Houston Office demand improves, though future remains uncertain.

EXECUTIVE SUMMARY

HOUSTON OFFICE MARKET SPACE AVAILABILITY REMAINS HIGH
Overall space availability, which includes current, sublease, and future vacancy, is at 29%. The CBD ended Q1 2022 with an availability rate of 35.3%, behind the Energy Corridor, which had a 36.2% availability rate, and the Westchase area, at 37.4%. While some companies are still contemplating sending employees back to the office, plus the demand to work from home and an oil and gas recovery that is slower than previously estimated, significant growth in the Houston office market may still be out of reach for the next couple of years. Current projects under construction are down to 1.7 million sq. ft. With a continued increase in demand, Houston’s high availability rate may have an opportunity to decrease gradually.

OIL PRICES OVER $100 A BARREL ARE NOT THE SAME THIS TIME AROUND
The last time oil prices hit $100 a barrel nearly ten years ago, Houston’s commercial real estate market thrived. Money from investors flowed, developers rushed to build new office space, and oil and gas companies signed long-term office leases with extra space for future growth. This time around, $100-a-barrel oil is not fueling the same enthusiasm. Energy companies are under pressure to control costs with fewer employees using less space and offering remote and flexible working arrangements. As of April 4, 2022, the price of WTI crude oil was $101.50 per barrel, and the number of weekly drilling rigs operating in U.S. oil fields rose to 673, an increase of 243 from the 430 rigs that were operating a year ago. Higher oil prices mean higher rig counts, which means higher production, but with Houston’s office market still driven by the energy sector, filling up vacant office space will take some time.

HOUSTON OFFICE MARKET OVERVIEW

VACANCY RATE AT 24.8%
The overall vacancy rate in the Houston office market decreased 30 basis points quarter-over-quarter from 25.1% as of Q4 2021. Year over year, the vacancy rate rose 150 basis points from 23.3% as of Q1 2021. The vacancy rate for Class A properties is at 27.8%. In Q1 2022, overall net absorption totaled positive 1.1 million sq. ft.—a quarterly positive level not seen in eight years. Of the 1.7 million sq. ft. currently under construction, 18% of that space has been spoken for. The overall Houston average asking full-service rent is at $29.17 per sq. ft.—down from one year ago at $29.89 per sq. ft.—while Class A space in the Central Business District is averaging $33.52 per sq. ft.

POSITIVE NET ABSORPTION IN Q1 2022
Net absorption in the Houston office market was positive so far in 2022, at 1.7 million sq. ft.—a quarterly positive return not seen in 30 consecutive quarters. The largest move-ins this quarter include Vinson & Elkins (211,995 sq. ft.) and McGuire Woods (29,492 sq. ft.) for a combined 241,487 sq. ft. in the new Texas Tower in the CBD; Hewlett Packard Enterprise in CityPlace 8 (220,000 sq. ft.) and CityPlace 10 (220,000 sq. ft.) for a combined 440,000 sq. ft. in The Woodlands; and Healthstore Holdings 126,492 sq. ft. in Millennium Tower in Westchase. This quarter’s largest move-outs include Vinson & Elkins, leaving 338,026 sq. ft. at 1001 Fannin St. in the CBD, Buckeye Partners vacating 70,736 sq. ft. in One Greenway Plaza, and U.S. Immigration and Customs exiting 52,326 sq. ft. at International Square 1 in Greenspoint.

OFFICE DEVELOPMENT
Office construction is at 1.7 million sq. ft across ten buildings, with 1.4 million sq. ft. (82%) available for lease. The Medical Center accounts for 825,500 sq. ft. or over 50% of the total space available. Currently underway in the Medical Center submarket, the 522,000-sq.-ft. Horizon Tower life sciences building is being built in Texas A&M Innovation Plaza and 265,000-sq.-ft. of phase one of Levit Green is underway. The Medical Center office market has the fifth-lowest submarket vacancy rate in the Houston metro at 15.6%. In addition, a new downtown office tower, 1550 on the Green, is underway. The office building will soon overlook the popular Discovery Green as the anchor of a new downtown district. The 28-story, 375,000-sq.-ft. Class-A office structure is to be located at 1550 Lamar St. According to a recent press release, global law firm Norton Rose Fulbright will relocate its Houston office in 2024 and acquire naming rights upon occupancy. The new 1550 on the Green tower is part of a new planned district that will be named Discovery West. The district will consist of 3.5 acres of mixed-use development featuring restaurants, retail, and green space.

INVESTMENT SALES TRENDS
Real Capital Analytics data reports quarterly office sales volume for Q1 2022 in the Greater Houston area at $607 million. The year-over-year change in volume is up 100% from $307 million in Q1 2021, signaling renewed optimism. The primary capital composition for buyers so far in 2022 was made up of 84% private investors and 12% institutional. For sellers, the majority was 44% institutional investors, 30% cross-border (a transaction is defined as cross-border if the buyer or major capital partner is not headquartered in the same country where the property is located), and 23% REIT/listed. A significant sales transaction during the first quarter of 2022 involved LXP acquiring the 554,385-sq.-ft. 5-story building at 10001 Richmond Ave. in the Westchase submarket. The property consists of three buildings situated on 28.57 acres that served as a back office and data center for WesternGeco, an affiliate of Schlumberger, the sole tenant since 2012.

LEASING ACTIVITY
Quarterly leasing velocity comprised of both new leases and renewals stood at 3.0 million sq. ft. during the first quarter—down from 3.3 million sq. ft. in Q4 2021. Year-over-year, Q1 2021 leasing activity registered at 3.1 million sq. ft. Top transactions during the first quarter included Enbridge Inc. signing a sublease for 292,892 sq. ft. at Energy Center V in the Energy Corridor; Strike Construction signing a lease for 42,804 sq. ft. at Wildwood Corporate Centre – North Building in The Woodlands; and Linde PLC inking a deal for 40,813 sq. ft. at Sierra Pines in The Woodlands.

AVERAGE ASKING RENTS
The Houston overall full-service average rates are at $29.17 per sq. ft., down slightly from last quarter at $29.33, and down from one year ago at $29.89 per sq. ft. Asking rates for overall Class A space are $33.52 and Class B are $22.68 per sq. ft. Rent growth has varied across Houston’s submarkets. Asking rents in the Midtown submarket averaged $35.41 per sq. ft., which is 21% higher than the metro average as a whole and ranked number two—only behind the CBD at $37.58—among Houston submarkets as of first quarter-end 2022.

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

Additional NAI Partners Research Reports

Houston Office | Quarterly Report | Q4 2021

Houston Office | Monthly Market Snapshot | March 2022