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The overall vacancy rate in the Houston office market was up 30 basis points quarter-over-quarter, and up 230 basis points year-over-year.


EXECUTIVE SUMMARY

VACANCY RATE AT 23.8%
The overall vacancy rate in the Houston office market was up 30 basis points quarter-over-quarter, and up 230 basis points year-over-year. The vacancy rate for Class A properties is at 26.2%, and Class B at 22.1%. In the first quarter, overall net absorption totaled negative 798,000 sq. ft.—Class A represented negative 494,000 sq. ft. of that tally, while Class B registered negative 229,000 sq. ft. Of the 4.1 million sq. ft. currently under construction, 45.6% of that space has been spoken for. Of the two properties completed so far in 2021, totaling 105,400 sq. ft., 66,130 sq. ft. of that space has been leased. The overall Houston average asking full-service rent is at $29.29 per sq. ft.—basically unchanged from one year ago at $29.28 per sq. ft.—while Class A space in the Central Business District is averaging $41.72 per sq. ft.

HOUSTON ECONOMIC INDICATORS
Houston ended 2020 behind the nation in its comeback from the COVID-19-driven job collapse. Houston added 118,800 jobs from April 2020 to January 2021, roughly one-third of the 354,000 jobs lost from February to April 2020. The closing spot price for West Texas Intermediate averaged $59.04 per barrel in February 2021, up 16.8% from $50.54 for the same period in 2020. Baker Hughes reports 403 drilling rigs were working in the U.S. during the first week of March 2021. That’s down from 790 rigs the same week in March last year. The rig count has inched up steadily since bottoming at 244 in mid-August. However, it remains well below its recent peak of 1,083 in late December 2018.


BROKER’S PERSPECTIVE

As we head into the second quarter of 2021, more than one full year after the white-collar workforce of Houston was sent home to work from makeshift home-offices, the office leasing industry is anxiously awaiting a hopeful large-scale return to the office. When NAI Partners’ Q1 2020 Office Market Report came out this time last year, the statistics weren’t pretty (although not that this was much of a change from what they’ve been for the last few years). Little did we know, they were about to get much worse.

The challenges of the last year (from every angle) are well-documented and anyone reading this is aware of the difficulties facing an office market without demand for offices while the vast majority of office workers sit at home. However, as of this writing more than 1.4 million Harris County residents have had at least one vaccine shot and that number is climbing rapidly. Many companies are making plans for their return to the office and having discussions around what that return looks like.

Until we see a large-scale return to the office (or at least comfortability around bringing employees back), it’s impossible to know what long-term impacts the pandemic will have on our industry. That said, there are some things I think I know:

  • For those comfortable with exploring a lease transaction with any significant level of term, deal economics are more aggressive than we have possibly ever seen. Concession packages (free rent and Tenant Improvement Allowance) and rental rates have both improved greatly in the tenants’ favor in the last year. Engage the market this year if you can.
  • Office design will become more functional. Tenants are looking at their office designs more analytically than ever, and that will lead to exciting changes in how we use our offices. The office is a critical component of a company’s culture, and is key to collaboration, training, and mentoring. The office is not going anywhere, but it will change.
  • Houston has a very long road ahead to healthy market conditions. With a market that was overbuilt prior to the pandemic, it’s hard to imaging climbing out of the realm of 20%- to 30% Vacancy/Availability. The best thing for our market would be to repurpose much of our older product to rebalance the supply and demand equation. Most owners won’t be imaginative enough for that, so Houston will continue to lag behind other major metros when it comes to occupancy and rental rates.

Hopefully, our next Quarterly Market Report will celebrate the return to the office, the return of office demand, and the end of this notorious time in history. Until then, we hope everyone stays well. Please don’t hesitate to contact our team at NAI Partners to discuss your office situation. We would love to be a resource for you.

