Houston’s office market posts positive net absorption for the first time in several years

Hou2017Q4OfficeMarketIndicatorsAfter six straight quarters of negative net absorption, Houston’s office market posts 673,000 SF of positive net absorption in Q4 2017. Although positive, Houston’s office market 2017 year-end absorption total is still well within the red, at negative 1.7M SF. After three years in an economic energy slump, Houston’s office market is ready for a boost. Even though oil prices have recently increased, the increase is not enough to spur hiring sprees in the energy industry. With the recent increase in oil prices the U.S. Energy Information Administration (EIA) has revised it’s forecast for world oil demand in 2018 by 100,000 barrels per day. Although Brent crude prices are up to $64 per barrel, the highest price since November 2014, it’s not enough to accelerate leasing of vacant office space. Recent news articles indicate that some of the large energy giants reported profits in the fourth quarter. However, profits were largely driven by continued lean budgets and staff reductions.

Developers have shown restraint over the past few years, only starting projects with a lead tenant guaranteed. A handful of planned buildings broke ground this past year with lead tenants in place including Bank of America, American Bureau of Shipping and HP. Once these projects deliver, those companies will vacate their existing space, leaving more than 1 million square feet for landlords to backfill.

In August 2017, Houston faced one of the worst natural disasters in history. Hurricane Harvey, a Category 4 hurricane, slammed the Texas coast and dumped over 50 inches of rain in parts of Houston. The event caused widespread flooding, destroying homes, businesses and infrastructure. This was a temporary set-back for many, but has had permanent ramifications for others. A joint industry survey confirmed that less than 7% of Houston’s office inventory suffered damage. Of that amount, the majority have been repaired and back in operation with a handful of buildings still undergoing repair.

According to the U.S. Bureau of Labor Statistics, the Houston MSA created 48,500 jobs (not seasonally adjusted) between November 2016 and November 2017, an annual growth rate of 1.6%, which is above than the national averages job growth rate of 1.5%.

 

Vacancy & Availability

Houston’s citywide vacancy rate decreased 20 basis points from 19.3% to 19.1% over the quarter and rose 150 basis points from 17.5% in Q4 2016. Over the quarter, the average suburban vacancy rate decreased 20 basis points from 18.9% to 18.7% and the average CBD vacancy rate increased 20 basis points from 20.4% to 20.6%.

The average CBD Class A and Class B vacancy rates increased 20 basis points over the quarter from 18.3% to 18.5% and from 28.2% to 28.4%, respectively. The average suburban Class A vacancy rate decreased 60 basis points from 21.9% to 21.3% between quarters, while the average suburban Class B vacancy rate rose 10 basis from 16.7% to 16.8%.

Of the 1,709 existing office buildings in our survey, 86 buildings have 100,000 SF or more of contiguous space available for lease or sublease. Further, 24 buildings have 200,000 SF or more of contiguous space available. Citywide, available sublease space totals 8.8 million SF, or 3.8% 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. Whereas vacant space is truly vacant and is and may still be immediately available.

HISTORICAL AVAILABLE SUBLEASE SPACE

Hou2017Q4OfficeHistoricalSubleaseSpace

 

Absorption & Demand

Houston’s office market posted 673,545 SF of positive net absorption in Q4 2017. CBD Class A space recorded the largest loss, with 72,517 SF of negative net absorption, while Suburban Class A posted the largest gain with 767,203 SF of positive net absorption. Some of the tenants that moved during the quarter include McDermott International (186,962 SF) in the West Belt submarket, Targa Resources Corp. (128,600 SF) in the CBD submarket, Lockton Companies (116,250 SF) in the Westchase submarket and Empyrean Benefit Solutions, Inc. (106,904 SF) in the Westchase submarket. The large amount of sublease space placed on the market during the energy downturn has steadily decreased over the last five quarters from 11.8M SF to 8.8M SF. The majority of the available sublease space has less than three years of term remaining.

 

Rental Rates

Houston’s average Class A asking rental rate decreased over the quarter from $35.31 per SF to $34.97 per SF. The average Class A rental rate in the CBD remained steady over the quarter at $44.37 per SF, while the average Suburban Class A rental rate decreased from $32.92 to $32.33 per SF. The current average rental rate, which includes all property classes, for Houston office space is $29.22 per SF gross.

