Leasing activity up 12% in Houston Office market.

EXECUTIVE SUMMARY

Q2 In Review
By the end of Q2 2023, the overall vacancy rate in the Houston office market rose 20 basis points quarter-over-quarter, from 24.5% to 24.7%. Leasing activity increased 12% quarter-over-quarter to 3.7 million sq. ft. in Q2 2023. Notable transactions such as Lyondell Bassell’s 318,504-sq.-ft. lease and Fluor’s 308,186-sq.-ft. lease were signed in May 2023. On the flip side, deliveries decreased from 265,000 sq. ft. in Q1 2023 to 180,000 sq. ft. in Q2 2023. Office construction remains strong at 2.9 million sq. ft. with 35,437 sq. ft. added from the previous quarter. Rent growth in Houston has continued to slow down, with the average full-service rate standing at $29.70 per sq. ft.

Houston Economic Update
Houston’s unemployment rate increased to 4.4% in May 2023, ticking up from 4.0% in April 2023. The metro’s jobless rate beat the state’s and the nation’s rates at 4.1% and 3.5%, respectively. Year-to-date, Houston has gained 33,496 jobs in the first five months of 2023, reflecting 2.5% annual growth. Service-providing industries experienced the most growth in May. Specifically, trade, transportation, and utilities (5,300 jobs, 0.8%), leisure and hospitality (4,600 jobs, 1.3%), and education and health services (3,000 jobs, 0.7%).

HOUSTON OFFICE MARKET OVERVIEW

West Houston Secures Multiple 300,000-Sq.-Ft. Leases
Quarterly leasing velocity for the entirety of the Houston office market—which is comprised of both new leases and renewals—stood at 3.7 million sq. ft. in Q2 2023—up 12% from 3.3 million sq. ft. in Q1 2023. Per a recent analysis in the Houston Business Journal, West Houston’s office market leasing momentum is among the top in the country as of Q2 2023, particularly in Galleria/West Loop and Energy Corridor. In a notable transaction, Lyondell Bassell secured the largest space of the quarter, signing a 318,504-sq.-ft. office lease in May 2023 in Galleria/West Loop with a move-in date anticipated at the end of 2024. Lyondell Bassell will occupy 15 floors within the Williams Tower at 2800 Post Oak Blvd. In addition, Fluor secured a 12-year lease for an entire 308,186-sq.-ft. office building, Three Eldridge, at 737 Eldridge Parkway in May 2023. Fluor’s move-in date is set for the second quarter of 2024.

Negative Net Absorption in Q2 2023
Net absorption—move-ins minus move-outs—fell from 231,947 sq. ft. to -337,527 sq. ft. quarter-over-quarter. Year-to-date, net absorption is at -105,580 sq. ft. Deliveries decreased from 265,000 sq. ft. in Q1 2023 to 180,000 sq. ft. in Q2 2023. Year-to-date, deliveries are at 445,000 sq. ft. The quarter’s largest move-ins include Axiom Space occupying 106,000 sq. ft. of office space within NASA/Clear Lake at 11603 Aerospace Avenue, and Cellipoint Bioservices filling 75,255 sq. ft. of office space within The Woodlands at 9501 Lakeside Blvd. The largest move-outs of the quarter include Reed Smith LLP vacating 67,142 sq. ft. of office space within the CBD at 811 Main Street, and PNC Bank leaving 78,968 sq. ft. of office space within Galleria/West Loop at 2200 Post Oak Blvd.

Vacancy Rate Increases to 24.7%
The overall vacancy rate in Houston’s office market rose to 24.7%, increasing 20 basis points from the prior quarter (24.5%). Class A and Class B properties have vacancy rates of 26.5% and 24.1%, respectively. Class A submarkets with the greatest year-over-year increases in vacancy rates include: NASA/Clear Lake (17.4% to 20.3%), Westchase (31.4% to 34.2%), and Southwest (21.9% to 24.2%). Class B submarkets with the greatest year-over-year increases include: Northwest (17.9% to 21.4%), Katy Grand Parkway (5.6% to 7.8%), and Bellaire (15.8% to 17.8%).

Medical Center Dominates Construction
Office construction is at 2.9 million sq. ft. across 16 buildings, with 806,636 sq. ft. (27%) available for lease. The Medical Center accounts for 1.5 million sq. ft. under construction and 51% of the total space available.
Notable developments underway in the Medical Center include: the 700,000-sq.-ft. Dynamic One building within TMC Helix Park, and the 521,522-sq.-ft. Horizon Tower Life Sciences building within the Texas A&M Innovation Plaza. The Medical Center has the eighth-lowest submarket vacancy rate in the Houston Metro at 17.0%, and the fifth-lowest submarket availability rate at 18.3%.

Investment Sales Trends
Real Capital Analytics reports quarterly office sales volume for Q2 2023 in the Greater Houston area at $93 million, down 84% year-over-year from $583 million in Q2 2022. The majority composition of buyers so far in 2023 was made up of 85% private and 13% institutional. For sellers, the majority composition was 69% private and 26% institutional. Investment sales activity will likely continue to decelerate over the near term as
future interest rate hikes and increased borrowing costs challenge investors to close on deals.

Rent Growth Slowing Down
The Houston overall full-service average rate stands at $29.70 per sq. ft., down slightly from the previous quarter’s $29.86 per sq. ft., and the previous year’s $29.70 per sq. ft. Asking rates for overall Class A and Class B space are at $34.40 per sq. ft. and $22.76 per sq. ft., respectively. On the quarter, submarkets with the highest asking rates include the CBD at $40.66 per sq. ft., followed by Greenway Plaza at $33.99 per sq. ft. Overall, rent growth in Houston is expected to continue to slowing down until Q2 2025. From Q2 2023 to Q2 2025, Houston’s overall full-service average rate is forecasted to drop from $29.70 sq. ft. to $28.74 sq. ft.

Alex Babcock
Senior Research Analyst
[email protected]
tel 713 275 9618