Joe Bright

Joe Bright
Vice President
NAI Partners


MARKET OVERVIEW

NET ABSORPTION REMAINS NEGATIVE
During the fourth quarter, Houston’s office market saw a 60% decrease in the amount of space that tenants were moving out of compared to the third quarter of 2020, which tallied an aggregate of negative 1,639,286 sq. ft. of net absorption—the highest quarterly total since NAI Partners began recording this data. The aggregate effect of the total net absorption for the entire year of 2020 was negative 4.2 million sq. ft., raising the overall vacancy rate to 23.3%. The amount of total office inventory that is being marketed for lease also increased quarter-over-quarter, lifting the availability rate to 28.0%. The difference between this figure and the vacancy rate reflects expected future move-outs. Space being marketed for sublease represents 7.2 million sq. ft., or 10.4% of the 68.8 million-sq.-ft. total availability figure. The Central Business District vacancy rate is at 27.2%, up 60 basis points from this time last quarter at 26.6%, while the Energy Corridor vacancy rate is at 27.4%, up 60 basis points from 26.8% in Q3 2020.

OFFICE DEVELOPMENT
Office construction is at 4.1 million sq. ft across 18 buildings, with 2.3 million sq. ft. (54.4%) available for lease. The Central Business District, Medical Center and Katy Freeway East account for 1.8 million sq. ft., or over 80% of the total space available. Hines’ Texas Tower is expected to deliver in Q4 2021 and is 40% preleased. Outside of downtown, of the 789,000 sq. ft. underway in the Medical Center submarket, the 512,000-sq.-ft. Horizon Tower life sciences building is being built in Texas A&M Innovation Plaza. Other office buildings under construction in the Katy Freeway East submarket include Marathon Oil’s 440,000-sq.-ft. future headquarters in CityCentre; and Village Tower II, a 150,000-sq.-ft. office building at 9655 Katy Freeway. The Medical Center market has an overall vacancy rate of 10.0%, while the Katy Freeway East market has a vacancy rate of 12.0% compared to the metro’s overall average of 23.8% Katy Freeway. The Medical Center market has an overall vacancy rate of 10.0%, while the Katy Freeway East market has a vacancy rate of 12.0% compared to the metro’s overall average of 23.8%.

INVESTMENT SALES TRENDS
Real Capital Analytics data reports quarterly office sales volume for Q1 2021 in the Greater Houston area at $256 million. The year-over-year change in volume is down 47% from $484 million in Q1 2020. The primary capital composition for buyers so far in 2021 has been made up of 91.0% private investors and 9.0% institutional. For sellers, the majority was 53.7% private investors and 43.0% institutional.

CONSTRUCTION BREAKTHROUGH OF TEXAS TOWER
A major milestone in the construction of the 47-story office tower recently took place changing the downtown Houston skyline with the structural topping out at 1.2 million-sq.-ft. The topping out occurred several weeks ahead of schedule, with completion scheduled in the fourth quarter. The tower broke ground before the pandemic, and the office market uncertainty that followed. Texas Tower is 40% preleased with tenants including Hines, Vinson & Elkins and DLA Piper law firms. Across the street from Texas Tower a 46-story apartment high rise at 414 Milam St. is being built. That project previously was called The Preston but was renamed Brava in November, scheduled to open in 2022.

LEASING ACTIVITY
The number of offices leases signed in Houston dropped by 33% in 2020 (3,110 deals) compared with 2019 (4,650 deals), as tenants delayed leasing decisions during the pandemic. The amount of signed lease transactions during the first quarter was 2.1 million sq. ft.—down from the previous quarter’s 3.1 million sq. ft., and down more than 60% from one year ago at 5.5 million sq. ft. The largest leases signed in Q1 2021—which is comprised of both new leases and renewals—include Buckeye Partners inking a new deal for 73,075 sq. ft. in Park Place River Oaks at 4200 Westheimer, and Academy of Accelerated Learning leasing 38,337 sq. ft. of space at 5999-6057 Savoy Dr. in the Southwest/Hillcroft submarket. The largest transactions during 2020 include Occidental renewing 801,967 sq. ft. of space at 5 Greenway Plaza, and Enterprise Products Partners renewing 512,345 sq. ft. in Enterprise Plaza at 1100 Louisiana St.


Leta Wauson
Director of Research
[email protected]
tel 713 275 9618

Additional NAI Partners Research Reports

Houston Office | NAI Partners Sublease Index | January 2021
Houston Office | Energy Corridor Q3 2020 | Submarket Spotlight
Houston Office | Monthly Market Snapshot | December 2020

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