 

Leasing Activity

Houston’s office leasing activity increased 17% over the quarter, rising from 3.0 million SF in Q3 2017 to 3.5 million SF in Q4 2017. A majority of the leasing activity was caused by renewals, but there were some tenants that needed short-term sublease space while their current lease space is rebuilt due to damage caused by Hurricane Harvey.

Q4 2017 Select Office Lease Transactions

Building Name/Address

Submarket

SF

Tenant

Lease Date

Two Allen Center

CBD

200,000

Saudi Aramco4

Oct-17

1360 Post Oak Blvd

West Loop/Galleria

156,151

Stewart Title4

Nov-17

Three Allen Center

CBD

98,000

Talos Energy1

Dec-17

Bank of America Center

CBD

82,916

TransCanada3

Oct-17

Two Allen Center

CBD

55,178

Chamberlain Hrdlicka2

Oct-17

LyondellBasell Tower

CBD

48,233

Beck Redden2

Nov-17

                                                                                                         

Sales Activity

Houston’s office investment sales activity grew substantially over the year, rising by 54% since Q4 2016. With most of the investor community believing the downturn in the energy industry has reached the bottom and has begun to rebound, they now see Houston as offering limited downside and the potential for healthy returns. The average sales price per square foot increased from $199 to $245 per SF over the quarter and rose significantly over the year by 86%.

 

Office Development Pipeline

1.9 million SF of office space is under construction, of which 62% is pre-leased. Build-to-suit projects make up 44% of the pipeline and the remaining 56% is spec office space under construction and is 36% pre-leased. The table below includes office buildings with a RBA of 100,000 SF or more under construction.

Building Name

Address

Submarket

SF

Pre-Leased

Developer/CONTRACTOR

Est. Delivery

Capitol Tower

800 Capitol St

CBD

778,344

31%

SCD Acquisitions LLC

Jun-19

CityPlace 2 - BTS for ABS

1701 City Plaza Dr

The Woodlands

326,800

93.9%

Barker Patrinely Group, Inc

Oct-18

CityPlace - HP Building 1

City Plaza Dr

The Woodlands

189,000

100%

Barker Patrinely Group, Inc

Jan-19

CityPlace - HP Building 2

City Plaza Dr

The Woodlands

189,000

100%

Barker Patrinely Group, Inc

Jan-19

The Post Oak

1600 West Loop S

West Loop/Galleria

104,579

70%

Tellepsen Builders

Feb-18

 

Quoted gross rental rates for existing top performing office buildings

Building Name

Address

Submarket

RBA (SF)

Year Built

% Leased

Avail. SF

Rent

($/SF)

Owner

BG Group Place

811 Main St

CBD

972,474

2011

92.4%

131,628

$53.91

BG Holdco LLC

Heritage Plaza

1111 Bagby St

CBD

1,212,895

1986

98.5%

97,532

$51.06

Brookfield Office Properties, Inc

Kirby Grove

2925 Richmond Ave

Greenway Plaza

248,275

2015

85.5%

45,989

$47.31

Midway Companies

CityCentre Two

818 Town & Country Blvd

Katy Freeway

149,827

2009

99.1%

8,790

$50.04

Midway Cc15 Partners

Town Centre One

750 Town & Country Blvd

Katy Freeway

253,714

2015

77.1%

58,065

$42.04

Moody Rambin

Williams Tower

2800 Post Oak Blvd

West Loop/Galleria

1,476,973

1983

90.2%

171,892

$47.81

Invesco Real Estate

3009 Post Oak Blvd

3009 Post Oak Blvd

West Loop/Galleria

304,419

2003

90.1%

39,764

$45.48

Post Oak Building LLC

CityWestPlace 4

2103 CityWest Blvd

Westchase

518,293

2001

85.5%

128,303

$44.83

Canada Pension Plan Investment Board

One BriarLake Plaza

2000 W Sam Houston Pky

Westchase

502,410

2000

89.5%

197,928

$44.63

TIER REIT, Inc

Two Hughes Landing

1790 Hughes Landing Blvd

The Woodlands

197,696

2014

94.0%

8,899

$44.47-$50.47

The Woodlands Development Company, L.P.

Note: Available SF includes direct and sublet space as well as any future available space currently listed.
Source: CoStar Property

 

Q4 2017 Houston Office Highlights

Houston Report Infographics20