Houston Faces Mixed Results in Q424 Amid Declining Absorption and Limited Construction

EXECUTIVE SUMMARY

Q4 In Review
Houston’s office market faced mixed results in Q4 2024, reflecting broader economic trends. The market saw a dip in employment growth, with a slight increase in unemployment rates compared to earlier in the year. Net absorption turned negative for the quarter, resulting in a year-end total of -269,794 sq. ft., driven by weak demand across both Class A and Class B properties. Leasing velocity also declined year-over-year, while vacancy rates held steady at 26.1%, underscoring continued challenges in tenant retention and demand.

Houston Economic Update
The Houston unemployment rate ticked up to 4.6% in October from 4.4% in September where it had been holding steady for three months. A year prior, the Houston unemployment rate was 4.1%. Houston’s labor force grew an annualized 0.5% in October, which was a significant slowdown. From January through September, the average monthly labor force growth rate was 3.3%.

Houston dropped 5,164 jobs in October, but there were upward revisions to already-strong payroll growth in August and September that kept recent job growth strong. For the three months ending in October, employment in Houston grew an annualized 4.1%, with 34,488 jobs added. Year over year in October, Houston’s labor market grew below trend, with employment expanding 1.2%. Oil and gas grew the most, with year-over-year gains of 8.5%. Larger sectors such as trade, transportation and utilities and professional and business services grew

HOUSTON OFFICE MARKET OVERVIEW

Net Absorption Turned Negative in Q4 2024
In Q424, the Houston office market recorded a negative 418,959 sq. ft. of net absorption, this moved the 2024 year-end total back into negative territory at -269,794 sq. ft. Class A properties recorded negative 117,633 sq. ft. in 2024, while Class B properties recorded negative 152,161 sq. ft. Notable move-ins in late 2024 include Thyssenkrupp taking 41,880 sq. ft. at Energy Crossing II; PetroTal taking 16,892 sq. ft. at Park 10 Centre; and VSC (Village Serena Communities) taking 16,009 sq. ft. at Glenborough Tower.

Leasing Declined for Most Submarkets
Quarterly leasing velocity—comprised of new leases and renewals—stood at 2.9 million sq. ft.— down 21% from the 2.4 million sq. ft. in Q3 2024, but down from the 3.7 million sq. ft. recorded in the fourth quarter of 2023. Notable new leases signed that will impact future absorption numbers include Schweitzer Engineering, which signed a 32,293-sq.-ft. lease at Westchase Oaks; Sheppard Mullin which signed a lease for 29,771 sq. ft. at Texas Tower (T2); and Murphy Oil, which signed a lease for 23,652 sq. ft. at 9805 Katy Freeway.
Vacancy Rate Holds Steady at 26.1%.

The overall vacancy rate in Houston’s office market is 26.1%, this is unchanged over the past quarter but up 30 basis points from one year ago. Class A and Class B properties have vacancy rates of 27.5% and 24.1%, respectively. Among the submarkets, Greenspoint/North Belt and Sugar Land/Fort Bend have the highest vacancy rates at 45.8% and 33.8%, respectively. On the opposite end of the spectrum, the Pearland/South and Northeast submarkets have vacancy rates at 8.5% and 11.6%, respectively.

Deliveries and Construction Pipeline Continue to Decline
For Q424, new office deliveries were 31,111 sq. ft. This is down 83% from last year. Also, the construction pipeline has been trending downward and is currently at 1.3 million sq. ft. This is down 55% from one year ago. As far as recent construction deliveries, the most notable new delivery in 2024 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 in 2024 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 Q4 2024 stands at $261 million. This represents 132 office properties that sold for an average transaction price of $49 per sq. ft. and an average cap rate of 10.2%. Notable recent office sales transactions include Capital Commercial purchasing the 521,949-sq.-ft. Noble Energy Center I from Chevron. Capital Commercial has been one of the most active buyers of high vacancy office properties in the major Texas markets over recent years. Also, Ameeco Management purchased Sugar Creek on the Lake from Madison Marquette. The 516,523-sq.-ft. Class A property was 43% leased at the time of the sale.

Asking Rates Flat, up 1.4% Over Past Year
Like most quarters over recent years, rates have been moving in opposite directions when it comes to newer Class A properties versus more commodity type Class B properties. Class A Properties have continued to see slight increases year over year, while Class B properties continue to see moderate rate declines. The overall average asking rate is $30.13 per sq. ft. (full service), with Class A properties averaging $34.87 and Class B properties averaging $22.54 per sq. ft.

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