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The overall vacancy rate in the Houston office market was down 70 basis points quarter-over-quarter, though up 20 basis points year-over-year. The vacancy rate for Class A properties is at 22.1%, and Class B at 21.6%.


Vacancy rate at 21.1%

The overall vacancy rate in the Houston office market was down 70 basis points quarter-over-quarter, though up 20 basis points year-over-year. The vacancy rate for Class A properties is at 22.1%, and Class B at 21.6%. In the fourth quarter, overall net absorption totaled 1.6 million sq. ft.—a quarterly level not seen since 2014— ending the year at positive 843,000 sq. ft.—the second straight year-end of positive absorption in the Houston office market, and the highest full-year tally since 2014’s 5.3 million sq. ft. Of the 3.3 million sq. ft. currently under construction, about 38% of that space has been spoken for, and of the 1.7 million sq. ft. delivered to the market in 2019, 37% is available for lease. The overall Houston average asking full-service rent has steadily grown over the past years to its current rate of $29.49 per sq. ft.—up from year-end 2018’s $29.22 per sq. ft.—while the Central Business District is averaging a robust $41.28 per sq. ft.

Job growth remains healthy

The Houston metro created 85,500 jobs, a 2.7% increase, in the 12 months ending November 2019 according to the Texas Workforce Commission—a number that may change when benchmark revisions are released later in the year. By industry, Professional and Business Services had the largest year-over-year increase with 26,400 jobs, followed by 13,000 jobs in Education and Health Services, and then Mining, Logging and Construction at 10,800 jobs. Houston’s unemployment rate was 3.6% in November, down from 3.8% in November of last year. For comparison, the Texas and U.S. rates were both 3.3%. The rates are not seasonally adjusted. The U.S. Energy Information Administration reported that the closing spot price for a barrel of West Texas Intermediate was $61.14 per barrel as of December 31, 2019, up from $45.15 the same time last year. Baker Hughes reported the U.S. rig count at 805 as of December 27, 2019, down -279 from a year ago.

Broker’s Perspective

New year, same question: where do you see the market heading this year? 2019 was similar to 2018 with regards to finishing the year with absorption on the positive side of the ledger—only this time at levels not seen since the 2014 oil crash. Houston job growth continues to improve, and the price of oil is now above $60 a barrel when just over 12 months prior, oil was priced at $45. Although much of this is positive news, there is still a ways to go for the Houston office market.

The abundance of sublease space continues to be a significant factor to consider when examining Houston’s road to recovery. The sublease market represents 11%, or 6.8 million sq. ft of the 62.1 million sq. ft. of total availability in Houston. I highlight this because most of our clients are excited to consider the below-market subleasing opportunities their friends and competitors are taking advantage of. Does this mean only sublease deals are getting done? No, but with subleases often getting the first look, I’d argue they are getting gobbled up faster than direct space. This is important as this does not directly benefit landlords, at least not immediately.

Believe it or not, overall full-service asking rates saw an increase of $0.27, at $29.49 from $29.22 just a year ago. This is likely due to construction slowing. A number of developments are still coming out of the ground but not nearly at the rate they were in 2013, 2014 and 2015. While landlords continue to evince a bullish front, concessions and flexible options are plentiful and appear to be steadily increasing to attract larger tenants to their properties.

While my perception of the market is cautiously optimistic, I see 2020 being similar to 2019 as we continue to head in the right direction toward recovery. The bright side is another tenant-friendly year for office-seeking users to take advantage of favorable deals in the market.

John Zivley
Vice President
NAI Partners


Positive net absorption in Q4 2019

During the fourth quarter, Houston’s office market saw a tremendous increase in the number of tenants moving into space compared to previous quarters in 2019. The aggregate effect of these net occupancy gains was just under 1.7 million sq. ft. of positive absorption for the quarter, lowering the vacancy rate to 21.1%. The amount of total office inventory that is being marketed for lease dropped by 30 basis points quarter-overquarter to an availability rate of 25.9%. The difference between this figure and the vacancy rate reflects expected future move-outs. Space being marketed for sublease represents 6.8 million sq. ft. or 11.0% of the 62.1 million-sq.-ft. total availability figure. The Central Business District vacancy rate is at 24.4%, down slightly from this time last quarter at 25.1%, while the Energy Corridor vacancy rate is at 27.3%, down substantially from 30.5% in Q3 2019. Tenants Transocean, Bank of America, Honeywell and Engie all assisted in lowering the amount of vacant space in Houston in the fourth quarter to end 2019.

