Uncertainty continues to plague Houston’s office market, but flight-to-quality and enhanced amenities dominate.

EXECUTIVE SUMMARY

HOUSTON OFFICE MARKET SPACE AVAILABILITY INCREASE
Overall space availability, including current, sublease, and future vacancy, is at 29.6%, up from 29.4% in Q1 2022 and up from 29.0% last year. The CBD ended Q2 2022 with an availability rate of 35.7%, behind the Energy Corridor, which had a 35.8% availability rate, and the Westchase area, at 37.3%. Sublease availability remains elevated at 7.8 million sq. ft. – the highest amount since Q1 2018 at 7.9 million sq. ft. The peak was reached at 11 million sq. ft. in Q3 2016 during the oil bust. Available sublease space represents about 3.2% of the metropolitan area’s total tracked inventory of 242 million sq. ft. There are 13 current projects under construction, adding up to 2.3 million sq. ft., with the post-pandemic office market centered around a flight-to-quality and increasing amenities to drive workers back to the office. Alas, significant growth in the Houston office market may still be out of reach for the next few years.

WTI DROPS BELOW $100 PER BARREL
For the first time in nearly two months, crude oil prices have fallen below $100 a barrel, reflecting investors’ growing concerns about a U.S. recession that could curb oil demand. West Texas Intermediate crude price fell as much as 10% on July 5 to hit a low of $97.43 before closing at $99.50, down 8% on the day. It’s the first time that WTI has been below $100 since May 11. The dollar has risen and strengthened recently as the Federal Reserve has raised interest rates in response to 40-year-high inflation. Meanwhile, according to AAA data, gasoline prices have decreased for 21 consecutive days – their longest losing streak since April 2020, in the early part of the COVID-19 pandemic. If a recession does strike and significantly lowers energy demand, a prolonged recovery could be in store.

HOUSTON OFFICE MARKET OVERVIEW

VACANCY RATE AT 25.2%
The overall vacancy rate in the Houston office market increased 10 basis points quarter-over-quarter from 25.1% as of Q1 2022. Year over year, the vacancy rate rose 90 basis points from 24.3%. The vacancy rate for Class A properties is 27.9%. In Q2 2022, overall net absorption totaled a negative 150,148 sq. ft., bringing the year-to-date amount to a positive 783,396 sq. ft. Of the 2.3 million sq. ft. currently, under construction, 71% of that space is available. The overall Houston average asking full-service rent is at $29.79 per sq. ft. – up from one year ago at $29.30 per sq. ft. – while Class A space in the Central Business District is averaging $44.04 per sq. ft.

NEGATIVE NET ABSORPTION IN Q2 2022
Net absorption in the Houston office market was negative 150,148 sq. ft. in Q2 2022, although year-to-date remains positive at 783,396 sq. ft. This quarter’s largest move-ins include UT Physicians 139,243 total sq. ft. of medical office space at Bellaire Station and 71,388 sq. ft. in the new Texas Tower, including DLA Piper LLP (31,843 sq. ft.). This quarter’s largest move-outs include Entergy Services leaving 101,056 sq. ft. at 10055 Grogans Mill Road in the Woodlands, Oceaneering vacating 80,864 sq. ft. at 11911 FM-529 in the FM 1960/Highway 249 submarket, and 76,828 sq. ft. vacated in Wells Fargo Plaza in the CBD including Greenberg Traurig (50,258 sq. ft.) and DLA Piper LLP (25,172 sq. ft.).

OFFICE DEVELOPMENT
Office construction is at 2.3 million sq. ft across 13 buildings, with 1.6 million sq. ft. (71%) available for lease. The Medical Center accounts for 1.3 million sq. ft. under construction and 55% of the total space available. Tracked projects currently underway in the Medical Center submarket include the 522,000-sq.-ft. Horizon Tower life sciences building under construction in Texas A&M Innovation Plaza and 265,000-sq.-ft. at Levit Green is underway. The Medical Center office market has the third-lowest submarket vacancy rate in the Houston metro at 12.7%. Katy Freeway East has the second-lowest vacancy rate at 10.5%, and about 190,000 sq. ft. is under construction at MetroNational’s nine-story office building at 9753 Katy Freeway in Memorial City. Construction resumed in April after a more than two-year pandemic-related pause at the property. Completion is scheduled for Q2 2023.

INVESTMENT SALES TRENDS
Real Capital Analytics data reports quarterly office sales volume for Q2 2022 in the Greater Houston area at $325.9 million. The year-over-year change in volume is up 2.3% from $318.5 million in Q2 2021. The primary capital composition for buyers so far in 2022 was made up of 71% private investors and 12% institutional. For sellers, the majority were 39% institutional investors, 36% private, and 22% cross-border (a transaction is defined as cross-border if the buyer or major capital partner is not headquartered in the same country where the property is located). A significant sales transaction during the second quarter of 2022 involved One Park 10 Plaza, a 162,919-sq. ft., eight-story office tower in the Energy Corridor acquired by Interra Capital Group. The property is part of the Park Ten Office Park, a 550-acre mixed-use, master-planned development. One Park 10 Plaza includes a four-story parking garage on 3.27 acres. The property was sold by Accesso Partners LLC for an undisclosed price.

FIVE COMPANIES LEASE OFFICE SPACE AT HOUSTON’S MEMORIAL CITY
Quarterly leasing velocity comprised of both new leases and renewals stood at 2.9 million sq. ft. during the second quarter—down from 3.2 million sq. ft. in Q1 2022. Year-over-year, Q2 2021 leasing activity registered at 3.5 million sq. ft. Top transactions during the second quarter included GEXA Energy signing a lease for 62,261 sq. ft. at 601 Travis in the CBD; Genesis Energy signing a lease for 49,145 sq. ft. at 811 Louisiana in the CBD; and Trafigura inking a deal for 31,079 sq. ft. at Texas Tower in the CBD. In addition, more than 90,000 square feet at two office buildings were leased by five companies in separate transactions at Memorial City in Katy Freeway East submarket. Asset Living  (24,040 sq. ft.), Longbridge Financial LLC (16,415 sq. ft.), and Marubeni America Corp. (4,665 sq. ft).

AVERAGE ASKING RENTS
The Houston overall full-service average rates are at $29.79 per sq. ft., up from last quarter at $29.53 and up from one year ago at $29.30 per sq. ft. Asking rates for overall Class A space is $34.33, and Class B is $22.73 per sq. ft. Rent growth has varied across Houston’s submarkets. Asking rents in the Midtown submarket averaged $35.33 per sq. ft., which is 19% higher than the metro average as a whole and ranked number two – only behind the CBD at $40.19 – among Houston submarkets a sof second quarter-end 2022.

Leta Wauson
Director of Research
[email protected]
tel 713 275 9618