“The office market stabilized in Q3 as expected. Absorption was only very slightly positive, but the positive absorption reverses what had been steady declines. The COVID Delta variant definitely caused many companies to further delay action but, in Houston at least, the move back to the office has been steadily increasing.”
Patrick Duffy, MCR | President | Houston
- Houston office workers heading back to office
- Vacancy continues to increase
- Absorption turns positive
- Construction pipeline decreases over the quarter
Houston’s office market posted positive absorption for the first time in 2 years, recording 27,430 square feet in Q3 2021. The vacancy rate rose over the quarter from 22.9% to 23.3%, a historical high. Houston’s office inventory increased slightly with 1,018,000 square feet of new inventory added in Q3. There is still 3.2 million SF of office space under construction and most of the new inventory which is 47% pre-leased is expected to deliver this year. 2.3 million square feet is spec development, of which 60% is pre-leased.
The spot price of West Texas Intermediate or “WTI” is now at multi-year highs, currently trading around $78.00 per barrel. As commercial real estate professionals, even though we’re not in Oil and Gas directly, living in Houston, we’re all in Oil and Gas and, as such, pay close attention to commodities pricing. According to the Greater Houston Partnership, Oil and Gas directly contributes 35% to Houston’s GDP. Indirectly it’s probably closer to double that. As office brokers, we tend to use current WTI price as an indicator for future office growth and activity; however, “Break-Even” or other oil field profit calculus is not the predictive driving force it once was.
According to Bloomberg NEF, US Shale Production will expand modestly over the next 18 months. The lack of expansion is primarily due to the amount of debt shale producers took on when WTI was priced much lower. So now, with multi-year highs on commodities pricing, these producers are choosing to pay down existing debt obligations and reward shareholders as opposed to drilling new wells. This same logic applies to conventional oil producers as well. If there is no significant expansion by these oil and gas producers, there is no need to hire additional employees, which means there is no need to expand their existing office footprint. Mergers and acquisitions may change the landscape some, but long gone are the days of “defensive” leasing during the “Shale Gale,” which ended January 2015. Additionally, the office market is still facing headwinds given the protracted COVID-19 Pandemic. Locally owned private companies have been the most active during this time, as they are not beholden to decision-makers on the East and West Coast. Large corporations are still in a holding pattern as they try to work through protective protocol implementation, social distancing within the office space and juggling my least favorite acronym, “WFH.”
Anecdotally, I can tell you that activity has picked up drastically from the same period last year in the more prominent submarkets. Landlord concessions are substantial for even shorter lease terms, those that are 3-5 years; rents have stayed flat or decreased slightly, and aggressive Landlords, those willing to bend both on rate and concessions for quality tenants, are winning new tenants. All that being said, there is currently a multi-generational supply of office space on the market and it will take some time before things significantly improve.
Construction Activity Timeline