of space that tenants were moving out of compared to the first quarter of 2020. The aggregate effect of the net occupancy decline was just over 850,000 sq. ft. of negative absorption for the quarter, raising the vacancy rate to 22.3%. The amount of total office inventory that is being marketed for lease also increased quarter-over-quarter at an availability rate of 26.5%. The difference between this figure and the vacancy rate reflects expected future move-outs. Space being marketed for sublease represents 5.8 million sq. ft., or 9.0% of the 63.8 million-sq.-ft. total availability figure. The Central Business District vacancy rate is at 26.7%, up 60 basis points from this time last quarter at 26.1%, while the Energy Corridor vacancy rate is at 26.3%, down from 26.4% in Q1 2020.


Office development

Office construction is at 4.1 million sq. ft across 22 buildings, with 1.9 million sq. ft. (47.2%) available for lease. The Central Business District and Katy Freeway East account for 1.1 million sq. ft., or 56.9% of the total space available. Hines’ Texas Tower is expected to deliver in late 2021 and is 40% preleased. Outside of downtown, of the 780,000 sq. ft. underway in the Katy Freeway East submarket, the 190,000-sq.-ft. building at 9753 Katy Freeway is being built with 85% of the space available for lease. Other office buildings under construction in the submarket include Marathon Oil’s 440,000-sq.-ft. future headquarters in CityCentre; and Village Tower II, a 150,000-sq.-ft. office building at 9655 Katy Freeway. The Katy Freeway East market has a vacancy rate of 10.9% compared to the metro’s overall average of 22.3%.


Investment sales trends

Real Capital Analytics data reports quarterly office sales volume for Q2 2020 in the Greater Houston area at $70 million, down significantly compared to this time last year at $715 million. The primary capital composition for buyers in 2020 was made up of 61.0% institutional and 33.3% private. For sellers, the majority was 34.6% REIT/ listed, 31.7% private investors, and 27.7% institutional. While the pandemic has caused many deals to be placed on hold, 11403 Compaq Center and an adjacent parking garage were acquired by Capital Commercial Investments from Hewlett-Packard in June 2020, according to CoStar. Located on an 11.92-acre site in the FM 1960/Highway 249 submarket, the portfolio is comprised of a 250,000-sq. ft., two-story office building and an 885-space parking garage. Originally developed as part of Compaq Computers’ corporate headquarters, the campus features direct connections to the larger nearly one million-sq.-ft. corporate campus for tenants Noble Energy, Lone Star College – University Park, YMCA Children’s Academy, and the current campus for Hewlett Packard Enterprise.


Oxy extends lease through 2031

Occidental Petroleum Corp. has signed on to stay at Houston’s Five and Three Greenway Plaza location through 2031, extending its 972,145-sq.-ft. lease. The energy company will maintain its split-campus setup less than one year after its substantial merger with Anadarko Petroleum Corp. Occidental has been scaling back assets and working to reduce its debt since its merger with Anadarko, but the firm’s plan to sell $15 billion in assets by late 2021 has been hindered by the Coronavirus pandemic, which has lowered the value of some of its oil assets.


Average asking rents

The Houston overall full-service average rates are at $29.39 per sq. ft., an increase of $0.11 from $29.28 last quarter—though down from one year ago at $29.55 per sq. ft. Asking rates for overall Class A space are $34.70 and Class B are $22.43 per sq. ft. Rent growth has varied across Houston’s submarkets. Asking rents in the Katy Freeway submarket averaged $35.39 per sq. ft., which is 51% higher than the metro average as a whole and ranked number two—only behind the CBD— among Houston submarkets as of the end of Q2 2020. Houston’s office market already sits at 22.3% vacancy, with even more space—both direct and sublease—likely coming available. In Houston, office tenants will perhaps have more leverage than at any other time in history with regards to negotiating rental rates, terms, tenant improvements and concessions. However, since the market was already soft prior to the current condition, the comparative impact to occupancies and rents may not be as dramatic as would be anticipated.

Leta Wauson
Director of Research
tel 713 275 9618

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