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Houston Office Commercial Real Estate Market Data and Economic Information - Post Office 401 Franklin St

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Overall vacancy is at 21.3%, up from this time last quarter at 20.6%, due in part to the 647,000 sq. ft. of vacant space delivered to the market in Q2 2019—about 64% of the total 1.0 million sq. ft. completed. The vacancy rate for Class A properties is at 23.2%, up from 22.8% this time last quarter. Net absorption is at negative 636,000 sq. ft. for Q2, comprised of negative 776,000 sq. ft. of direct space and positive 140,000 sq. ft. of sublease space.


EXECUTIVE SUMMARY

Office market vacancy inches upward

Overall vacancy is at 21.3%, up from this time last quarter at 20.6%, due in part to the 647,000 sq. ft. of vacant space delivered to the market in Q2 2019—about 64% of the total 1.0 million sq. ft. completed. The vacancy rate for Class A properties is at 23.2%, up from 22.8% this time last quarter. Net absorption is at negative 636,000 sq. ft. for Q2, comprised of negative 776,000 sq. ft. of direct space and positive 140,000 sq. ft. of sublease space. Overall net absorption has remained positive during the past three quarters. The overall average asking full-service rent has steadily grown over the past years to its current rate of $29.39 per sq. ft., up $1.24 from a year ago—a 4.4% increase.

Healthy near-term outlook for the Houston region

Employment increased to a 3.3% annual growth rate (25,800 jobs) over the three months ending in May, up from 2.0% growth for the three months in February. The leisure and hospitality sector added the most jobs (7,900), while the mining sector logged the fastest growth rate at 12.9%. Most of the remaining gains came from professional and business services (6,100; primarily from professional, scientific and technical jobs). The May Houston unemployment rate held steady at April’s record low of 3.5%. Texas overall also had an unemployment rate of 3.5% in May, while the U.S. rate was 3.6%. The Federal Reserve Bank of Dallas reported that West Texas Intermediate (WTI) crude oil fell nearly $10 per barrel from April to June as signs of rising inventories and concerns about the pace of global demand growth weighed on the price.  The U.S. rig count slipped to an average of nearly 970 rigs in June, a drop of 108 rigs from the three-year high of 1,077 in December. Variations in monthly drilling activity tend to follow changes in monthly oil prices with a lag of about three months.

Houston Office Commercial Real Estate Market Data and Economic Information - Supply and Demand

Houston Office Commercial Real Estate Market Data and Economic Information - Market Indicators


Broker’s Perspective

As we reflect on the second quarter of 2019, the prior onrush of companies leasing office space has reached a turtle’s pace. On the positive side, Houston’s employment growth rate has increased to 3.3%, which translates to approximately 25,800 new jobs over the three months ending in May. Companies hiring is always positive news, but unfortunately job growth hasn’t been concurrent with expanding office footprints at a pace with which available space is coming online. Let’s take a deeper dive.

Energy—more specifically, oil and gas—directly accounts for approximately 35% of Houston’s overall Gross Domestic Product. This GDP percentage does not include industries indirectly tied to oil and gas—meaning the percentage of Houston’s GDP tied to the Energy sector is significantly higher than that percentage. The closing price of West Texas Intermediate (WTI) was $57.73 per barrel the last week of June 2019. By comparison, during the same period in 2018 the closing price for WTI was $74.13 per barrel. When looking through the optics of higher crude prices, some companies committed to office leases in anticipation of the ramp up in what was hoped to be long-term sustained pricing. The fact is that in the majority of shale plays outside of the Permian Basin, the costs to extract oil are too high for companies to stay profitable at sub-$60 per barrel. The result is that most oil and gas companies are now staying “lean and mean” with respect to all costs, until WTI stabilizes at a higher price point.

For the office market, we have seen an uptick in overall vacancy to 21.3%, compared to 20.6% during this time last quarter, across the approximately 234 million sq. ft. of Class A and Class B office space spread throughout the 23 submarkets of the Greater Houston Metropolitan Statistical Area (MSA). Despite the increase in vacancy, the overall initial quoted full-service asking rent has grown year over year to its current average of $29.39 per square foot, up $1.24 from a year ago—a 4.4% increase. It should be noted that these are asking averages which does not equate to economics for where transactions are being completed.

Needless to say, no matter how much the Greater Houston Partnership touts Houston as a diversified economy, we are still an oil-and-gas town. Until the City of Houston can actively recruit Big Technology to set up shop, the office market will be a rollercoaster ride for the foreseeable future.

Taylor Wright

Taylor Wright
Vice President
NAI Partners


MARKET OVERVIEW

Net absorption breaks positive streak

During the second quarter of 2019, Houston’s office market saw an increase in the number of tenants moving out of space compared to the past few quarters. The recent aggregate effect of these net occupancy losses was just over 636,000 sq. ft. of negative absorption. Tenants such as British Petroleum vacated 194,194 sq. ft. in the Energy Corridor, while Bank of America no longer occupies 143,396 sq. ft. at 700 Louisiana St., both representing recent relocations. The amount of total office inventory that is being marketed for lease increased by 40 basis points quarter-over-quarter to 25.9%. The difference between this figure and the vacancy rate reflects expected future move-outs. Space being marketed for sublease represents 7.0 million sq. ft., or 11.5% of the 61.1 million-sq.-ft. total availability figure.

