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The overall vacancy rate in the Houston office market was up 80 basis points quarter-over-quarter, and up 150 basis points year-over-year.



Vacancy rate rises to 23.0%

The overall vacancy rate in the Houston office market was up 80 basis points quarter-over-quarter, and up 150 basis points year-over-year. The vacancy rate for Class A properties is at 24.2%, and Class B at 23.1%. In the third quarter, overall net absorption totaled almost negative 1.6 million sq. ft.—Class A represented negative 680,000 sq. ft. of that tally, while Class B registered 810,000 sq. ft. Of the 4.3 million sq. ft. currently under construction, 58.8% of that space has been spoken for. Of the 17 properties completed in 2020, totaling 1.3 million sq. ft., about half of that space is leased. The overall Houston average asking full-service rent is at $29.38 per sq. ft.—down slightly from one year ago at $29.44 per sq. ft.—while Class A space in the Central Business District is averaging $42.59 per sq. ft.


Houston economic indicators

According to the Federal Reserve Bank of Dallas, Houston payrolls lost 353,600 jobs between February and April 2020 as pandemic lockdowns limited economic activity. The most recent data show that the total number of jobs recovered since April increased from 106,600 in July to 117,100 in August. That puts Houston’s recovery at 33% of jobs lost. The local uptick in recovery from July to August came mostly from professional and business services, which added 4,600 jobs to its recouped total. The price of West Texas Intermediate (WTI) crude oil recovered to the low $40’s over the summer. It bottomed in late April 2020, averaging under $17 a barrel. Historically, a change in the price of oil precedes a change in the rig count by about three months. The U.S. weekly rig count bottomed in early August, at 244 rigs, a record low, and had only managed to inch up to 261 the week ending Sept. 25. WTI weakened slightly in September, averaging nearly $40 for the month. WTI has yet to break above $50, the level most firms in the Dallas Fed Energy Survey believe will be needed to see a substantial increase in drilling activity.



As we approach the last quarter of 2020, the COVID-19 era no one will forget, is there light at the end of the tunnel for the office market? Hopefully, as most of the major corporations are planning to bring their employees back to work in the first quarter 2021. West Texas crude has recovered from record negative lows in April to averaging around $40 per barrel. But what will future office space look like and how much space will businesses need? Some say due to social distancing that the private office concept may return stronger than before. The trend has generally been around a 50% office, 50% open concept split. Some experts say private office could end up being as much is 80% of the office space. If that’s the case, firms may be leasing more space. Others are saying that there could be a hybrid model with the executives back in the office and the other portion of the workforce alternating days in the office. Whatever the office space makeup, people in general like to go to the office. Our collective experience for much of this year has shown that office space plays a key role in our economy by fostering collaboration, innovation, culture and productivity—all of which are essential in creating and maintaining competitive advantages.

Looking back at the third quarter, the Houston office market did not do very well. COVID was slowing the economy and our energy industry was going backwards with layoffs and mergers, which may result in more blocks of vacant space. The citywide direct vacancy rate is up to 21.8% which is the highest level we have on record. Leasing activity at approximately 1.9 million sq. ft. is the lowest quarter of leasing since NAI Partners began tracking data in 1999.

The silver lining to all of this is that it has created significant opportunities for tenants. While many companies are taking the conservative approach during the pandemic with short-term lease commitments, those that can move forward now are able to lock in great long-term lease packages.

One approach has been what the industry calls a “blend and extend.” This concept is accomplished when a tenant’s lease is at above-market rental rates and it is reset to a current rental rate. Some additional rent relief may also be provided while extending the term under a new attractive economic package.

In regard to rental rates, while they have dropped slightly this quarter, most landlords are trying to maintain their base rates while offering other attractive economic incentives. Since leasing activity has been slow, many landlords are getting aggressive early by offering significant amounts of free rent, moving allowances, and attractive tenant improvement allowances and even leasing bonuses to attract new tenants or retain an existing tenant. For new tenants whose leases may not be expiring for over a year, “beneficial occupancy”—early occupancy prior to commencement at no charge or at a significantly reduced rate—is also being offered.

For tenants in the market there has also been a flight to quality. The quality and condition of the office environment may never have been more important for employers and employee retention than it is today. Tenants are focusing on newer Class A buildings while older buildings are being renovated in order to compete. For tenants there may not be a better time to be in the market.

