Inflation, rising interest rates, and the pandemic’s effects continue to challenge the Houston office market.

EXECUTIVE SUMMARY

Vacancy rate at 25%
The overall vacancy rate in the Houston office market was unchanged quarter-over-quarter. However, year-over- year, the vacancy rate rose 70 basis points from 24.3%. The vacancy rate for Class A properties is 27.5%. In Q3 2022, overall net absorption totaled a positive 87,000 sq. ft., bringing the year-to-date amount to a positive 897,000 sq. ft. Of the 3.2 million sq. ft. currently under construction, 63% of that space is available. The overall Houston average asking full-service rent is at $30.03 per sq. ft.—up from one year ago at $29.54 per sq. ft.—while Class A space in the Central Business District is averaging $44.04 per sq. ft.

Global oil demand remains resilient despite slowing economies
U.S. benchmark West Texas Intermediate crude for November delivery added $1.24, or 1.4%, to settle at $87.76 a barrel as of October 5, 2022. Major oil producers agreed to reduce their collective crude production levels by 2 million barrels a day starting next month, but that’s not a guarantee that prices will continue to climb. The number of active U.S. rigs drilling for oil rose by two to 604 as of September 30, reported Baker Hughes. That followed increases in each of the past two weeks. In the third quarter, drillers added rigs for the eighth quarter in a row, but the addition of 12 rigs was the smallest increase since September 2020.

HOUSTON OFFICE MARKET OVERVIEW

Houston office market space availability increase
Overall space availability, including current, sublease, and future vacancy, is at 29.9%, up from 29.5% in Q2 2022 and up from 28.8% last year. The CBD ended Q3 2022 with an availability rate of 37.1%, second to the Greenspoint/North Belt submarket, which had a 53.1% availability rate followed by the Energy Corridor at 36.2%. Sublease availability remains elevated at 8.4 million sq. ft. — the highest amount since Q3 2017. The peak was reached at 11 million sq. ft. in Q3 2016 during the oil price plunge. Available sublease space represents about 3.4% of the metropolitan area’s total tracked inventory of 241 million sq. ft. Physical office occupancy registered 57.6%, as reported by Kastle Systems’ Back to Work Barometer near the end of September.

Positive net absorption in Q3 2022
Net absorption in the Houston office market was positive 87,000 sq. ft. in Q3 2022, and year-to-date registered at a positive 897,000 sq. ft. This quarter’s largest move-ins include Hines Interests 186,434 sq. ft. at Texas Tower, and 57,571 sq. ft. at 13141 Northwest Freeway, including Camillo Properties (28,786 sq. ft.) and Legend Homes (28,786 sq. ft.). This quarter’s largest move-outs include Enbridge Inc. leaving 632,511 sq. ft. at 5400 Westheimer Ct. in the Galleria (Enbridge Inc. subleased 290,025 sq. ft. at Energy Center V in Q3 2022), Hines vacating 159,938 sq. ft. in Williams Tower in the Galleria submarket, and EP Energy vacated 62,261 sq. ft. in 601 Travis in the CBD.

Office development
Office construction is at 3.2 million sq. ft across 17 buildings, with 2 million sq. ft. (63%) available for lease. The Medical Center accounts for 2 million sq. ft. of medical/office space under construction and 67% of the total space available. Tracked projects currently underway in the Medical Center submarket include the 700,000-sq.-ft. TMC Industry Building; 522,000-sq.-ft. Horizon Tower life sciences building in Texas A&M Innovation Plaza; 386,000-sq.-ft. at 1550 on the Green; and 294,000-sq.-ft. Levit Green. The Medical Center office market has the third-lowest submarket vacancy rate in the Houston metro at 12.4%. Katy Freeway East has the second-lowest vacancy rate at 10.9%. In addition, and about 190,000 sq. ft. is under construction at MetroNational’s nine-story office building at 9753 Katy Freeway in Memorial City, scheduled for delivery in Q2 2023, and 167,000 sq. ft. at Town Centre Two in Town & Country Village scheduled for completion in Q3 2023.

Investment sales trends
Real Capital Analytics data reports quarterly office sales volume for Q3 2022 in the Greater Houston area at $515 million. The year-over-year change in volume is down 21% from $655 million in Q3 2021. The primary capital composition for buyers so far in 2022 was made up of 62% private investors, 17% institutional, and 14% REIT/Listed. For sellers, the majority were 45% private investors, 30% institutional, 13% 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 12% REIT/Listed. A significant sales transaction during the third quarter of 2022 involved the 206,943 sq. ft. 200 Park Place office building, situated on1.27 acres. 200 Park Place at 4200 Westheimer sold for $145,000,000 or $700.68 per sq. ft., according to CoStar. 200 Park Place is part of the Park Place mixed-use development, which runs along Westheimer Rd. and Mid Lane in Houston’s upscale River Oaks and Highland Village area.

Chevron sells San Ramon campus
Chevron has sold its global headquarters in California for around $174.5 million, where it had been based for the past two decades, as the energy company shifts more of its workforce to Texas. The San Ramon cutback broadens an effort to decrease its California workforce and expand its Texas operations. The company is attempting to move more employees to two towers it owns in downtown Houston that were formerly the headquarters of the now-defunct energy provider Enron Corp. The 50-story, 1.25 million-sq.-ft. tower at 1400 Smith St. in downtown is connected by a walkway to the 40-story, 1.16 million-sq.-ft. tower at 1500 Louisiana St. Chevron’s Houston offices are home to around 6,000 employees, the result of years of gradually moving the majority of its California workforce to Texas.

Average asking rents
The Houston overall full-service average rates are at $30.03 per sq. ft., up from last quarter at $29.96 and up from one year ago at $29.54 per sq. ft. Asking rates for overall Class A space is $34.29, and Class B is $22.73 per sq. ft. Rent growth is mixed across Houston’s submarkets. Asking rents in the Midtown submarket averaged $34.40 per sq. ft., which is 15% higher than the metro average as a whole and ranked number two—only behind the CBD at $41.04—among Houston submarkets as of third quarter-end 2022. The asking rate is officially quoted for any given building and will differ from the ‘bottom line’ actual rental, after negotiations, known as the effective rate.

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