Houston Office Market Report
Rental Rates, Vacancy, Construction, Trends
Here you will find the most current Houston Office Market Report which has been released. You’ll also find all previous quarterly updates below for the Houston market. The data, statistics, and trends will provide a complete picture of where the Houston office market sits today, and where it may be in the coming quarters.
2018 Year-End Houston Office Market Update
Coming Soon!
2018 Mid-Year Houston Office Market Update
As the 2017 calendar year came to a close, I noted the first glimpses of optimism within the Houston business community in a long time. The oil market was beginning to stabilize, and OPEC had recently announced an extension of its output restrictions through the end of 2018. Now, with half of 2018 in the rear-view mirror, we can safely agree on the fact that Houston’s office market has reached bottom. Growth is expected to occur slowly, and most in the commercial real estate industry admit that it may take 18+ months to backfill all the occupancy losses. Sublease space has continued to saturate the office market, especially in Q1 2018. In the 2nd quarter the available sublease space decreased by 700k sf and could mark a turning point. Tenant concessions are still quite strong across the leasing market, and it’s anticipated to remain a tenant-favorable environment through 2019.
The Strength of Oil & Gas
Today oil is trading consistently in the $65-70 per barrel price range, which is considered a comfortable price point for most in the industry. U.S. crude production has set new records on several occasions this year, most recently just a week ago reaching 11 million bpd. The U.S. rig count has consistently risen through H1 2018, and finally eclipsed the 1,000 mark for the first time since April 2015. There is certainly a feeling in the city that the oil market is back, and with it, the Houston economy. Of course this stabilizing market does not guarantee an immediate influx of hiring and job growth. Energy firms are beginning to hire, yet it is clear that new positions will be posted and filled cautiously on an as-needed basis. The trend prior to the most recent oil downturn was for energy firms to sign “large and long” lease agreements, and their hiring tended to follow suit. This time around we are noting a more measured approach to both hiring and leasing decisions.
Houston Office Market Report – By the Numbers
In the second quarter of 2018 the vacancy rate in the Houston office market decreased mildly from 16.7% to 16.5%. This equated to a net increase in occupancy of 202,720 sf for the quarter. With a total office market exceeding 325 million square feet, this rate yields upwards of 53-55 million square feet of vacant space citywide. When considering available space which is still occupied, but will soon be vacant, the rate exceeds 20%, or 65 million square feet. Despite a weak first quarter for Houston’s office market I do believe the bottom has been reached. Leasing activity seems to be trending upward, and there are a number of new start-ups and firms securing equity funding rounds at this time. Time will tell if this upward trend can continue, and if we will see any substantive reductions in the sublease market for H2 2018.
Rental rates decreased slightly in the 2nd quarter but are practically flat for the year. Across all building classes in Houston the average asking rental rate was $27.60 per square foot. Building owners have continued the strategy of providing more generous concession packages in the form of rental abatement, tenant improvement allowances, free parking, and other inducements as a means of avoiding rental rate reductions. We expect this to continue through the remainder of 2018.
The Houston office market now consists of over 326 million square feet of space and totals more than 9,000 properties. Class A buildings account for a staggering 45% of the total office market. Another 42% of the market is considered Class B, with the remaining 13% falling into Class C.
Houston Construction Activity
Commercial office construction activity remains light at this time, with only 2.6 million square feet in the works. Seven properties remain under construction in The Woodlands, accounting for 35% of the UC inventory in Houston. Overall, this construction space is 52% pre-leased at this time. Over half the properties currently underway will not deliver to the market until 2019. The construction activity for 2017 lagged behind the historical average of ~ 5 million square feet and 2018 will fall short of this number as well. As the market fundamentals begin to re-balance we expect to see an uptick in construction starts. The recent announcement by Hines that they will develop a new 47-story building on the former site of the Houston Chronicle is the first sign of this.
Best and Worst Performers
In the first half of 2018 three submarkets stood out for improved performance: Galleria/Uptown, The Woodlands, and the Katy/Grand Parkway area. Together these three submarkets accounted for over 700k sf of positive absorption. Overall, the South Main/Medical Center remains the strongest office submarket with a 4.1% vacancy rate, under-scoring the healthy performance of Houston’s medical industries. The Woodlands remains the strongest of the large markets at 9.1% vacant – well below the average. Sugar Land is a close second at 9.8% vacancy, and the FM1960/249 area is doing well at 10.4%, reflecting the fact that many Class B and C properties are managing to remain well-occupied.
