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Q2 2022 | Houston Office Market Report

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2022_Q1_Office_Skyline_1536x1040

“The office market, more than any other sector, is still dealing with occupiers grappling with long-term adjustments brought on by work-from-home shifts in the workforce and short-term concerns over the direction of the economy. The result is that larger organizations have been quiet, and most of the leasing activity has been with smaller, private companies. The larger organizations, which can best move the occupancy needle, are on the sidelines for now. Construction issues have improved slightly since Q1, and we expect continued improvement in that area for the balance of the year.”
Patrick Duffy, MCR | President | Houston
 

Key Takeaways

  • Houston office market records negative net absorption
  • Vacancy up marginally by 10 basis points
  • Leasing activity remains steady over quarter
  • Class A occupiers gravitate toward newer product
2022_Q2_Office_Vacancy Rate   2022_Q2_Office_Net Absorption 
 2022_Q2_Office_Under Construction    2022_Q2_Office_Lease Rates
 

Houston Highlights

Houston’s office market posted negative net absorption in Q2 2022, recording -224,211 square feet. The overall average vacancy rate rose marginally by 10 basis points between quarters from 23.4% to 23.5%. Office inventory remained unchanged, as no new inventory was added and there is 2.0 million SF of office space under construction. Average rental rates increased over the year. Houston’s Class A overall average full service rental rate rose from $35.10 per square foot in Q2 2021 to $36.29 per square foot in Q2 2022. Leasing activity remained steady over the quarter, recording 2.9 million square feet, which includes renewals.

Market Indicators

2022_Q2_Office_Market Indicators 

Historic Comparison

2022_Q2_Office_Historic Comparison 

 

Market Fundamentals

2022_Q2_Office_Market Fundamentals 

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

Executive Summary

Commentary by Rob Johnson | Vice President

While overall office vacancy in Houston’s Class A buildings currently exceeds 25%, newer Class A buildings continue to show strong absorptions trends, leaving a wake of opportunity for prepared and informed office users.

Many real estate publication headlines will quickly lead readers to statistics outlining the vacancy rate of office buildings in Houston. According to statistics from our data sources, the current Class A office vacancy across all of Houston is 25.7%, however, this can be a misleading statistic.

Organizations that continue to show firm commitments for in-person office presence have indicated their desire for premium facilities. Justification can range from employee recruitment and retention to maintaining an image.

When looking at Class A occupancy of properties larger than 100,000 RSF delivered to the market in the last ten years, an alternate picture emerges. Across all Houston submarkets, this younger asset class has a vacancy rate of 13.9%, a statistically significant decrease from the 25.7% for all Class A buildings. This data set’s occupancy and absorption trends suggest a more competitive market for newer Class A product.

Additionally, several large Class A buildings have been delivered to Houston’s CBD in recent years. It is important to consider that these buildings will likely need some time to accurately determine their effect on the market and if they will further exacerbate the trend of movement from legacy Class A properties to newer product. When users maintain the same occupancy footprint when relocating, the absorption net result is marginal. Still, it is important to note what asset class the occupiers were vacating and which buildings they are gravitating toward.

Lease commitments at the newer Class A buildings have created an opportunity in some legacy Class A assets where owners compete for tenants to fill available space and maintain existing tenants. Many of the legacy Class A assets have undergone, or are in the process of, large capital projects to provide or improve the amenities tenants have come to expect from Class A buildings. In addition, many landlords are providing concession packages that enhance their attractiveness to existing occupants to maintain their tenancy as well as to attract new potential users considering a different location.

For tenants to capitalize on the opportunities in the current office market, two key factors will play a significant role: 1) knowledge of which landlords and assets are willing to provide rich concession packages, and 2) the creditworthiness of the occupier. With proper direction, strong credit tenants will likely find amenity-rich buildings with economic concession packages that will not likely be seen again until the next tenant-friendly market cycle – perhaps years from now.

Top Performing Office Buildings

Quoted Gross Rental Rates

Building   Submarket    RBA    Year Built    % Leased    Avail SF    Rent ($/SF) 
 609 Main at Texas   CBD    1,057,237    2017   96.2%    85,784    $60.59 
 Offices at Kensington2   E. Fort Bend / Sugar Land     85,218   1998    97.3%    13,133    $31.50 
 Twenty Greenway Plaza    Greenway Plaza    433,159    1984 / 2014   84.2%    94,709   $37.45 
 CityCentreThree    Katy Freeway    120,226    2012    100%    23,037    $49.18
 Three Hughes Landing    The Woodlands    320,722    2015    92.0%    32,781    $44.47
 Williams Tower    West Loop / Galleria    1,482,384    1983 / 2020    73.5%    694,396    $45.00
 Lockton Place    Westchase   186,000    2017    93.9%   25,775    $46.08

 

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   
 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
Source: CoStar

   2022_Q2_Office_Construction Timeline

 

 

2021_Q2_Office_Submarket Map


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Q2 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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Rob Johnson

Vice President | Houston

Houston

Rob Johnson consults with his clients to determine their goals, with respect to both their core business and from a real estate perspective, to tailor a solution that respects both objectives. Rob has assisted local and multi-national organizations with requirements in Houston as well as across the nation. He creates leverage for his clients using market knowledge and experience in order to achieve the defined aims of the transaction. Rob's goal is to allow his clients to focus on their core business while he shoulders the burden of real estate matters that arise.

Rob attended The Kinkaid School for ten years and graduated from Vanderbilt University in 2000 with a Bachelor of Science degree. He is a third generation Houstonian with a plethora of hobbies and interests ranging from classic cars to classical literature, but is generally found with his family during free time. He and his wife Erin have five children: Quint, Liv, Rhett, Lorelei, and Leila.

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