It’s time to get back to the office. In-person collaboration produces energy that stimulates ideas.
“Decision time accelerates when everyone is together.”
Patrick Duffy, MCR | President | Houston
• Vacancy continues to increase
• Absorption remains negative, but the forecast looks brighter
• Deliveries and construction pipeline decrease
• Rental rates begin to decrease
If you look at the glass half full, Houston saw a smaller amount of negative absorption in Q1 2021 than in Q4 2020; however, tenants still vacated 780,000 SF more than they occupied, pushing the vacancy rate from 21.9% to 22.3%. Houston’s office inventory increased slightly due only to resizing of buildings because there were no new deliveries in Q1. There is still 3.4 million SF of office space under construction expected to deliver this year, of which is approximately 63% is pre-leased. 2.4 million square feet is spec development, of which 57% is pre-leased. Fingers crossed, office developers will hold off on any proposed developments for the foreseeable future until Houston’s abundant variety of office space opportunities can be absorbed.
Commentary by Blake R. Virgilio, CCIM, SIOR | Vice President
The Houston Office Market continued to feel downward pressure from the pandemic and limited new leasing demand; however, there is now light at the end of the tunnel. Traffic on the highways has increased, social gatherings are more prevalent and major employers that have had employees WFH for 13 months are starting to implement their return to office plans, starting in May and running through the summer. A general rule of thumb regarding return to office plans has been the larger the company, the more conservative and delayed their return to the office will be. We’re now seeing even the city’s largest employers planning to have their employees back by August, given the current trajectory of COVID statistics and vaccinations in Texas. Tour activity has increased throughout Q1 due to an increased confidence in the business outlook and tenants not having the luxury to delay decision-making. Due to the continued abundance of supply, many office searches start with the criteria of “we want to only look at spaces that are move-in ready.” This has caused landlords to implement new spec-suite and flex suite programs, which will now be part of a landlord’s standard leasing program moving forward.
Concessions are still very high in the marketplace due to tenant-favored fundamentals and all-time high tenant improvement costs. This trend will continue until we see significant positive absorption. The current office market recovery will be different than past recoveries in that oil and gas may not be the predominant stalwart to drive employment growth and increased demand. Oil prices have stabilized at +/- $60/barrel, but there is a subdued positive outlook for future production and white-collar energy jobs. While WFH will have a place in many companies moving forward, the number of business leaders who expect their footprints to decrease because of WFH is significantly less than it was 12 months ago. Of the major industry types in Houston, engineering firms are the most aligned with a WFH strategy.