Houston’s office market faces its fair share of challenges at the start of 2023.

EXECUTIVE SUMMARY

Hybrid work is here to stay
Three years after the coronavirus outbreak, some Houston companies are moving forward with key commitments to office space and renewing current leases. While uncertainty continues to trouble the Houston office market, the flight-to-quality trend continues as employers look for space to retain current employees and attract new ones. Many businesses are encouraging a hybrid return to the office; however, some are leaning towards a return to the office in line with pre-pandemic attendance, believing company culture is built in the office. Acknowledging that hybrid working is a trend that is here to stay, the physical office will remain important for employees to build relationships, collaborate, and feel connected to the company culture.

Oil prices fall on global economy concerns
Oil prices fell for a second day on January 4 on worries about the strength of the global economy and surging Covid-19 infections in China. West Texas Intermediate, the U.S. standard, declined 2.2% to $75.23 a barrel. Contracts fell more than 4% on Tuesday, the first trading day of the year. According to Baker Hughes, the number of active U.S. rigs drilling for oil is at a current level of 627, unchanged from last week and up from 467 (34.3%) from one year ago.

Vacancy rate at 25%
The overall vacancy rate in the Houston office market was up 10 basis points quarter-over-quarter from 24.9% and unchanged year-over-year. The vacancy rate for Class A properties is 27.5%. In Q4 2022, overall net absorption broke even at positive 5,200 sq. ft., bringing the year-to-date amount to a positive 664,000 sq. ft. Of the 3.1 million sq. ft. currently, under construction, 61% of that space is available. The overall Houston average asking full-service rent is at $29.97 per sq. ft.—up from one year ago at $29.68 per sq. ft.—while Class A space in the Central Business District is averaging $41.15 per sq. ft.

HOUSTON OFFICE MARKET OVERVIEW

Houston office market space availability remains unchanged
Overall space availability, including current, sublease, and future vacancy, is at 29.9%, unchanged quarter-over-quarter, and up 110 basis points from 28.8% last year. The CBD ended Q4 2022 with an availability rate of 36.6%, second to the Greenspoint/North Belt submarket, which had a 48.8% availability rate, followed by the Energy Corridor at 36.5%. Sublease availability remains elevated at 8.4 million sq. ft. — the highest amount since Q3 2017 at 9.5 million sq. ft. 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 metro area’s total tracked inventory of 241 million sq. ft. Physical office occupancy in Houston registered 58.8%, as reported by Kastle Systems’ Back to Work Barometer mid-December.

Positive net absorption in Q4 2022
Net absorption in the Houston office market was positive 5,200 sq. ft. in Q4 2022, and year-to-date registered at a positive 664,000 sq. ft., both up significantly from last quarter and last year. Some recent activity reflects Houston’s office sector’s long-term challenges. In the second quarter, Baker Hughes signed a 130,000-sq. ft. lease at 575 Dairy Ashford Road, in the Energy Corridor. The company currently occupies 340,000 sq. ft. at its current headquarters office and adjacent buildings on Aldine Westfield Road in the Greenspoint submarket. Once the relocation is complete, in Q2 2023, the company will have reduced its Houston office space presence by more than 60% in the past two years.

Office development
Office construction is at 3.2 million sq. ft across 17 buildings, with 2 million sq. ft. (61%) 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 290,000-sq.-ft. Levit Green. The Medical Center office market has the third-lowest submarket vacancy rate in the Houston metro at 13.2%. Katy Freeway East has the second-lowest vacancy rate at 9.5%. In addition, 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 Q4 2022 in the Greater Houston area at $114.5 million. The year-over-year change in volume is down 86% from $823 million in Q4 2021. The primary capital composition for buyers in 2022 was made up of 67% private investors, 16% institutional, and 12% REIT/Listed. For sellers, the majority were 44% private investors, 34% institutional, and 12% REIT/Listed. A significant sales transaction in 2022 involved the 206,943-sq.-ft. 200 Park Place office building, situated on 1.27 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.

Leasing activity
At the end of 2022, quarterly leasing was still down more than 25% compared to levels averaged during the three years before the pandemic. Still, there are some bright spots. Some of the years largest transactions include EOG Resources renewing its lease for 374,000 sq. ft. of space at 1111 Bagby St., where its headquarters has been since 2007; Apache Corp. relocating its headquarters to Westchase from its longtime home in the Galleria area after signing an early lease renewal and expansion in Briarlake Plaza. Apache will occupy 328,000 sq. ft. at Briarlake Plaza, where it currently leases 210,000 sq. ft. in a lease that was set to expire in late 2024; Enbridge cut its requirement in half when it leased more than 290,000 sq. ft. at Energy Center V for the relocation of its Houston office. The company previously occupied more than 600,000 sq. ft. at 5400 Westheimer Court near the Galleria, and Bechtel, an engineering and construction firm, leased more than 282,000 sq. ft. in two buildings in CityWestPlace in Westchase. The company will relocate from 3000 Post Oak near the Galleria at the end of 2023.

Average asking rents
The Houston overall full-service average rates are at $29.97 per sq. ft., down from last quarter at $30.03 and up from one year ago at $29.68 per sq. ft. Asking rates for overall Class A space is $34.43, and Class B is $22.74 per sq. ft. Rent growth is mixed across Houston’s submarkets. Asking rents in the Midtown submarket averaged $34.07 per sq. ft., which is 14% higher than the metro average as a whole and ranked number two—only behind the CBD at $41.15—among Houston submarkets as of year-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