Houston’s office market posts positive absorption in Q2 2018
Houston’s office market made progress in the second quarter, posting positive absorption of 84,750 SF. This is a substantial increase from the negative 1.4 million SF of absorption recorded in the first quarter. Talos Energy relocated into 101,072 square feet in 3 Allen Center building in June and Cigna Corp. moved 600 employees into 91,190 square feet of space in the Brookhollow Central One building located at 2800 North Loop West in May. These were the largest relocations during the second quarter of 2018.
Even though the recent data released by the US Bureau of Labor Statistics shows the Houston MSA created 79,200 jobs (not seasonally adjusted) between May 2017 and May 2018, an annual growth rate of 2.6% which is above the national average job growth rate of 1.6%, indicating that Houston’s economy is humming along, many large firms have recently begun downsizing their office space or relocating to smaller footprints. This is proven to be true in the latest report that Occidental Petroleum will vacate close to 800,000 SF of its’ Greenway Plaza submarket space and place it on the sublease market for occupancy in 2020. The company plans to move to a new West Houston building planned on the site of the former ConocoPhillips West campus, according to a recent article in the Houston Business Journal.
Vacancy & Availability
Houston’s citywide vacancy rate decreased 30 basis points from 22.0% to 21.7% over the quarter, but this was an increase year on year of 290 basis points up from the 18.8% recorded in Q2 2017. Over the quarter, the average suburban vacancy rate increased 20 basis points from 19.2% to 19.4% and the average CBD vacancy rate fell 30 basis points from 22.0% to 21.7%.
The average Class A vacancy rate in the CBD dropped 90 basis points over the quarter from 19.8% to 18.9% and the average Class B vacancy rate in the CBD increased from 31.4% to 33.0%. The average suburban Class A vacancy rate decreased 40 basis points from 22.7% to 22.3% between quarters, while the average suburban Class B vacancy rate rose 80 basis points from 16.1% to 16.9%. Of the 1,699 existing office buildings in our survey, 81 buildings have 100,000 SF or more of contiguous space available for lease or sublease. Within these, 23 buildings have 200,000 SF or more of contiguous space available. Citywide, the available sublease space increased over the quarter from 9.0 million SF to 9.4 million SF, which is 4.1% of Houston’s total office inventory. Available space differs from vacant space in that it includes space that is currently being marketed for lease and 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.
Absorption & Demand
Houston’s office market posted 84,750 SF of positive net absorption in Q2 2018. Suburban Class B space recorded the largest loss, with 595,012 SF of negative net absorption. In contrast, Suburban Class A space recorded the largest gain, posting 589,503 SF of positive net absorption. Many of the tenants that moved consolidated from several locations into one and others downsized to more effective spaces. The large amount of sublease space placed on the market during the energy downturn decreased during 2017; however, sublease space crept back up over the 9.0M SF mark during the first half of 2018.
Average rental rates have held relatively steady through the energy downturn as landlords prefer to give some abated rent than lower the base rent. Houston’s average asking rental rate for Class A space decreased over the quarter from $34.97 per SF to $34.91 per SF. The average Class A rental rate in the CBD decreased slightly over the quarter from $44.37 to $44.23 per SF, while the average Suburban Class A rental rate decreased from $32.33 to $32.21 per SF. The current average gross rental rate, which includes all property classes for Houston office space is $29.19 per SF.
Houston’s office leasing activity decreased 30% over the quarter, falling from .9 million SF in Q1 2018 to .7 million SF in Q2 2018. Activity included new/direct, sublet and renewals. Some of the more notable transactions are listed in the table below. Looking ahead, Houston’s office market absorption has already turned back to red in the first week of the third quarter primarily due to companies downsizing to new locations or contracting in their current locations.*
*For a table of select office lease transactions click here to download the complete report.
Houston’s office investment sales dropped slightly over the year, falling by 6.3% since Q1 2017. The average sales price per square foot trended down slightly from $211 to $206 per SF over the quarter and rose significantly over the year from $172 per SF in Q2 2017. Houston’s average cap rate of 7.8% is trending higher than the U.S. average of 6.7%.
Office Development Pipeline
1.8 million SF of office space is under construction and 5% of the space is pre-leased. Build-to-suit projects make up 38% of the space under construction, and the remaining 62% is spec office space which is 60% 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.
Q2 2018 Houston Office Highlights
Click here for full report.