“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
- 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
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.
The forecast in the graph above is based on a trailing four quarter average.
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)|
|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
|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|
Construction Activity Delivery Timeline
75,000 SF or Greater