The office market in Houston continues to struggle with slower demand and major vacancy issues. Employees are returning to the office slowly, but steadily and companies are fine tuning their policies for work-from-home with most pressing employees for more time in the office. The tight labor market makes the effort to “force” employees back into the office problematic for employers concerned about losing employees who have grown fond of working remotely. We saw more activity from the larger users this quarter, but it was still subdued. Economists are starting to agree that a recession is on the way, if not already here, and companies are taking a more defensive posture as a result. We expect office leasing to remain sluggish in the short term.
Patrick Duffy | President
- Houston office market records negative net absorption
- Vacancy up marginally by 20 basis points
- Leasing activity rose over quarter
- Spec suites lease up quickly
Houston’s office market posted negative net absorption in Q3 2022, recording -409,185 square feet. The overall average vacancy rate rose marginally by 20 basis points between quarters from 23.1% to 23.3%. Office inventory increased slightly as 97,600 square feet of new inventory was added. There is two million square feet of office space under construction. Houston’s average NNN rental rates increased over the year, but fell slightly on a quarterly basis. Houston’s Class A overall average full service rental rate increased on an annual basis, but dropped over the quarter from $36.37 per square foot in Q2 2022 to $35.59 per square foot in Q3 2022. Leasing activity rose from 3.4 million square feet to 3.7 million square feet over the quarter.
*The forecast in the graph above is based on a trailing four quarter average.
Commentary by Darren Gowell| Vice President
While the Houston office market is still dealing with employees’ desire to work from home, the shift of returning to the office is becoming a reality. According to Kastle Systems, 58% of Houston’s workforce have returned to the office which is above the 47.2% top 10 markets average. Only a few months ago, that percentage was in the high 30% range, but more companies have asked employees to increase their time in the office for several reasons. The issues include a perceived decision-making process lag, training, collaboration, and an overall reduction of employee productivity. In addition, the need for more face-to-face employee interaction balanced with a tight labor market that got comfortable with work-from-home during COVID is causing the “C”-Suite level executives to reconsider their space needs.
After delayed decision-making, Houston recorded more significant transactions in the third quarter, including the renewal of EOG, Baker Botts, Bechtel’s relocation and downsizing and Baker Hughes’ relocation. In addition, the continued flight to quality buildings is a driving force that intends to entice employees to return to the workplace and enhance recruiting and retention overall.
Spec suites remain popular with tenants who do not want to deal with a protracted build-out process and realize they don’t have the luxury of the long lead time associated with fully custom spaces. As a result, we expect landlords to continue the strategy of building spec suites for smaller tenants (typically under 5,000 square feet) to enhance their leasing efforts. However, another trend we see is landlords not as open to offering ultra-short-term leases, forcing tenants to accept longer terms, but packaged with generous concessions.
To attract and retain current tenants, Class A landlords are offering higher tenant improvement packages, reducing the upfront out-of-pocket costs to the tenant, thus lowering net effective costs. This trend will likely continue, resulting in Class B product struggling to compete with Class A spending allotment.
Top Performing Office Buildings
Quoted Gross Rental Rates
Large Sublease Availabilities
170,000 SF or Greater
Houston Office Historical Sublease Space
Construction Activity Delivery Timeline
Class A 100,000 SF or Greater