On the other end of the spectrum we have Greenspoint/N Beltway, Houston CBD, the West Beltway, and Westchase submarkets rounding out the worst performers. Together these four submarkets accounted for over 1.3 million square feet of vacancy increases. Another 1 million square feet of vacancy was lost across 19 other submarkets in Q2 2018. Greenspoint/N Beltway is now 47% vacant, followed by Post Oak Park at 27%.
Summary
As you’ve read in this Houston Office Market Report, the local economy has been improving of late, due in large part to the oil & gas market rebounding. There are some economic headwinds on the horizon globally and nationally for the United States which could affect demand for the oil & gas market. Most predictions are considering a 24-36 month time period for that slowdown to materialize. The flattening yield curve, tumultuous stock market, rising interest rates, and the threat of inflation are certainly on investors minds. Here in Houston locally, there is renewed optimism about the coming recovery for our economy. With that recovery will come stabilization of the office market, though we expect this to be a long, drawn out climb back to reasonable occupancy levels.
Click here to view the full Oxford Partners Q2 2018 report.
2017 Year-End Houston Office Market Update
Houston Office Market Update: Vacancy Flat, Oil Market Strengthening
With the second half of 2017 coming to a close there has been a renewed confidence in the Houston market. Disruptions to global oil supply including a leak in the Forties Pipeline system in the U.K., Iranian protests, economic uncertainty in Venezuela, and reduced output in the Keystone pipeline in North America contributed to higher oil prices. These supply disruptions, along with OPEC’s agreement to continue the 2% output restriction through the end of 2018 helped push Brent and WTI prices into a $60-70 trading range. At the same time, the global economy has been strengthening which has pushed the demand higher and helped draw on crude inventories. Crude inventory stockpiles have consistently dropped week over week for nearly a quarter, leading Goldman Sachs to forecast a balancing of the market by mid-2018.
As reported in the Houston Chronicle at the end of December, a survey of oil executives found that most believed a trading price of $60-65 per barrel would drive new drilling in 2018. At least half the executives surveyed believed the US rig count would continue to climb. US oil production is already approaching 10 million bpd and some are claiming production records could be set for the US and Texas in 2018.
There is certainly an excitement and optimism in Houston around the improvement of the oil & gas market, and by extension, the Houston economy as a whole. Economic indicators for the US look good, and the stock market rally continues. However, there still remains a potential for sharp price corrections in the short term. Some have questioned the level of speculation in trading recently, and if any negative indicators were to surface it could lead to a swift drop in price. Worse, if US production continues to climb and new well drilling picks up, OPEC and Russia may decide to halt the production freeze prior to year end. These risks are ever-present, but with strong global economic growth and demand leading the way, 2018 may be a strong rebounding year for the city of Houston.
What This Means For Houston Office Market
The citywide vacancy rate rose in Q3 by 0.3% but improved slightly by year end to 16.3%. This improvement in vacancy rate, a positive 769k square feet of office space being occupied, represents the only quarterly improvement of 2017. Though the economic indicators are strong it is clear that the office market will take awhile to re-balance. Developers have largely avoided new office construction projects over the last two years. This has helped to avoid adding too much new space to an already saturated market. If the Houston economy can continue to strengthen through 2018 we could see an influx of new oil & gas startups. Some sublease space may be removed from the market as firms adjust their staffing needs in the face of a potentially bullish market. The largest of the industry may even consider hiring in key roles to support growth initiatives. The office market would benefit greatly from these developments, and we could see the vacancy rate finally begin to fall.
For now though, let’s take a look back at the previous two quarters of 2017 and where things stand today.
Best & Worst Performers
The overall Houston office vacancy rate dropped slightly from 16.4% to 16.3% at the end of 2017. Some of the submarkets to reduce vacancy rates in the fourth quarter include: Downtown Houston CBD, Sugar Land, FM1960/Champions, Energy Corridor, The Woodlands, Westchase, and the Medical Center. It is interesting to point out that the largest oil & gas heavy office areas of Houston all improved in the final quarter of 2017.
Some of the under-performing submarkets which again increased in vacancy include: Greenway Plaza, Katy & Grand Parkway West, NASA / Clear Lake, West Loop, and San Felipe / Voss.
What About Rental Rates?
