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Houston Office market records highest total of positive net absorption since 2017. 


EXECUTIVE SUMMARY

 

OVERALL OUTLOOK OPTIMISTIC DESPITE SETBACKS
While the omicron variant may be postponing the plans of some companies still contemplating sending employees back to the office, the pandemic does not seem to be the obstacle it was this time last year. Significant growth although, may still be out of reach for the next couple of years. The Houston office market will still have to contend with the uncertainty of Covid-19 variants, the demand to work from home, and an oil and gas recovery that is slower than previously estimated. Overall space availability, which includes current, sublease and future vacancy, has climbed to 29% as of year-end 2021. The CBD finished 2021 with an availability rate of 36.5%, following only behind the Energy Corridor, which had a 37.4% availability rate, and the Greenspoint area, with 49.3%.

WILL 2022 USHER IN $100 OIL?
Crude oil prices increased in 2021 as increasing COVID-19 vaccination rates, relaxing pandemic-related restrictions, and a growing economy resulted in global petroleum demand rising faster than petroleum supply. The increased demand for petroleum and crude products boosted energy prices by an average of 59% last year, counting the increase of West Texas Intermediate crude by 62%, according to the S&P Goldman Sachs Commodity Index. Severe weather involving the February freeze and back-to-back hurricanes along the Gulf Coast also contributed to spiking energy prices. Experts expect 2022 to also show increases as demand outstrips supply. The price of WTI crude oil as of January 5, 2022 was $77.85 per barrel and as of December 31, 2021, the number of weekly drilling rigs operating in U.S. oil fields rose to 586, an increase of 235 rigs that were operating a year ago. The rig count is a leading indicator of the nation’s oil and gas production.

Houston Office Data Graphs

 


HOUSTON OFFICE MARKET OVERVIEW

 

VACANCY RATE INCREASES TO 25.0%
The overall vacancy rate in the Houston office market increased from 24.7% quarter-over-quarter and rose 150 basis points year-over-year. The vacancy rate for Class A properties is at 28.3%. In Q4 2021 overall net absorption totaled positive 649,022 sq. ft.—a quarterly positive level not seen since Q4 2017. This brings the 2021 year-end total net absorption to negative 1,633,425 sq. ft. Of the 2.4 million sq. ft. currently under construction, 34% of that space has been spoken for. The overall Houston average asking full-service rent is at $29.32 per sq. ft.—down from one year ago at $29.87 per sq. ft.—while Class A space in the Central Business District is averaging $42.07 per sq. ft.

POSITIVE NET ABSORPTION IN Q4 2021
Net absorption in the Houston office market was back in black in Q4 2021, at 649,022 sq. ft.—a quarterly positive return not seen for over 15 consecutive quarters. The largest move-ins this quarter were Marathon Oil moving into their new 440,000-sq.-ft. headquarters at 990 Town and Country Blvd.—One MRO in CityCentre in the Katy Freeway East submarket, and Live Nation is the main office tenant at Montrose Collective moving into 75,000 sq. ft. at 888 Westheimer Road in Midtown.

HOUSTON OFFICE DEVELOPMENT HASN’T STOPPED
Office construction is at 2.4 million sq. ft. across 16 buildings, with 1.6 million sq. ft. (66%) available for lease. Hines’ Texas Tower delivered in Q4 2021 and is 42.5% preleased. The 47-story, 1.1 million sq. ft. skyscraper opened at 845 Texas Ave. on the anniversary of the first Hines Houston skyscraper, One Shell Plaza, back in 1971. The Medical Center accounts for 807,000 sq. ft., or over 50% of the total space available. Currently underway in the Medical Center submarket, the 522,000-sq.-ft. Horizon Tower life sciences building is being built in Texas A&M Innovation Plaza and 245,000-sq.-ft. of phase one of Levit Green is underway. The Medical Center office market has the third lowest submarket vacancy rate in the Houston metro at 11.9%. In addition, a new downtown office tower, 1550 on the Green is underway. The office building will soon overlook the popular Discovery Green as the anchor of a new downtown district. The 28-story, 375,000-sq.-ft. Class-A office structure is located at 1550 Lamar St. According to a recent press release, global law firm Norton Rose Fulbright will relocate its Houston office in 2024 and acquire naming rights upon occupancy. The new 1550 on the Green tower is part of a new planned district that will be named Discovery West. The district will consist of 3.5 acres of mixed-use development featuring restaurants, retail, and green space.

INVESTMENT SALES TRENDS
Real Capital Analytics data reports quarterly office sales volume for Q4 2021 in the Greater Houston area at $697 million. The year-over-year change in volume is up 30% from $537 million in Q4 2020, signaling renewed optimism. The primary capital composition for buyers in 2021 was made up of 67% private investors, 10% institutional and 10% REIT/listed. For sellers, the majority was 34% private investors, 28% REIT/listed, and 27% institutional. A significant sales transaction during the fourth quarter of 2021 involved Group RMC acquiring the 491,092-sq.-ft. 22-story high rise at 5718 Westheimer. The Class A office property was built in 1982, renovated in 2017, and is situated on two parcels totaling 6.77 acres. The property includes a 10-story adjacent parking structure connected by a walkway. At time of sale by UBS Realty Investors, the property was 68% leased by multiple tenants including Egyptian Consulate, Cokinos Natural Gas Company, Old Republic Title, and KHOU TV.

LEASING ACTIVITY
Quarterly leasing velocity—which is comprised of both new leases and renewals—stood at 2.6 million sq. ft. during the fourth quarter—down from 3.6 million sq. ft. in Q3 2021. Year-over-year, Q4 2020 leasing activity registered at 3.1 million sq. ft. Top transactions during the fourth quarter included Beck Redden signing a renewal for 47,200 sq. ft. at 1221 McKinney St. in the CBD; Opportune signing a renewal for 45,930 sq. ft. at 711 Louisiana St. in the CBD; and Waterbridge inking a deal for 37,205 sq. ft. at 5555 San Felipe St. in the Galleria/West Loop submarket.

AVERAGE ASKING RENTS
The Houston overall full-service average rates are at $29.32 per sq. ft., up from last quarter at $29.26, and down from one year ago at $29.87 per sq. ft. Asking rates for overall Class A space are $33.93 and Class B are $22.50 per sq. ft. Rent growth has varied across Houston’s submarkets. Asking rents in the Greenway Plaza submarket averaged $34.43 per sq. ft., which is 17% higher than the metro average as a whole and ranked number two—only behind the CBD at $38.48—among Houston submarkets as of year-end 2021.


Leta Wauson
Director of Research
leta.wauson@naipartners.com
tel 713 275 9618

Additional NAI Partners Research Reports

Houston Office | Quarterly Report | Q3 2021

Houston Office | Monthly Market Snapshot | December 2021

 

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