Houston’s office market is finally on the mend

2018 Q3 Office Houston ImageHouston’s office market made more progress in the third quarter than it has in the past three years, posting positive absorption of 901,844 SF, a substantial increase from the negative 0.7 million SF of absorption recorded one year ago. Leasing activity increased 22% over the quarter, and Houston’s overall vacancy rate is finally below 20%.

Houston’s job growth increased by 3.7% over the year according to recent data released by the US Bureau of Labor Statistics. The Houston MSA created 101,200 jobs (not seasonally adjusted) between August 2017 and August 2018, growing faster than Texas and the U.S. during the same period. Employment sectors with the most substantial growth includes the construction sector which grew by 13.5% over the year, and professional and business services which increased by 7.2%.

According to the U.S. Energy Information Administration, Gulf Coast refineries are taking in record levels of crude oil. Crude oil exports were up significantly in the first half of 2018 and West Texas Intermediate crude oil prices jumped in the first week of October 2018, exceeding $75.00 per barrel for first time since November 2014. The increase in crude oil production, along with the increase in crude oil prices and significant job growth are all indicators that Houston’s economy is bustling and it is positive news for Houston’s office market.

Vacancy & Availability

Houston’s citywide vacancy rate decreased 40 basis points from 20.1% to 19.7% over the quarter, but this was an increase of 50 basis points year over year, up from the 19.2% recorded in Q3 2017. Over the quarter, the average suburban vacancy rate decreased 30 basis points from 19.6% to 19.3% and the average CBD vacancy rate fell 60 basis points from 22.2% to 21.6%.

The average Class A vacancy rate in the CBD dropped 40 basis points over the quarter from 19.7% to 19.3% and the average Class B vacancy rate in the CBD decreased from 31.3% to 29.8%. The average suburban Class A vacancy rate decreased 40 basis points from 22.3% to 21.9% between quarters, while the average suburban Class B vacancy decreased 10 basis points from 17.3% to
17.2%.

Of the 1,717 existing office buildings in our survey, 83 buildings have 100,000 SF or more contiguous space available for lease or sublease. Within these, 26 buildings have 200,000 SF or more contiguous space available. Citywide, the available sublease space decreased over the quarter from 9.4 million SF to 8.8 million SF. Available space differs from vacant space in that it includes space that is currently being marketed for lease but may be occupied with a future availability date. In contrast, vacant space is truly vacant and is and may still be immediately available. Most of the sublease space is located in Class A properties as seen in the chart below.

Q3 2018 Houston Office Graph

Absorption & Demand

Houston’s office market posted 901,844 SF of positive net absorption in Q3 2018. Suburban Class A space recorded the largest gain, posting 457,043 SF of positive net absorption. Some of the tenants that relocated during the third quarter include the Harris County Veterans Service (moving into 118,800 SF in 500 Jefferson in the CBD submarket), Exterran Energy Solutions (occupying 44,900 SF in 11000 Equity Drive office building located in the West Belt submarket) and WorkSuites (moving into 30,355 SF at 2001 Timberloch Place in The Woodlands submarket).

Rental Rates

Houston’s average asking rental rate increased over the quarter from $28.99 per SF to $30.02 per SF. Houston average rental rate for Class A space decreased over the quarter from $34.93 per SF to $34.18 per SF. In contrast, the average Class A rental rate in the CBD increased by a dollar over the quarter up from $44.28 to $45.28 per SF. The Suburban Class A rental rate decreased from $32.24 to $31.04 per SF. 

Leasing Activity

Houston’s office leasing activity increased 22% over the quarter from 2.9M SF to 3.5M SF. Leasing activity includes new/direct, sublet, renewals/expansions and pre-leasing in proposed buildings. Some of the more notable transactions are noted in the table below. Highlighting the continuing improvement in the market, the office market recorded 2.3 million square feet of leasing activity in the first four days of the fourth quarter of 2018.*

*For a table of select office lease transactions click here to download the complete report. 

Sales Activity

Houston’s office investment sales plunged dramatically over the year, falling by 45.3% since Q3 2017. The average sales price per square foot trended up from $197 to $221 per SF over the quarter. Houston’s average cap rate of 7.5% is the same as the U.S. average rate.

Office Development Pipeline

3.2 million SF of office space is under construction and 46.6% of space is pre-leased. Build-to-suit projects make up 26% of the space under construction and the remaining 74% is spec office space, of which 28% is pre-leased. The table below includes office buildings under construction with a RBA of 100,000 SF or more. 

*For a table of the buildings under construction click here to download the complete report. 

Q3 2018 Houston Office Highlights

Houston Q3 2018 Office Infographic33

Q3 2018 Houston Office Front Page Screenshot

 

 

Click here for full report. 

Q2_2018_Houston_Office_Average Prices