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Q1 2022 | Houston Office Market Report

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2022_Q1_Office_Skyline_1536x1040

“Tenants and landlords are struggling with an environment where construction is much more complicated than it was previously. Both pricing and timing are harder to forecast. Tenants looking for highly customized space need to start the process at least four to six months earlier than normal and landlords are leaning into pre-built “spec” suites as a solution for smaller tenants.”
 
Patrick Duffy, MCR | President | Houston
 

Key Takeaways

  • Houston office market records positive net absorption
  • Vacancy rates down slightly
  • Annual leasing activity down 5%
  • Tenants and landlords continue to see longer construction times
2021_Q4_Office_Vacancy Rate   2022_Q1_Office_Net Absorption 
 2022_Q1_Office_Under Construction    2022_Q1_Office_Lease Rates
 

Houston Highlights

Houston’s office market posted positive net absorption in Q1 2022, recording 899,763 square feet. About half of the absorption was Hewlett Packard Enterprise’s move into two new buildings in The Woodlands submarket. The buildings HPE left unoccupied were sold and are expected to be placed on the rental market later in the year, which will result in about 689,000 square feet of negative absorption. Houston’s overall average vacancy rate fell 20 basis points between quarters from 23.3% to at 23.1%. Houston’s office inventory increased with 529,900 square feet of new inventory added in Q1. There is still 1.3 million SF of office space under construction.

Market Indicators

2022_Q1_Office_Market Indicators 

Historic Comparison

2022_Q1_Office_Historic Comparison 

 

Market Fundamentals

2022_Q1_Office_Market Fundamentals 

The forecast in the graph above is based on a trailing four quarter average.

Executive Summary

Commentary by Neil Potter | Senior Project Manager

The construction industry has faced the impact in several areas due to the pandemic-induced supply chain disruptions of 2021. Material procurement has become challenging with the associated cost escalations and availability. Other specialized components are continuing to be sparse with limited options to expedite and impact schedules and material selections. Longer delivery times for materials also indicate that ordering products early in the process will be critical in mitigating scheduling issues.

Market trends in the interior construction division are pointing towards higher subcontractor demand due to latent projects breaking free. We are seeing a slight rise in overall subcontractor costs, but mainly in the drywall, acoustical ceiling and metals divisions. The market is not fully saturated with work and as more projects come online, we would expect costs to rise accordingly.

Supply chain issues including metals and carpet remain a challenge. Lighting, switch gear, doors and appliances also have long lead times. These issues are continuing to delay substantial completion of projects beyond their intended dates and should be planned for accordingly.

Material and labor quotes are only being held for less than a week in some cases versus the sixty to ninety days we have been accustomed to because of the rapidly changing price and delivery issues. Large players (for example Industrial Real Estate Investment Trusts that are active developers) are stockpiling materials (like loading dock levelers) making the issues even worse.

In conclusion, construction is much more complicated than it was previously. Both pricing and timing are harder to forecast.

Recent Lead Times

  • Switch Gear – 52 Weeks from Approved Submittals
  • Fixtures – 12-24 Weeks
  • Generators – 48 Weeks
  • Doors – 16 weeks
  • Ice maker – 32 Weeks
  • Frames – 3-6 Weeks
  • Appliances – 16 Weeks
  • Carpet – 8-10 Weeks

Cost Increases since August 2021

  • Mechanical, Electrical & Plumbing – Increase by roughly 35%
  • Finishes – Increase by roughly 15-20%
  • Doors, Frames, Hardware – Increase by 28%
  • Insulation/Fireproofing – Increase by 15%
  • Millwork – Increase by 22%
  • Metals – Increase by 35%
  • Concrete – Increase by 16%
  • General Conditions – Increase by 23%
  • Site Work – Increase by 22%
  • Earthwork – Increase by 22%

 

Top Performing Office Buildings

Quoted Gross Rental Rates

Building   Submarket    RBA    Year Built    % Leased    Avail SF    Rent ($/SF) 
 811 Main   CBD    972,474    2011    97.6%    164,494    $51.68 
 Offices at Kensington 1   E. Fort Bend / Sugar Land     85,556   1998    90.5%    19,847    $31.50 
 Regions Financial Center   Greenway Plaza    183,129    2016    92.6%    21,761    $47.88 
 CityCentre Five    Katy Freeway    227,063    2015    98.2%    15,922    $48.83
 One Hughes Landing    The Woodlands    197,719    2013    97.0%    5,959    $45.25
 Williams Tower    West Loop / Galleria    1,482,384    1983 / 2020    73.6%    572,671    $44.49
 CityWestPlace Bldg 1    Westchase    305,828    2000    73.8%    99,447    $42.35

