Houston currently has more people working than at any time in the City’s history. We are the #1 destination for U-Haul (net positive population growth), our medical economy is booming, energy companies are healthy and investing capital and the Port of Houston is breaking records monthly. There are plenty of things to worry about in 2023, but Houston is well positioned to withstand any national or global downturn this year. There are a few office submarkets showing signs of real strength lately and there are market whispers of several multi-floor tenants in late stages of negotiations. That said, office users are still trying to come to grips with proper space allocations for their employees in the hybrid work-from-home model that most companies are adopting. As a result, we expect this year to show minor improvement in terms of occupancy and relatively stable rents.
Patrick Duffy | President
Key Takeaways
- Houston office market records positive net absorption
- Vacancy down marginally by 10 basis points
- Year-end leasing activity up over previous year
- Spec suites continue to lease up quickly
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Houston Highlights
Houston’s office market posted positive net absorption in Q4 2022, recording 98,820 square feet, pushing the year-end total to positive net 284,877 square feet. The overall average vacancy rate dropped marginally by 10 basis points between quarters from 23.3% to 23.2%. Office inventory increased slightly as 54,800 square feet of new inventory was added and 1.9 million square feet of office space is 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 $36.09 per square foot in Q3 2022 to $35.46 per square foot in Q4 2022. Annual leasing activity increased by 1 million square feet to 13.6 million square feet in 2022 compared to 12.5 million square feet recorded in 2021.
Market Indicators
Historic Comparison
Market Fundamentals
*The forecast in the graph above is based on a trailing four quarter average.
Executive Summary
Commentary by Ray Lopez | Vice President
In 2022, the Houston Office Market continued to have significant headwinds as companies searched to understand their office presence. With a tight labor market at 4.1%, employers have been reluctant to put the full-court press on employees’ return to the office for those employers that wish to do so. On the other hand, certain employers have found opportunities to have employees working from home or a hybrid approach. Most businesses are still confident in maintaining some variation of a permanent office.
As the Federal Reserve continues to raise interest rates, we anticipate an increase in the unemployment percentage and, as a result, change the tune for employers as they make a more concerted effort to bring employees back to the office. In addition, tech companies nationally, which were at the forefront of remote work, are changing routes and bringing employees back into the office, especially with a softening of the labor pool.
According to Kastle Systems, 59.6% of the workforce has returned to the office compared to February 2020. Unfortunately, while employment has exceeded Pre-Pandemic levels, the office market has failed to see any positive results from this impact and availability for Houston stands at 27.7%.
This year we saw a minimal change in absorption (square footage occupied) of positive 98,820 SF, roughly 1% of the total inventory. However, when you look deeper into this, you see clear winners in the Katy Freeway & Woodlands submarket with 424k SF and 578k SF, and on the flip side, you have the West Loop submarket with a negative 480k SF absorption. These losses in occupancy can take years to fill, particularly with a lack of momentum on lease transactions. For example, large lease relocations such as Becthel Corporation relocating to CityWestPlace and taking 282,500 square feet and Apache relocating to Briarlake Plaza with a future occupancy of 328,000 square feet. While this impact will not occur until late 2024, this leaves a cloudy outlook on the West Loop market with a significant amount of space to backfill, or rethink the use of the space.
For a corporation looking at its space needs, there is a tremendous opportunity to reevaluate its real estate needs and verify it aligns with its mission as a company. Having ample time to account for the construction and lead times is critical to a well thought-out process. Additionally, each landlord, while on the surface may appear to be deal-makers, has lending and credit constraints. While landlords have continued to understand the credit risk of their tenants within their portfolio, it is also necessary for tenants to understand the landlords’ credit risk and ability to fund up-front capital improvements.
Top Performing Office Buildings
Quoted Gross Rental Rates
Large Sublease Availabilities
160,000 SF or Greater
Houston Office Historical Sublease Space
Construction Activity Delivery Timeline
Class A 100,000 SF or Greater
Source: CoStar