The average rental rate across all Houston office buildings increased slightly from $27.60 to $27.76. Though a very minor increase, these rates are aligned with a slight improvement in vacancy rates. The completion of several Class A properties joining the market likely also contributed to the increase. There are still many deals to be made out in the market today, but lease expirations toward the end of 2018 and into 2019 may face a shifting market from the tenant’s favor to the landlord’s. Vacancies are still high though, and it will take time to fill all that space.
Houston Construction Activity
The year 2015 was a busy time for commercial construction in Houston. The 12.6 million square feet of office space delivered that year represented the largest amount of space to hit the market in one year since 1984. Unfortunately that timing also coincided with the beginning of the oil & gas downturn. Predictably in 2016 construction decreased significantly to 6.1 million square feet. Still this number was higher than 4 out of the previous 6 years – due mainly to projects already in progress during the start of the downturn. In 2017 the number was halved again, down to 3.4 million square feet delivered. Just under 2.5 million square feet of office space remains under construction today. About half of this space is already pre-leased to tenants. Capitol Tower in downtown Houston CBD accounts for 700k of the space under construction, and another 6 buildings in The Woodlands account for 700k more. The rest is distributed across various other Houston submarkets.
Summary
The talk all throughout 2017 centered around when the market would hit bottom. Finally we are seeing some indication that it may have been reached toward the end of the year. Entering 2018 we see strong economic fundamentals here in Houston, in the United States, and globally as well. The oil & gas recovery is just beginning, and there are several risk factors to watch including recovery of supply from recent disruptions, retracting of the OPEC production freeze prior to year end, and speculative trading which could cause an imbalance in the financial markets. The rapid increase in U.S. shale production will need to be watched closely as well. As crude inventories continue to decline we will all be watching for market equilibrium to occur. If oil can continue trading in the $60-70 price range consistently we believe hiring will begin and new companies will start-up. The words today are “cautious optimism”, and that probably describes the feelings of the majority of Houstonians very well.
View and download the full report here.
2017 Year-End Houston Office Market Update
Optimism ran high across the Houston office market in the first quarter of 2017. Fresh off an OPEC production freeze and considering the prospect of an awakening oil & gas industry, many were hopeful that oil prices would reach the 60’s or higher, and job growth would strengthen.
Through the second quarter optimism dimmed somewhat as oil prices failed to sustain much real gain. The U.S. rig count has steadily risen and surpassed the 750 mark, representing a 45% increase since this time last year. Reduction in OPEC output has mostly been neutralized by U.S. production increases.
The mid-year report for the Houston office market reflects this reality as the citywide vacancy rate rose yet again to 16.1%. Net absorption has been negative for three straight quarters meaning more space has been left vacant. The trend could continue as more of the 11 million square feet of sublease space expires and trades hands back to landlords. Class A office properties attributed most to the losses with 850,000sf additional vacant space. Vacancy decreased among Class B office buildings suggesting some companies relocated to reduce rental expense in the tough economic climate.
Best & Worst Performers
Very few sub-markets posted strong performance in the previous quarter, but a few managed to reduce overall vacancy. These include Bellaire, Richmond/Fountainview, and San Felipe/Voss. The worst performers included the North Belt, West Loop, and Greenway Plaza. Overall vacancy rates increased in 12 of the largest 20 sub-markets in Houston this quarter.
What About Rental Rates?
Yet again average rental rates increased across the Houston office market in Q2. This despite continued concern around the prolonged oil & gas recovery, significant levels of sublease space available, and 3 straight quarters of net negative absorption. The gains were fairly tepid though, and we expect to see rates drop over the next few quarters if absorption losses continue.
Upcoming Construction Deliveries
A total of 19 office buildings completed construction and delivered to the market in Q2 2017 adding about 350k square feet of space. Remaining construction to be delivered still exceeds 3 million square feet, with 42% of that space already preleased. Downtown/CBD accounts for a quarter of the remaining under construction office space with Sugar Land accounting for another 13%. Two thirds of the under construction projects are anticipated to deliver in 2017 with the remainder delivering in the first half of 2018.
Summary
The office market continues to soften as the oil recovery has lagged and market equilibrium has remained difficult to attain. Many commercial real estate professionals across Houston are voicing optimism that we’ve reached bottom. This may be true in terms of oil prices and layoffs, but for the office market we believe there is room to go. At the end of the day deals are being negotiated well below the quoted rental rates as rental abatement and generous tenant improvement allowances abound. For companies weathering the storm or in industries less affected by oil now is a great time to consider finding new office space.
View the full Mid-Year 2017 Market Report here.