Houston Office market sees record-high asking rents amid rising vacancies

EXECUTIVE SUMMARY

Q2 In Review
By the end of Q2 2024, the overall vacancy rate in the Houston office market rose 120 basis points over the past quarter to 26.3%. Net absorption was a positive 402,024 sq. ft., but this did not keep pace with the 521,323 sq. ft. of new office construction that was delivered to the market. Newer Class A properties continue to account for most of the positive net absorption for the quarter, with 73% going into higher quality properties. Average asking rates have been split between higher quality Class A assets and more commodity Class B properties. The high-quality assets are achieving near or at record high-rates, while the commodity properties continue to see moderate rental rate declines. This has flattened out the overall average. Rates currently stand at $30.25 per sq. ft.—up 1.9% year over year.

Houston Economic Update
Houston’s labor market growth was strong and broad. In the energy sector, production jobs declined year over year while growth has been concentrated in mining-related services. Exports of energy goods through the Port of Houston ticked down in March. Inflation slowed in April, and real wages were up year over year. Houston added jobs at a strong pace in April. Annualized total nonfarm job growth from March to April was 4.3% (or 12,110 jobs). Annualized employment growth was 2.0% (17,163) from January through April. The strongest gains were in education and health services (4.2%), leisure and hospitality (3.7%) and financial activities (3.6%). Education and health services added 4,700 jobs while leisure and hospitality added 3,273. Trade, transportation and utilities was the only sector to shed jobs during that same period, declining 0.7% (-1,217 jobs).

HOUSTON OFFICE MARKET OVERVIEW

Positive Net Absorption in Q2 2024
Net absorption—move-ins minus move-outs—was a positive 402,024 sq. ft. for the quarter; this is much healthier than the negative 552,926 sq. ft. in Q1 2024 or the negative 337,527 sq. ft. in Q2 of 2023. Notable recent move-ins include OneSubsea subleasing 99,501 sq. ft. at Energy Center V, Up Excellence Academy leasing 59,000 sq. ft. at 330 N Sam Houston, and Rimkus Consulting Group leasing 50,380 sq. ft. at Woodbranch Plaza III.

Leasing Up 17% Quarter Over Quarter
Quarterly leasing velocity—comprised of new leases and renewals—stood at 3 million sq. ft.— up 17% from 2.6 million sq. ft. in Q1 2024. Notable new leases that will impact future absorption numbers include Blue Cross Blue signing a lease for 136,800 sq. ft. at West Belt Office Center I, Noble Corp. leasing 110,250 sq. ft. at CityWestPlace and Orion Group Holdings leasing 47,416 sq. ft. at East River One.

Vacancy Rate at 26.3%
The overall vacancy rate in Houston’s office market is 26.3%. Quarter over quarter, the vacancy rate increased 120 basis points from 25.1%. Year over year, the vacancy rate increased 160 basis points from 24.7%. Class A and Class B properties have vacancy rates of 27.1% and 25.3%, respectively. Among the submarkets, Greenspoint/North Belt and FM 1960/Hwy 249 have the highest vacancy rates at 50.1% and 38.3%, respectively. On the opposite end of the spectrum, the Pearland/South and Northeast submarkets have vacancy rates in the single digits, at 7.6% and 9.9%, respectively.

Deliveries Surpass 500,000 Sq. Ft.
For Q2 2024, new office deliveries were 521,323 sq. ft. The most notable new delivery was 1550 on the Green, a 386,323-sq. ft. office property that is part of the Discovery West business park in the Houston CBD. The project has been roughly 50% leased by Norton Rose Fulbright (117,454 sq. ft.) and the Boston Consulting Group (53,007 sq. ft.). The only other significant new project was the 135,000-sq. ft. medical office property leased by Kelsey-Seybold Clinic at 11555 University Blvd in Sugarland.

Investment Sales Trends
CoStar Capital Market Analytics reports the cumulative 12-month sales volume for Q2 2024 stood at $206 million. This represents 124 office properties that sold for an average transaction price of $74 per sq. ft. and an average cap rate of 9.4%. Notable recent office sales transactions include The Wideman Company purchasing 708 and 712 Main, a two building complex totaling 889,186 sq. ft. 708 Main was recently vacated by WeWork and 712 Main was 70% leased at the time of the sale. Also, Goddard Investment Group purchased Energy Center II, a 306,721-sq. ft. office property that boasts major tenants such Baker Hughes (130,644 sq. ft.), AES Drilling Fluids (27,614 sq. ft.) and Equifax (17,932 sq. ft.).

Record-High Asking Rent
Houston’s overall full-service average rent increased to $30.25 per sq. ft.— up slightly from the last quarter’s $30.22 per sq. ft. Asking rents for overall Class A and Class B space are at $35.35 per sq. ft. and $22.06 per sq. ft., respectively. Over the past few quarters, rates for quality Class A properties have continued to increase, while commodity Class B properties have seen a moderate decline, making rates overall relatively flat. Over the past year, overall asking rates are up 1.9%.

Steve Trivolet
SVP of Research and Market Forecasting
tel 214 223 4008
[email protected]