“Our office market continues to struggle to move to positive absorption in most submarkets, but there is a 6 to 12 month lag from decision to expand and actual occupancy. Our conversations with clients suggest the momentum has improved.”
Patrick Duffy, MCR | President | Houston
- Vacancy continues to increase
- Absorption remains negative, but on a lesser extent than the previous quarter
- Deliveries and construction pipeline increased over the quarter
- Rental rates continue to drop
Houston’s office market continues to post negative net absorption recording negative 474,700 square feet in Q2 2021, pushing the year-to-date total negative net absorption to 1,220,200 square feet. The vacancy rate rose over the quarter from 22.7% to 23.0%, a historical high. Houston’s office inventory increased slightly with 483,600 square feet of new inventory added in Q2. There is still 3.5 million SF of office space under construction and most of the new inventory which is 60% pre-leased is expected to deliver this year. 2.4 million square feet is spec development, of which 58% is pre-leased.
Oil prices are hitting seven-year highs; consumer confidence is jumping to the highest level since the pandemic started; Houston retail is making a solid comeback, and the industrial real estate market barely blinked during the pandemic, yet the office market seems to be a ship that doesn’t want to rise with the tide. Even though Houston, Austin and Dallas are leading the rest of the country in getting employees back to the office, roughly 50% staying at home is creating a drag on the turnaround.
Most office users continue to delay major real estate decisions because of their culture, their employee job descriptions, or their aversion to risk. Even though the reward of gathering a company’s leaders and employees together in one physical location is very real, it’s hard to quantify. This behavior is further perpetuated by landlords who accommodate the procrastination due to the relatively large supply of product in the market they must compete against.
An increasing number of office tenants are emerging from the fog with a clear vision of how they intend to use their space and how much of it they need, which is why there’s a steady stream of employees going back into the office (for some portion of the workweek), but that’s still not enough to materially impact the quarterly trends of the Houston office market.
The overall market remains fickle, with short bursts of activity, making it hard to imagine the second half of the year looking much different than the previous six months. High-quality, newer office buildings continue to benefit from the ongoing shift to quality.