 

Large Sublease Availabilities

150,000 SF or Greater

 Building     Tenant     Submarket     SF   
 Lake Pointe Plaza     Fluor Corp     E. Fort Bend / Sugar Land     658,400  
 Energy Tower III    TechnipFMC     Katy Freeway    324,807   
 1735 Hughes Landing     ExxonMobil     The Woodlands    273,560   
 1500 Post Oak Blvd     BHP Petroleum     West Loop / Galleria     204,885   
 CityWestPlace Bldg 3    ION Geophysical     Westchase    200,782   
 Twelve Greenway Plaza     Direct Energy     Greenway Plaza     173,760  
 1325 S Dairy Ashford    Schlumberger     Katy Freeway     155,320   
 919 Milam    SNC-Lavalin    CBD     154,863   

 

Construction Activity Delivery Timeline

75,000 SF or Greater

  2022_Q1_Office_Construction Delivery Timeline

 

2021_Q2_Office_Submarket Map


2022_Q1_Office_SearchResultImage_1024x972

Q1 2022 | Houston Office Market Report

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Related Experts

Lisa Bridges

Director of Market Research

Houston

Lisa joined Colliers in 2010 as Director of Market Research and has 37 years of commercial real estate experience. Lisa initiates proactive market research projects to further the business goals of the company. She writes and prepares 29 market reports annually, including quarterly reports on Houston's retail, office, industrial and healthcare properties.  Further, she prepares statistical ownership reports for various clients as well as an annual Houston Economic Overview. Lisa also creates PowerPoint market presentations, trade journal articles, and other marketing materials supporting the company's business endeavors. She works with senior management in planning the company's marketing strategy and public relations support for local and national conferences, luncheon meetings, recruitment programs, and special events.  Lisa works closely with the company's brokers to develop effective custom market research material specific to existing and potential clients.

Lisa serves on the Colliers Editorial Board, the Colliers U.S. Research Council, and is a recipient of the Colliers Researcher of the Year Award.

Lisa earned the Commercial Property Research Certification (CPRC) from Colliers University.  CPRC is the first and only accreditation for commercial real estate research professionals. It offers a professional development path to increase strategic and tactical expertise in marketing/research, knowledge of the industry and capabilities with commercial real estate tools.

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Neil Potter

Senior Project Manager

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Neil Potter is a Senior Project Manager and member of the Design and Construction Advisory team at Colliers in Houston, Texas. Potter has a diverse background in construction, starting with carpentry hands on to ownership of general contracting companies. For the past 20 years, Potter has been in the construction industry and is able to use the knowledge that he has gained to help owners successfully navigate the design and construction process.

Most recently, Potter served as the Vice President of Construction and leader of Arch-Con Corporations Community Division. Potter was responsible for managing multiple project teams, preconstruction services, estimating, scheduling, business development, project management and project closeout. During his time at Arch-Con, he successfully oversaw the contracting and construction of more than 250,000 square feet for non-profits, liturgical, private education and community centers. Constructing various building types, Potter created value for his clients by offering solutions, alternative construction methods and working with architects and engineering teams to reach clients’ budgets and construction goals.

Prior to his role as Vice President, Potter was a partner with Bayou City Construction, a boutique interior construction company. There he was responsible for managing budgets, subcontractors and business development. Other responsibilities included cost estimation, bidding process, sub-contractor management, project scheduling, change management, and the management of various compliance requirements related to permitting, inspections and safety, and managing communications with the architects, engineers and owners.

Potter’s tenacity was shown at early age by one of his most proud achievements, being an Eagle Scout. Neil is a Texas Christian University graduate, where he received a Bachelor of Science in Psychology. He and his wife, Macari, are the proud parents of three children Kendall, Mary Langham, and James IV. He resides in the City of Houston, where he is an active member of the community, being a member of multiple non-profit organizations.

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