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Q4 2022 | Houston Office Market Report

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2022_Q1_Office_Skyline_1536x1040

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
Vacancy Rate   Net Absorption 
 2022_Q4_Office_Under Construction    2022_Q4_Office_Overall Lease Rates
 

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

2022_Q4_Office_Market Indicators 

Historic Comparison

2022_Q4_Office_Historic Comparison 

 

Market Fundamentals

2022_Q4_Office_Market Fundamentals  2 

*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

2022_Q4_Office_Top Performing Office Buildings

 

Large Sublease Availabilities

160,000 SF or Greater

2022_Q4_Office_Sublease Availabilities

 

Houston Office Historical Sublease Space

2022_Q4_Office_Historic Office Historical Sublease Space 

Construction Activity Delivery Timeline

Class A 100,000 SF or Greater
Source: CoStar

   2022_Q4_Office_Construction Action Delivery Time 

 

 

2022_Q3_Office_Submarket Map


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Q4 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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Ray Lopez

Vice President

Houston

Ray Lopez joined Colliers in late 2021 as Vice President with the Occupier Advisory team in the Houston office. Ray specializes in occupier representation focusing exclusively on advising occupiers on their lease negotiations, renewals, expansions, subleases, relocations, property acquisitions and dispositions.

Ray is an accomplished commercial real estate advisor with nearly two decades of real estate experience, ranging from comprehensive real estate strategies for occupiers to managing large commercial real estate portfolios to being a leasing director tasked with increasing the occupancy of an office portfolio. One of Ray’s defining qualities is his integrity and passion to make a real difference for his clients.

Ray’s clients range from local independently owned regional companies to global corporations with a local, national and international presence. His experience in all phases of a transaction gives Ray the ability to confidently guide his clients to the best decision.

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