Subscribe to Our Research Content

  • This field is for validation purposes and should be left unchanged.


Houston Office Commercial Real Estate Market Economic Data and Information - New Year Q4 2018 Report

Download the PDF



Office market vacancy drops

Houston’s overall vacancy rate decreased to 21.2% in Q4 2018, down 50 basis points quarter-over-quarter and up slightly at 10 basis points year over year. Net absorption ended Q4 2018 in positive territory for the second consecutive quarter at 1,652,979 sq. ft., closing out 2018 with a year-to-date total of positive 433,245 sq. ft. This marked the first time the Houston office market ended a calendar year with positive absorption since Q4 2014 when the year-end total registered at 4.6 million sq. ft. While overall occupancy in the Houston office market remains below 80%, the current rate of 78.8% still marks Houston’s highest quarterly level recorded in 2018. The overall average asking gross rent is up $0.09 at $28.99 per sq. ft. from last quarter, and $1.00 from a year ago—a 3.6% increase.

Houston’s job growth slower, although still above historical average

The outlook for Houston tempered as leading indicators mostly slowed over the past three months, based on data from the Federal Reserve Bank of Dallas – Houston Economic Indicators. Revisions to data from earlier in the year show that 2018 Houston employment growth has been healthy but not as strong as early estimates suggested. Houston jobs were revised down from an annual 3.3% from December 2017 to October 2018, to 2.4%. While slower, growth is still above the historical average rate of 2.1%. The revised data puts Houston on track to have added about 73,000 jobs in 2018. The biggest revisions of jobs removed were in professional and business services and construction. Leading year-to-date job growth sectors are now manufacturing, education and health services, and construction. Houston should experience healthy economic growth in 2019 and 2020, as long as outside influences such as energy prices, the ongoing U.S. expansion, and global growth continue in Houston’s direction. Net migration, construction, and consumer confidence—Houston’s inside influences—must also stay in alignment.

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

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

Broker’s Perspective

With 2018 behind us, I believe I echo many of my industry colleagues when I say that it feels like the market is finally recovering, albeit slowly. And as the year progressed, even the pace of the recovery seemed to pick up. Absorption not only more than doubled from the third to fourth quarter, but tripled year-over-year. Additionally, total availability decreased by 80 basis points during the last three months, despite more than 700,000 sq. ft. delivering.

The fourth quarter was an active period for sublease deals, with sublease space accounting for four times more square feet of absorption than direct space. Large subleases in big submarkets continue to transact at roughly half of market rates—average direct asking rents were up roughly a dollar over last year—though the smart money is on sublease pricing increasing going forward.

A significant portion of the positive absorption posted during the fourth quarter was due to ConocoPhillips moving into 597,000 sq. ft. at Energy Center IV—it may be hard to remember now, but this deal was announced back in April 2013. Notwithstanding that, it underscores what many in the industry are feeling at present.

The flight-to-quality continues, as Class A buildings citywide absorbed 1.2 million sq. ft. for the year, while Class B buildings posted negative numbers to the tune of 880,000 sq. ft. Though we are experiencing historically high availability for our market, new trophy towers continue to fill, with significant chunks of space committed to during pre-leasing.

With WTI dipping into the mid $40s as the year closed, what can we expect next year? While an obvious correlation exists between oil and the Houston office market, that relationship has been strained as our diverse economy has been growing. Rising interest rates, bear market signals, and pundits feel we may be near a correction in the national economy; however, Houston employment continues to grow and the Greater Houston Partnership forecasts 71,000 new jobs in 2019. With these factors in mind, we remain cautiously optimistic that the office market will continue into recovery, though we are likely still six-to-eight quarters away from an equilibrium market.

Nick Terry

Nick Terry
Senior Associate
NAI Partners


Positive net absorption in Q4 2018

During the fourth quarter of 2018, Houston’s office market saw a tremendous increase in the number of tenants moving into space compared to previous quarters this year. The aggregate effect of these net occupancy gains was just under 1.7 million sq. ft. of positive absorption. In the fourth quarter direct space was responsible for 344,000 sq. ft., and sublease space represented 1.3 million sq. ft. The increased demand numbers have led to vacant office space falling to 21.2%, or to put it another way: about 950,000 sq. ft. less of office product lies empty. The amount of total office inventory that is being marketed for lease dropped by 80 basis points quarter-over-quarter to 25.8%. The difference between this figure and the vacancy rate reflects expected future move-outs. Space being marketed for sublease represents 8.2 million sq. ft. or 13.6% of the 60.2 million-sq.-ft. total availability figure.

