Houston’s office market makes small gains in Q1
Houston’s office market continues to slowly improve, filling vacant space emptied during the energy downturn. In Q1 2019, the market posted positive absorption of 724,000 SF, a substantial increase from the negative 1.2 million SF of absorption recorded one year ago. Leasing activity decreased over the quarter from 5.1M SF to 2.8M SF. Houston’s overall vacancy rate fell slightly from 19.8% to 19.5% over the quarter, but is still well above Houston’s predownturn average vacancy rate in 2014 of 11.6%.
Construction activity remained the same at 2.5M SF as developers continue to show constraint by holding off on proposed projects. Only 100,000 SF delivered during Q1 2019 and only 50,000 SF is in the pipeline scheduled to deliver next quarter.
Houston’s job growth increased by 2.4% over the year, according to recent data released by the U.S. Bureau of Labor Statistics. The Houston MSA created 72,600 jobs (not seasonally adjusted) between February 2018 and February 2019, 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 9.0% over the year, durable goods manufacturing up by 7.6% and construction which increased by 7.1% over the year.
Vacancy & Availability
Houston’s citywide vacancy rate decreased 30 basis points from 19.8% to 19.5% over the quarter. The average suburban vacancy rate decreased 70 basis points from 19.8% to 19.1% and the average CBD vacancy rate fell 30 basis points from
21.4% to 21.1% between quarters.
The average Class A vacancy rate in the CBD remained stable over the quarter at 18.7%, and the average Class B vacancy rate in the CBD fell from 31.6% to 30.3%. The average suburban Class A vacancy rate decreased 40 basis points from 21.7% to 21.3% between quarters, while the average suburban Class B vacancy decreased 80 basis points from 18.7% to 17.9%.
Of the 1,704 existing office buildings in our survey, 79 buildings have contiguous space of 100,000 SF or more available for lease or sublease. Of these, 26 buildings have contiguous space of 200,000 SF or more available. Citywide, available sublease space decreased over the quarter from 7.8 million SF to 7.4 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, unoccupied is truly vacant and is available immediately.
Absorption & Demand
Houston’s office market posted 724,000 SF of positive net absorption in Q1 2019, a 58% decrease from the previous quarter. Suburban Class A space recorded the largest gain, posting 606,639 SF of positive net absorption. A few of the tenants that relocated during the first quarter include American Bureau of Shipping (moving into 303,000 SF in CityPlace 2 in The Woodlands submarket), Asurion (moving into 129,000 SF in Legacy at Fallbrook in the West Belt submarket) and Houston Forensic Science Center (occupying 83,000 SF in Jefferson Towers at Cullen Center located in the CBD submarket).
Houston’s average asking rental rate increased over the quarter from $29.04 per SF to $29.20 per SF. The Class A average asking rental rate rose over the quarter from $34.80 per SF to $35.59 per SF, and the average CBD Class A rental rate also rose from $45.27 to $45.76 per SF. The Suburban Class A average asking rental rate increased from $31.89 to $32.29 per SF.
Houston’s office leasing activity decreased over the quarter from 5.1M SF to 2.8M 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 volume decreased over the quarter by 37.8% to 371.5M from 597.2M in Q1 2019. The average sales price per square foot trended up from $170 to $187 per SF over the quarter. Houston’s average cap rate of 7.3% is higher than the average U.S. cap rate of 6.6%.
Office Development Pipeline
2.5 million SF of office space is under construction, all of which is spec development and 41.6% is pre-leased. The table below includes office buildings under construction with an RBA of 100,000 SF or more.
*For a table of the buildings under construction click here to download the complete report.