Demand for Class A Properties Increases and Vacancy Drops Slightly

EXECUTIVE SUMMARY

Q2 In Review

The Houston office market in Q2 2025 showed some positive gains, with net absorption increasing significantly to 757,641 sq. ft., a stark contrast to the previous quarter’s performance. Vacancy rates edged down to 26.2%, reflecting a 30-basis-point decrease from Q1 2025. Leasing activity also increased, rising to 2.7 million sq. ft., up 28.7% from the prior quarter. Submarkets, such as The Woodlands and CBD, contributed to positive absorption figures recording 419,095 sq. ft. and 118,190 sq. ft., respectively, buoyed by Class A demand. Construction deliveries increased 69.5%, adding 123,710 sq. ft. to office inventory. The construction pipeline trended up 23.6% to 1.4 million sq. ft. Rental rates decreased quarterly by almost $1.00 per sq. ft. to $28.89 per sq. ft. Class A properties’ rental rate rose slightly to $32.95 per sq. ft. from $32.83 per sq. ft., and the overall Class B average rental rate is $23.04 per sq. ft. Class B buildings continued to face moderate rate pressure.

Houston Economic Update

The Houston unemployment rate increased from 3.9% in April to 4.2% in May, and increased from 4.0% one year ago. Houston’s labor market recorded employment growth of 0.9% year-over-year, adding 29,600 jobs —a slowdown compared to the earlier momentum in the year.

That job growth was uneven across sectors. Oil and gas employment remained a standout, growing 4.6% year over year in 2024 (3,600 jobs), bolstered by increased Texas oil production and rising retail fuel prices into early 2025. Additional sectors also showed resilience, with other services growing at an annualized rate of 2.4% (3,200 jobs), education and health services expanding at a 2.2% annualized rate (9,900 jobs), and leisure and hospitality increasing at an annualized rate of 1.7% (6,400 jobs). Sectors that experienced job loss include Information at -1.7% (500 jobs), professional and business services at -1.3% (7,300 jobs), and construction at -0.6% (1,300 jobs).

MARKET OVERVIEW

Net Absorption Rose Sharply in Q2 2025

In Q2 2025, the Houston office market recorded 757,641 sq. ft. of positive net absorption, a significant increase from the 7,960 sq. ft. in Q1 2025. Class A properties contributed 904,947 sq. ft., while Class B properties experienced negative absorption of -147,306 sq. ft., highlighting a growing demand disparity. On a submarket level, The Woodlands and CBD led with 419,095 sq. ft. and 118,190 sq. ft. absorbed, respectively, while submarkets like Greenspoint/North Belt (-56,046 sq. ft.) and Galleria/West Loop (-52,046 sq. ft.) saw notable declines.

Leasing Declined Across Most Submarkets 

Quarterly leasing velocity—comprised of new leases and renewals—fell to 2.1 million sq. ft., down 28% from 2.9 million sq. ft. in Q4 2024. Notable leases in early 2025 include Mercuria signed a 64,775 sq. ft. lease at Kirby Grove, Skadden signed a 52,482 sq. ft. lease at Texas Tower, (which will take the property to 97% occupancy) and SM Energy Company signed an extension/ expansion for 41,454 sq. ft. at One Eldridge.

Vacancy Rate at 26.2%

The overall vacancy rate in Houston’s office market decreased to 26.2% in Q2 2025, down 30 basis points from 26.5% in Q1 2025 and 70 basis points from 25.9% a year ago in Q2 2024. Class A properties reported a vacancy rate of 27.6%, while Class B stood at 24.2%. Among submarkets, Greenspoint/North Belt and FM 1960/Hwy 249 had the highest vacancy rates at 48.8% and 40.0%, respectively, while Pearland/South and Northeast remained the lowest at 7.6% and 10.9%.

Deliveries and Construction Pipeline Rose Quarterly

New office deliveries in Q2 2025 totaled 123,710 sq. ft., up from 73,000 sq. ft. in Q1 2025, with contributions from Northeast (50,000 sq. ft.), Sugar Land/E Ft Bend (48,000 sq. ft.), and Katy/Grand Pkwy W (25,710 sq. ft.). The construction pipeline rose to 1.4 million sq. ft., up 23.6% from 1.1 million sq. ft. in Q2 2025.

Investment Sales Trends

In the second quarter of 2025, 44 office properties totaling 9.9 million sq. ft. were sold. Total sales volume was $69.3 million, with an average price per square foot of $80 per sq. ft., and an average cap rate of 7.8%. Notable sales in early 2025 included
Clarion Partners selling the two-building portfolio known as Westchase Park, totaling 569,825 sq. ft., for a rumored price of $58.95 million or $103 per square foot. The property was 65% leased at the time of sale. A notable transaction in Q2 2025
was Dominus Commercial’s purchase of the three-building (806,541 sq. ft. in total) office portfolio, Brookhollow Central, from Hertz Investment Group at an undisclosed price.

Leasing Velocity Increases

Quarterly leasing velocity—comprised of new leases and renewals—rose to 2.7 million sq. ft., up 28.7% from 2.1 million sq. ft. in Q1 2025. Highlighting the uptick in leasing activity this quarter, Parker Wellbore signed a direct lease on floors 3 and 4 at
CityWest Place IV following their sublease term. In the CBD submarket, Black Stone Minerals renewed their lease at 1001 Fannin for 55,082 sq. ft. while Gibson Dunn signed on for a renewal and expansion, growing their footprint to 69,453 sq. ft. at 811 Main.

Asking Rates Decrease by 3.5%

Average asking rental rates declined by almost $1.00 per sq. ft. in Q2 2025, with the overall gross asking rent at $28.89 per sq. ft., down 3.5% from $29.93 in Q1 2025 and down 2.8% from $29.72 in Q2 2024. Class A properties averaged $32.95 per sq. ft., while Class B properties averaged $23.04 per sq. ft. Premium submarkets like CBD ($34.71 per sq. ft.) and Greenway Plaza ($33.59 per sq. ft.) continued to command higher rents, though Class B properties in weaker submarkets faced ongoing competitive pressure.

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