Office development

Office construction is at 3.3 million sq. ft across 22 buildings, with 2.0 million sq. ft. (61.8%) available for lease. The Central Business District and Galleria/West Loop, account for 1 million sq. ft., or one-half of the total space available. The new Bank of America Tower delivered 781,000 sq. ft. in the second quarter and is about 85% leased as of the end of the fourth quarter. In addition, Hines’ Texas Tower is expected to deliver in late 2021 and is 40% preleased. Outside of downtown, The Howard Hughes Corporation’s 180,000-sq.-ft. build-to-suit for Alight Solutions in The Woodlands is underway along with Freeway Properties’ 150,000-sq.- ft. Katy Ranch Phase II in the Katy/Grand Parkway West Submarket.

Investment sales trends

Real Capital Analytics data reports quarterly office sales volume for Q4 2019 in the Greater Houston area at $1.8 billion, up significantly compared to this time last year at $592 million. The primary capital composition for buyers in 2019 was made up of 38.5% institutional, 29.7% private, and 22.1% REITl/listed. For sellers, the majority was 36.9% private, 35.6% 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) and 11.8% institutional investors. A recent record deal in Houston was Skanska selling Bank of America Tower for $373 million. CoStar reported that Skanska sold a 90% investment in the building, or around 702,000 sq. ft., to an affiliate of Beacon Capital Partners. The acquisition amounted to about $531 per sq. ft., setting a new record for a publicly reported nonmedical office deal in Houston. The previous price per sq. ft. record for a nonmedical office building in Houston is $527 per sq. ft. from 2015, when BBVA Plaza in the Uptown-Galleria area sold to Spain-based Masaveu for $172 million.

Highly sought-after office space acquired

The Howard Hughes Corporation acquired two Class A office towers, warehouse space and developable land in The Woodlands from Occidental. The $565 million transaction also includes the purchase of Occidental’s Century Park campus in the West Houston Energy Corridor—a 63-acre, 1.3-million-sq.-ft. campus with 17 office buildings. In The Woodlands, the acquisition includes The Woodlands Towers at The Waterway, which total approximately 1.4 million sq. ft. of office space, and a 125,000-sq.-ft. warehouse. Also included are 9.3 acres of developable land located in The Woodlands Town Center. The Howard Hughes Corp. reported that Occidental will continue to be located at The Woodlands Towers at The Waterway, and will lease back 100% of the larger, approximately 808,000-sq.- ft. tower at 1201 Lake Robbins Drive and 100% of the warehouse for 13 years.

Energy Center I adds 87,000-sq.-ft. sublease

Although future uncertainty persists, deals are still getting done in Houston. Of the 2.8 million sq. feet of leasing activity in Q4 2019, the Energy Corridor submarket ranked number three, assisted by DCP Midstream which took 86,718 sq. ft. across floors 5-6 and 14-15 in CityWestPlace II at 2107 CityWest Blvd. from Equinor. DCP signed the lease in Q4 2019 and plans to move into the building in Q3 2020. The vacancy rate in the Energy Corridor sits at 29.6%.

Average asking rents

The Houston overall full-service average rates are at $29.49 per sq. ft., an increase of $0.27 from $29.22 a year ago. Asking rates for overall Class A space are $35.03 and Class B are $21.95 per sq. ft. Rent growth has varied across Houston’s submarkets. Asking rents in the Katy Freeway submarket averaged $32.68 per sq. ft., which is 9.8% higher than the metro average as a whole and ranked number three among Houston submarkets as of the end of 2019. This is predictable from a leading West Houston office submarket, as rents in the Energy Corridor also grew by 4.8% year-overyear, thanks in part to increased leasing activity.

Leta Wauson
Director of Research
tel 713 275 9618

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