More Space for Space: Intuitive Machines touches down at Houston Spaceport

EXECUTIVE SUMMARY

Q3 In Review
By the end of Q3 2023, the overall vacancy rate in the Houston Office market rose 40 basis points quarter-over-quarter, from 24.5% to 24.9%. Hybrid work, higher interest rates, and preference for higher-quality space have contributed to tenants downsizing and vacating existing workplaces. Leasing activity decreased 47% from 4.0 million sq. ft. in Q2 2023 to 2.1 million sq. ft. in Q3 2023. Year-to-date, leasing activity registered at 9.5 million sq. ft. On the flip side, deliveries are at 308,077 sq. ft., nearly tripling from the prior year’s 111,924 sq. ft., bringing the year-to-date total to 801,077 sq. ft. Lastly, the average asking rent surpassed $30 per sq. ft., currently standing at $30.24 per sq. ft.

Houston Economic Update
Houston’s unemployment rate increased to 4.9% in August 2023, slightly up from 4.8% in July 2023. The metro’s jobless rate lagged the state’s and the nation’s rates at 4.5% and 3.9%, respectively. Houston’s employment stood at 3.3 million in August 2023. The largest job gains by sector included: other services (+3,900 jobs, 3.3%), leisure and hospitality (+3,400 jobs, 1.0%), and financial activities (+1,800 jobs, 1.0%). The largest job declines by sector included: professional and business services (-3,300 jobs, -0.6%), construction (-2,300 jobs, -1.0%), and trade, transportation, and utilities (-600 jobs, -1.0%).

HOUSTON OFFICE MARKET OVERVIEW

Leasing Momentum Tapers Down From Prior Quarter
Quarterly leasing velocity—which is comprised of both new leases and renewals—stood at 2.1 million sq. ft. during the third quarter—down 47% from 4.0 million sq. ft. in Q2 2023. Year-to-date, leasing activity registered at 9.5 million sq. ft., compared to the prior year-to-date figure of 12.7 million sq. ft. Next Decade, LNG inked one of the largest leases for the quarter— a 90,034-sq.-ft. lease of Class A office space at 1000 Louisiana Street in July 2023. Tenant preference for smaller, higher-quality space has continued to impact leasing activity in recent months. Gulf Cos., a global engineering firm, signed a lease for 52,148 sq. ft. of Class A office space at 1080 Eldridge Parkway in July 2023, downsizing from their 115,000-sq.-ft. footprint at 16010 Barkers Point Lane—the company’s move is scheduled for April 2024.

Negative Net Absorption in Q3 2023
Net absorption—move-ins minus move-outs—remains in negative territory at -858,651 sq. ft. in Q3 2023, plummeting from -94,765 sq. ft. in Q2 2023. Year-to-date, net absorption is at -676,849 sq. ft. NOV, Inc. vacated a three-building, 337,019-sq.-ft. office campus near the corner of Parkwood Circle Drive and Beechnut Street in August 2023, marking one of the largest contributors to negative net absorption in Q3 2023. Another notable move-out was SNC-Lavalin leaving 156,499 sq. ft. at 919 Milam Street. The specific date was not disclosed by CoStar.

Vacancy Rate Increases to 24.9%
The overall vacancy rate in Houston’s office market rose to 24.9%, increasing 40 basis points from the prior quarter (24.5%). Class A and Class B properties have vacancy rates of 26.7% and 24.6%, respectively. Class A submarkets with the greatest year-over-year increases in vacancy rates include: Gulf Freeway/Pasadena (27.3% to 33.3%), Midtown (17.3% to 20.0%), and Energy Corridor (27.0% to 29.6%). Class B submarkets with the greatest year-over-year increases include: Southwest (17.7% to 22.7%), Gulf Freeway/Pasadena (15.6% to 18.2%), and East Fort Bend/Sugarland (21.1% to 22.4%).

Deliveries Nearly Tripled From Prior Quarter
By the end of Q3 2023, deliveries in the Houston office market had increased to 308,077 sq. ft. Year-over-year, deliveries nearly tripled from 111,924 sq. ft. Year-to-date, deliveries are at 801,077 sq. ft.—with the NASA/Clear Lake/SE and the South Main/Medical Center submarkets accounting for 67% of the space delivered. Intuitive Machine’s headquarters—a 125,000-sq.-ft. office building built in July 2023 at 13150 Space Center Boulevard (Houston’s Spaceport) accounted for one of the largest deliveries of the quarter. Office construction is at 2.6 million sq. ft. across 15 buildings, with 670,657 sq. ft. (26%) available for lease.

Investment Sales Trends
Year-to-date, CoStar Capital Market Analytics reports the cumulative 12-month sales volume for 2023 at $558 million in the Houston office market. With 527 deals completed thus far in 2023, the average transaction price currently stands at $113 per sq. ft. with an average transaction cap rate at 7.6 %. A notable transaction in Q3 2023 included Chevron Phillips Chemical, a polymer and petrochemical provider, closing on a 6-story, 360,000-sq.-ft. office building at 9500 Lakeside Boulevard in August 2023. The property was sold by development company JD Warmack Woodlands LP for $34 million. Chevron Phillips Chemical plans to move into the Research Forest Lakeside 3 Building by early 2025.

Rent Once Again Surpasses $30 Per Sq. Ft.
The Houston office overall full-service average rate stands at $30.24 per sq. ft., up slightly from the previous quarter’s $29.73 per sq. ft., and the previous year’s $30.10 per sq. ft. Asking rates for overall Class A and Class B space are at $35.20 per sq. ft. and $23.09 per sq. ft., respectively. Submarkets with the highest quarter-over-quarter increases in asking rates include the CBD at $42.11 per sq. ft. (3.6%), followed by Greenspoint/N Belt at $17.76 per sq. ft. (2.0%).

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