Houston’s office market closes out 2018 with positive net absorption
Houston’s office market continues to take baby steps towards filling vacant space emptied during the energy downturn. In Q4 2018, the market posted positive absorption of 1.9 million SF, a substantial increase from the negative 0.4 million SF of absorption recorded one year ago. Leasing activity remained steady over the quarter at 3.5M SF pushing the year-end total to 14M SF. Houston’s overall vacancy rate fell slightly from 20.6% to 20.0% over the quarter, but it is still well above Houston’s 5-year average vacancy rate of 16.4%.
Construction activity decreased in Q4 2018 from 3.2M SF to 2.5M SF as several new buildings were delivered. HP’s and ABS’s new CityPlace buildings in The Woodlands submarket delivered during Q4 2018.
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 114,400 jobs (not seasonally adjusted) between November 2017 and November 2018, growing faster than the U.S. during the same time period. Employment sectors with the most substantial growth include support activities for mining which grew by 11.7% over the year, construction increased by 10.8% and durable goods manufacturing was up by 9.0% over the year.
Vacancy & Availability
Houston’s citywide vacancy rate decreased 60 basis points from 20.6% to 20.0% over the quarter. The average suburban vacancy rate also decreased 60 basis points from 20.3% to 19.7%, and the average CBD vacancy rate fell 40 basis points from 21.7% to 21.3% between quarters.
The average Class A vacancy rate in the CBD dropped 70 basis points over the quarter from 19.7% to 19.0% and the average Class B vacancy rate in the CBD remained stable at 30.1%. The average suburban Class A vacancy rate decreased 100 basis points from 22.7% to 21.7% between quarters, while the average suburban Class B vacancy decreased 30 basis points from 18.7% to 18.4%.
Of the 1,734 existing office buildings in our survey, 79 buildings have 100,000 SF or more contiguous space available for lease or sublease. Of these, 26 buildings have 200,000 SF or more contiguous space available. Citywide, available sublease space decreased over the quarter from 8.9 million SF to 8.0 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 immediately available.
Absorption & Demand
Houston’s office market posted 1.9M SF of positive net absorption in Q4 2018. Suburban Class A space recorded the largest gain, posting 1.4M SF of positive net absorption. A few of the tenants that relocated during the forth quarter include ConocoPhillips (moving into 597,600 SF in Energy Center IV in the Katy Freeway submarket), MidCoast Energy Partners (moving into 61,600 SF in Hess Tower in the CBD submarket) and Sheridan Production Co LLC (occupying 59,075 SF in Four Oaks Place located in the West Loop/Galleria submarket).
Houston’s average asking rental rate remained relatively steady over the quarter, decreasing from $29.06 per SF to $29.04 per SF. The Class A average asking rental rate decreased over the quarter from $34.50 per SF to $34.43 per SF, as did the average CBD Class A rental rate which fell from $45.28 to $44.30 per SF. In contrast, the Suburban Class A average asking rental rate increased from $31.37 to $31.64 per SF.
Houston’s office leasing activity decreased 2.8% over the quarter from 3.6M SF to 3.5M SF. 2018 leasing activity totaled 14M SF. Leasing activity includes new/direct, sublet, renewals/expansions in existing buildings, and pre-leasing in proposed buildings. Some of the more notable transactions are noted in the table below. *
*For a table of select office lease transactions click here to download the complete report.
Houston’s office investment sales decreased over the year by 20.0% to $172 per SF from $215 per SF in Q4 2017. The average sales price per square foot trended down from $195 to $172 per SF over the quarter. Houston’s average cap rate of 7.2% is above the average U.S. cap rate of 6.5%.
Office Development Pipeline
2.5 million SF of office space is under construction and 46.7% is pre-leased. Build-to-suit projects make up 6% of the space under construction and the remaining 94% is spec office space, of which 49.5% is pre-leased. Build-to-suit projects for ABS and HP in the CityPlace Development in The Woodlands submarket delivered during the fourth quarter, adding 704,800 SF to existing inventory. 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.
Q4 2018 Houston Office Highlights
Click here for full report.