While the Houston Office market fundamentals may be lackluster, the economic recovery in Houston remains positive.
VACANCY RATE AT 24.4% The overall vacancy rate in the Houston office market was up 30 basis points quarter-over-quarter, and up 210 basis points year-over-year. The vacancy rate for Class A properties is at 26.8%. Overall net absorption totaled negative 864,000 sq. ft. Of the 4.5 million sq. ft. currently under construction, 51.7% of that space has been spoken for. The overall Houston average asking full-service rent is at $29.16 per sq. ft.—down from one year ago at $29.27 per sq. ft.—while Class A space in the Central Business District is averaging $41.35 per sq. ft. While the aggregate numbers for the Houston office market aren’t anything to write home about, there are pockets of positivity when drilling down into the submarket arena: notably, Katy Freeway East—the 10th-largest by inventory of Houston’s 23 submarkets—features the smallest vacancy rate among all submarkets, at only 10.9%. Additionally, Katy Freeway East 91,344 sq. ft. of year-to-date positive net absorption paced all submarkets, and it did so while posting the metro’s 4th-highest average asking rent of $33.64 per sq. ft.
HOUSTON ECONOMIC INDICATORS The most recent data show continued economic recovery in Houston. In April, payrolls and the labor force increased, unemployment was down, and the weight of COVID on the region continued to decline. Baker Hughes reports the oil and gas rig count rose by 5 to 475 in the week to July 2, its highest since April 2020. That put the total rig count up 212, or 81%, over this time last year. West Texas Intermediate prices for August settled up 2.4%, or $1.76, at $75.23 a barrel, hitting its highest level since October 2018—climbing more than 50% on the year after starting 2021 at around $48.50 per barrel. Demand has increased as people take to the roads amid the economic reopening.
NET ABSORPTION REMAINS NEGATIVE During the second quarter, Houston’s office market continued to see the number of tenants moving out of space outpace the number of tenants moving into space. The aggregate effect of the total net occupancy for the second quarter of 2021 was negative 865,000 sq. ft., raising the overall vacancy rate to 24.4%. The amount of total office inventory that is being marketed for lease also increased quarter-over-quarter, elevating the availability rate to 29.2%. The difference between this figure and the vacancy rate reflects expected future move-outs. Space being marketed for sublease represents 8.1 million sq. ft., or 11.4% of the 71.7 million-sq.-ft. total availability figure. The Central Business District vacancy rate is at 28.7%, up 50 basis points from this time last quarter at 28.2%, while the Energy Corridor vacancy rate is at 28.0%, up 20 basis points from 27.8% in Q1 2021.
OFFICE DEVELOPMENT Office construction is at 4.5 million sq. ft across 19 buildings, with 2.2 million sq. ft. (48.3%) available for lease. The Central Business District, Medical Center and Katy Freeway East account for 1.8 million sq. ft., or over 80% of the total space available. Hines’ Texas Tower is expected to deliver in Q4 2021 and is 40% preleased. Outside of downtown, of the 789,000 sq. ft. underway in the Medical Center submarket, the 512,000-sq.-ft. Horizon Tower life sciences building is being built in Texas A&M Innovation Plaza. Other office buildings under construction in the Katy Freeway East 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 Medical Center market has an overall vacancy rate of 11.3%, while the Katy Freeway East market has a vacancy rate of 10.9% compared to the metro’s overall average of 24.4%.
INVESTMENT SALES TRENDS Real Capital Analytics data reports quarterly office sales volume for Q2 2021 in the Greater Houston area at $275 million. The year-over-year change in volume is up 150% from $110 million in Q2 2020. The primary capital composition for buyers so far in 2021 has been made up of 78.5% private investors and 8.7% institutional. For sellers, the majority was 60.7% private investors and 32.3% institutional.
DOWNTOWN HOUSTON’S NEWEST OFFICE SKYSCRAPER Construction has commenced on 1550 on the Green, a 375,000-sq. ft. office tower overlooking the Discovery Green Park in downtown Houston. The 28-story tower is located at 1550 Lamar St. and is said to ultimately be renamed after its anchor tenant, law firm Norton Rose Fulbright. The tower represents the first phase in a broader 3.5-acre mixed-use development that will include residential and retail covering three city blocks. Construction is scheduled to be completed by 2024. The office project is commencing at a time when Houston’s already soft office market faces additional struggles from the pandemic. Downtown Houston’s office vacancy rate is hovering close to 29%, which is higher than the Galleria/West Loop area’s 25% vacancy rate and higher than the metropolitan area’s average of 24%.
LEASING ACTIVITY Quarterly leasing velocity—which is comprised of both new leases and renewals—stood at 2.3 million sq. ft. during the second quarter—down slightly from 2.4 million sq. ft. in Q1 2021. Year-over-year, Q2 2020 leasing activity registered at 4.4 million sq. ft. Top transactions during the second quarter included Catholic Charities signing a 7th floor sublease for 37,321 sq. ft. at 5599 San Felipe St., and Xavier Educational Academy signing a new lease for 32,000 sq. ft. at 1001 West Loop South, both in the Galleria/West Loop submarket. Concho Resources renewed 27,767 sq. ft. at 1001 Fannin St. in the CBD, and AES Drilling Fluids inked a new deal for 27,614 sq. ft. at 575 N. Dairy Ashford in the Energy Corridor.
AVERAGE ASKING RENTS The Houston overall full-service average rates are at $29.16 per sq. ft., down from last quarter at $29.29, and from one year ago at $29.36 per sq. ft. Asking rates for overall Class A space are $34.12 and Class B are $22.90 per sq. ft. Rent growth has varied across Houston’s submarkets. Asking rents in the Greenway Plaza submarket averaged $34.62 per sq. ft., which is 19% higher than the metro average as a whole and ranked number two—only behind the CBD at $38.73—among Houston submarkets as of the end of the second quarter 2021.
Director of Research
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