While there is optimism looking forward, the office market will remain soft for the remainder of 2020 and into 2021—however, we believe 2021 will be a year for recovery in many areas locally and nationally. Houstonians and Houston businesses have a “can-do” attitude that has proven to always bounce back. Let’s just hope it happens sooner rather than later.

Jason Whittington

Jason Whittington
NAI Partners



Increased negative net absorption in Q3 2020

During the third quarter, Houston’s office market saw a 20% increase in the amount of space that tenants were moving out of compared to the second quarter of 2020. The aggregate effect of the net occupancy decline was close to 1.6 million sq. ft. of negative absorption for the quarter, raising the vacancy rate to 23.0%. The amount of total office inventory that is being marketed for lease also increased quarter-over-quarter, lifting the availability rate to 27.1%. The difference between this figure and the vacancy rate reflects expected future move-outs. Space being marketed for sublease represents 6.2 million sq. ft., or 9.4% of the 66.3 million-sq.-ft. total availability figure. The Central Business District vacancy rate is at 26.1%, up 10 basis points from this time last quarter at 26.0%, while the Energy Corridor vacancy rate is at 26.8%, up 210 basis points from 24.7% in Q2 2020.


Office development

Office construction is at 4.3 million sq. ft across 23 buildings, with 1.8 million sq. ft. (41.2%) available for lease. The Central Business District and Katy Freeway East account for 1.1 million sq. ft., or 61.1% of the total space available. Hines’ Texas Tower is expected to deliver in Q4 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 12.0% compared to the metro’s overall average of 23.0%.


Investment sales trends

Real Capital Analytics data reports quarterly office sales volume for Q3 2020 in the Greater Houston area at $222 million. The year-over-year change in quarterly volume is down 58.7% from $537 million in Q3 2019. The primary capital composition for buyers in 2020 has been made up of 53.7% private investors and 41.3% institutional. For sellers, the majority was 32.2% private investors, 28.9% institutional, and 25.4% REIT/listed. While the pandemic has caused many deals to be placed on hold, a subsidiary of the second-largest financial institution in Mexico is moving its U.S. headquarters to Houston from New York City. Banorte-Ixe Securities International opened a new corporate headquarters in September in a 10,000-sq.-ft. office in Houston’s Uptown-Galleria area at 5075 Westheimer Road. The lease representsroughly a 20% expansion from the company’s current U.S. headquarters in New York City, according to CoStar. Other recent relocations include Florida-based real estate marketplace moving its headquarters to Houston, and Murphy Oil also moved its headquarters to the city earlier this year from Arkansas. These moves show that Houston is still attracting new business despite the headwinds of the pandemic and energy downturn.


Republic Square relaunched in Energy Corridor

Republic Square, which sits on 35 acres facing Interstate 10, formerly served as the headquarters of Exxon Chemical. With two years of major renovations complete, Dart Interests is relaunching the 320,000-sq.-ft. development with NAI Partners serving as property manager and the exclusive leasing agent. Even as the coronavirus pandemic and energy downturn have ravaged Houston’s office market, new tenants at Republic Square include GATE Energy leasing 24,302 sq. ft.; Sparkhound taking occupancy of 4,533 sq. ft.; and Samsung inking a deal for 3,974 sq. ft. With COVID-19 putting new demands on leasing, tenant interest in Republic Square has significantly increased due to its low-density design offering space for social distancing.


Average asking rents

The Houston overall full-service average rates are at $29.38 per sq. ft., almost unchanged from last quarter at $29.37, and from one year ago at $29.44 per sq. ft. Asking rates for overall Class A space are $34.55 and Class B are $22.51 per sq. ft. Rent growth has varied across Houston’s submarkets. Asking rents in the Greenway Plaza submarket averaged $34.90 per sq. ft., which is 36% higher than the metro average as a whole and ranked number two—only behind the CBD—among Houston submarkets as of the end of Q3 2020. Houston’s office market sits at 23.0% vacancy, with even more space—both direct and sublease—likely coming available. Prior to COVID-19, the trend in the Houston office market had been the flight to quality. Now, as employers place value on having more space, new opportunities will arise, and landlords will have to look at things differently in order to attract future tenants.

Leta Wauson
Director of Research
tel 713 275 9618

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