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

Demand for brand-new office buildings

Office construction is at 2.3 million sq. ft. across eight buildings with 55.3% of the space available for lease. Capitol Tower at 800 Capitol St. is still on schedule for a delivery date in mid-2019, and with the recent lease signing of Chicago-based law firm Winston & Strawn, the project is currently up to 81% preleased. Winston & Strawn signed a 15-year deal to occupy 62,515 sq. ft. of the 750,000-sq.-ft. tower with a move-in date of first quarter 2020. Bank of America agreed to lease 210,000 sq. ft. in the tower in April 2017, and Houston-based Waste Management recently inked a deal for 284,000 sq. ft.

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

Another sign of the flight-to-quality is PROS Holdings’ headquarters relocation to the recently opened Kirby Collection in Houston. The cloud software company plans to move from its current space at 3100 Main St. to 118,000 sq. ft. at 3200 Kirby Drive. PROS’ lease will anchor the 13-story office portion of the mixed-used development. The three largest office leases this year in Houston—involving Bank of America, United Airlines and law firm Vinson & Elkins—each suggested a desire to move from a vintage building to a brand-new building.

Investment sales activity slows in 2018

Real Capital Analytics data reports year-to-date office sales volume for 2018 in the Greater Houston area at $2.4 billion. The fourth quarter sales volume was $252.2 million compared to fourth quarter 2017 at 1.7 billion, resulting in a year-over-year quarterly volume change of -85.6%. The primary capital composition for buyers in 2018 was made up of 49.3% institutional, and 35.8% private. For sellers, the majority was 40.1% REIT/listed, and 27.1% institutional. In consideration of the slower investment activity, the bright side is that office deliveries were comparatively small in 2018, right at 1 million sq. ft. At the beginning of 2017, there was roughly 3.7 million sq. ft. of office space under construction in Houston.

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

NAI Partners Sublease Index down

The NAI Partners Sublease Index—measured by the amount of sublease space as a percentage of total available space—registered at 13.6% near the end of December. Space currently being marketed for sublease represents 8.2 million sq. ft., compared to this time last month at 8.5 million sq. ft., a decrease of 3.5%. There has been a 32.7% drop in sublease availability since the third quarter of 2016, when it reached its high point of 12.2 million sq. ft. Many factors—including lease expirations and companies choosing to remove sublease space from the market—have contributed to the decrease and are expected to continue to do so going into 2019.

Houston Office Commercial Real Estate Market Economic Data and Information - Investment Trends graph

There is currently a total of 35.8 million sq. ft. of available Class A space—both direct and sublease—across Houston. Sublease space makes up 18.3% (6.5 million sq. ft.) of that total. Of the 22.4 million sq. ft. of total available Class B space, sublease space accounted for 7.0%, or 1.5 million sq. ft. While Class A product still comprises a significantly elevated amount of available space, as the percentage change in availability is up 125% since Q3 2014; Class B is actually beginning to stabilize somewhat, as its percentage change in availability since Q3 2014 is at 39%.

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

Average asking rents increase

The market saw overall full-service average rates increase $0.09 to $28.99 per sq. ft. from last quarter, and $1.00 from a year ago. Although concessions such as free rent and tenant improvement allowances make posted rents less meaningful as a market indicator, the price of Houston’s office space is climbing. The highest-quality space, with the best location, and ease of accessibility will generate the highest rents. Asking rates for Class A space in the CBD are at an average of $40.19 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 Galleria/West Loop submarket, a 20,000 sq. ft. sublease recently leased for around 40% below direct rent rates. In addition, a comparable amount of sublease space in Greenway Plaza reported rents at 66% less than that submarket’s direct rent rates.

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

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

We Want to Hear From You

  • This field is for validation purposes and should be left unchanged.