Demand for Class A Properties Remains Healthy and Rental Rates Rise

EXECUTIVE SUMMARY

Houston’s office market in Q1 2026 experienced increased deliveries, higher vacancy, and negative absorption, but recorded increased leasing activity and higher average rental rates. Net absorption decreased to -158,417 sq. ft. from 375,171 sq. ft. recorded in the previous quarter. Vacancy rates edged up to 26.5%, reflecting a 20-basis-point increase from Q4 2025. Leasing activity increased 29.8% to 2.7 million sq. ft. Although absorption for the quarter was negative, twelve submarkets posted positive absorption, with Class A properties accounting for all of it. Construction deliveries increased 120.2%, adding 464,450 sq. ft. to office inventory. The under-construction pipeline dropped 39.6% to 622,040 sq. ft. Rental rates increased quarterly by 0.7% to $30.84 per sq. ft. Class A property rental rates rose 1.5% to $36.35 per sq. ft., while the overall Class B average rental rate dropped 1.2% to $22.93 per sq. ft.

SUPPLY & DEMAND

KEY MARKET INDICATORS

MARKET OVERVIEW

NET ABSORPTION TURNS NEGATIVE IN Q1 2026

In Q1 2026, the Houston office market recorded -158,417 sq. ft. of negative net absorption, down from 375,171 sq. ft. in Q4 2025. Class A properties contributed 95,067 sq. ft., while Class B properties recorded -253,484 sq. ft., representing a preference in favor of Class A properties. At the submarket level, twelve submarkets posted positive total absorption in Q1 2026, with FM 1960 (152,084 sq. ft.), NASA/Clear Lake (74,557 sq. ft.), and Woodlands/Conroe (71,480 sq. ft.) recording the highest levels. The CBD submarket (-155,929 sq. ft.) recorded the highest negative absorption, driven by Shell’s lease expiration of over 500,000 sq. ft. The building is undergoing a $50 million renovation. Some of the tenants that contributed to the positive absorption recorded in Q1 2026 include Memorial Hermann, which moved into 135,000 sq. ft. at 9250 Pinecroft Dr., and Boston Scientific, taking 63,000 sq. ft. at 1717 N Sam Houston Parkway W.

QUARTERLY LEASING VELOCITY INCREASES 29.8%

Quarterly leasing velocity—comprised of new leases and renewals—increased to 2.7 million sq. ft. from 2.1 million sq. ft. in Q4 2025. Notable leases in Q1 2026 include VoltaGrid, which signed a 60,000 sq. ft. lease at 920 Town & Country Blvd., Seyfarth Shaw, which signed a 40,000 sq. ft. lease at 811 Main St, and DRB Group signed a 26,000 sq. ft. lease at Energy Tower II located at 11720 Katy Freeway.

VACANCY RATE INCREASES

The overall vacancy rate in Houston’s office market increased to 26.5% in Q1 2026, up 20 basis points from 26.3% in Q4 2025. Class A properties reported a vacancy rate of 28.6%, while Class B properties reported a vacancy rate of 25.3%. Submarkets, including Greenspoint/North Belt and FM 1960/Hwy 249, had the highest vacancy rates at 47.2% and 37.1%, respectively. In contrast, Pearland/South, Northeast, and Woodlands/Conroe had the lowest rates at 8.8%, 11.2%, and 13.4%, respectively.

QUARTERLY DELIVERIES UP AND CONSTRUCTION PIPELINE DOWN

New office deliveries in Q1 2026 totaled 464,450 sq. ft., up 120% from 210,879 sq. ft. in Q4 2025, with submarket contributions from Katy Freeway (324,450 sq. ft.), Northeast (53,925 sq. ft.), Kingwood/Humble (32,625 sq. ft.), NASA/Clear Lake (80,000 sq. ft.), and Northwest (60,000 sq. ft.). The construction pipeline fell 17.7% over the quarter to 622,040 sq. ft., an annual decline of 54.9%. The largest project under construction is The RO located at 3120 Buffalo Speedway in the Greenway Plaza submarket. The 146,000 sq. ft. was 100% pre-leased in 2024 by Vitol Inc., an energy and commodities company. The building is slated for completion in May 2027.

INVESTMENT SALES TRENDS

CoStar Capital Market Analytics reports that over the past 12 months, sales volume for the Houston office market totaled $788 million. This represents 166 properties that sold with an average sales price of $120 per sq. ft. and an average cap rate of 8.5%. Notable recent sales transactions include Acquest Development’s sale of the 470,623-square-foot, Class A, former Noble Energy Tower at 1002 Noble Energy Way to First Community Credit Union for an undisclosed price. Also, KBS sold the 170,881-square-foot, Class A, 1800 Bering to DML Capital for an undisclosed price. The property is 83.2% leased at the time of sale.

AVERAGE ASKING RENTAL RATES INCREASE

Average asking rental rates increased 0.7% quarterly and 6.5% annually to $30.84 per sq. ft. in Q1 2026. Class A properties increased to $36.35 per sq. ft from $35.81 per sq. ft., while Class B properties dropped to $22.93 per sq. ft. from $23.22 per sq. ft. Premium submarkets such as the Katy Freeway ($43.79 per sq. ft.), the CBD ($38.74 per sq. ft.), and The Woodlands/Conroe ($37.72), continued to command higher rents. The submarkets with the lowest average asking rental rates are Greenspoint/North Belt ($17.39 per sq. ft.), Southwest ($21.57 per sq. ft.), and Kingwood/Humble ($22.35 per sq. ft.).