Houston Office Commercial Real Estate Market Data and Economic Information - Availability Rates

Development and Redevelopment

Office construction is close to 2.4 million sq. ft. across 16 buildings, with 1.5 million sq. ft. (62.9%) available for lease. The downtown area, including the Central Business District (CBD) and Midtown, account for 810,000 sq. ft., or one-third of the total space available. The new Bank of America Tower delivered 781,000 sq. ft. in the second quarter, and Hines’ Texas Tower is expected to deliver in late 2021. In addition, plans for Post Houston are progressing forward to redevelop the historic U.S. Post Office building into downtown Houston’s most recent mixed-use project. The 550,000-sq.-ft. building at 401 Franklin St. will include a 210,000-sq.-ft. rooftop park and organic farm, restaurants, bars and coworking space. Post Houston is located three miles northwest of The Ion, the hub of a proposed 16-acre innovation district to advance the city’s technological appeal. The Ion is scheduled to break ground this summer to convert the former Sears at 4201 Main St. into an innovation center.

Houston Office Commercial Real Estate Market Data and Economic Information - Net Absorption

Investment sales activity picks up

Real Capital Analytics data reports quarterly office sales volume for Q2 2019 in the Greater Houston area at $661 million compared to this time last year at $334 million, resulting in a year-over-year quarterly volume increase of 97.8%. The primary capital composition for buyers in 2019 was made up of 50.5% private, 22.2% cross-border, and 16.5% REITl/listed. For sellers, the majority was 37.8% private, 32.6% institutional, and 21.5% REIT/listed. A recent noteworthy sale, Stockdale Capital Partners purchased a 10-story 433,159-sq.-ft. creative office building in Houston’s Greenway Plaza submarket. The Class A office building—known as the Koch Building, 20 Greenway Plaza—was 95.0% leased at the time of sale by Principal Real Estate. Its tenant list includes companies Merrill Lynch, Mitsubishi, Sunnova Energy Corp., REALEC Technologies and Koch. The multi-tenant office property was built in 1984, renovated in 2014, and is located on a 2.42-acre lot.

Houston Office Commercial Real Estate Market Data and Economic Information - Construction

Top Leasing Activity – Q2 2019

  • In the Woodlands submarket, Alight Solutions, a wealth and human resources consulting firm signed a 180,000-sq.-ft. build-to-suit lease at 8770 New Trails Dr. The property is currently under construction and is expected to be completed by spring 2020.
  • Honeywell has leased 114,068 sq. ft. at CityWestPlace Building 1, at 2107 CityWest Blvd. in the Westchase submarket. Honeywell will relocate its office in late 2019 from space at 1250 Sam Houston Parkway. Factoring in sublease space, the Westchase office submarket has an overall vacancy rate of 26.6%, Class A registers at 29.5%, and Class B at 23.4%. This is in comparison to 21.3% for the Houston area overall.
  • Also, in the Westchase submarket, Empyrean Benefit Solutions, Inc., signed a long-term lease for its 107,000 sq. ft. Houston headquarters to remain at its current location in Pinnacle Westchase, a nine-story office building at 3010 Briarpark Drive. The company moved to the offices as a temporary measure after its West Loop office was impacted by Hurricane Harvey in 2017, and is planning major renovations to the seventh and eighth floors of the 470,000-sq. ft. building.
  • King & Spalding has renewed a lease for floors 39-42 at 1100 Louisiana; a 55-story, 1,265,332-sq.-ft. Class A office tower in the Houston CBD. The law firm, with over 90 lawyers in Houston, has been a tenant in 1100 Louisiana since 1995.

Houston Office Commercial Real Estate Market Data and Economic Information - Sales Volume

Average asking rents increase

The Houston overall full-service average rates are at $29.39 per sq. ft., an increase of $1.24 from $28.15 a year ago. Asking rates for overall Class A space are $34.87 and Class B are $21.70 per sq. ft. Asking rates are at their highest for Class A space in the CBD averaging $43.52 per sq. ft. In the meantime, there are still a lot of sublease opportunities for tenants to secure office space for a small percentage of the price. In the Energy Corridor, sublease space is at an average of $21.49 per sq. ft., around 45% below direct rent at $31.07 per sq. ft. In addition, the average cost of sublease space in the Galleria/West Loop submarket is reported at close to 40% less than that submarket’s direct rent rates. Recent data from a commercial real estate research source reports Houston office rent growth has increased only slightly in recent months with the immediate increases driven by new listings at Hines and Ivanhoe Cambridge Texas Tower in the CBD, which is asking $59 per sq. ft. The one-million-sq.-ft., 47-story tower on the 800 block of Texas Avenue is being built on the site of the former Houston Chronicle building and is scheduled to open in late 2021.

Houston Office Commercial Real Estate Market Data and Economic Information - Leasing Activity

Houston Office Commercial Real Estate Market Data and Economic Information - Asking Rent


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

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