Q1 2015 Houston Office Market Research & Forecast Report
Houston’s Office Market Beginning to Feel the Effects of the Oil Price Slump
Houston’s office market indicators have begun to reflect the dramatic drop in oil prices that occurred in Q4 2014. This is no surprise as just over one-half of Houston’s economy is directly tied to the energy industry. Available sublease space increased by 33% between quarters from 4.5M SF to 6.0M SF. The good news is the majority of new inventory and projects under construction are significantly pre-leased and most proposed projects have been put on hold. This, coupled with a relatively low vacancy rate, should help keep Houston’s office market fairly healthy until energy prices rise.
Over 3.5M SF of new inventory delivered during Q1 2015 and about 68.0% of the new inventory is pre-leased including 1.5M SF of ExxonMobil’s North Houston campus.
Houston’s office construction pipeline is still over 14.0M SF of which 65.0% is pre-leased. The majority of the space is located in suburban submarkets and is scheduled to deliver in 2015.
Houston’s office market recorded 1.2M SF of positive absorption in Q1 2015, about one-half of what was recorded in the previous quarter.
The citywide average rental rate increased slightly between quarters; 0.9% from $27.12 to $27.35 per SF, and from $27.10 per SF one year ago. The average CBD Class A rental rate increased over the quarter; however, the average Class A suburban rental rate decreased.
The Houston metropolitan area created 96,700 jobs between February 2014 and February 2015, an annual increase of 3.4% over the prior year’s job growth. Sectors creating most of the jobs contributing to the annual increase include mining and logging, arts, entertainment & recreation, and accommodation & food services. Houston’s unemployment rate fell from 5.4% one year ago to 4.3%.
VACANCY & AVAILABILITY
Houston’s citywide vacancy rate rose 90 basis points between quarters from 11.6% to 12.5%, and rose by 70 basis points from 11.8% in Q1 2014. Between quarters, the average suburban vacancy rate increased 90 basis points from 12.0% to 12.9%, while the average CBD vacancy rate increased 10 basis points from 10.6% to 10.7%.
The average CBD Class A vacancy rate remained steady between quarters at 9.5%, and the average CBD Class B vacancy rate rose 60 basis points from 10.3% to 10.9%. The average suburban Class A vacancy rate increased 230 basis points from 9.9% to 12.2%, and the average suburban Class B vacancy rate decreased 20 basis points between quarters from 13.8% to 13.6%.
Of the 1,666 existing office buildings in our survey, 55 buildings have 100,000 SF of contiguous space available for lease or sublease. Further, 20 buildings have 200,000 SF of contiguous space available. Citywide, available sublease space totals 6.0 million SF or 2.8% of Houston’s total office inventory, but only 1.9 million SF of the available sublease space is vacant.
ABSORPTION & DEMAND
Houston’s office market posted 1.2 million SF of positive net absorption in Q1 2015, about one-half of the 2.5 million SF posted in the previous quarter.
Suburban Class A space posted the largest gain, with 670,117 SF of positive net absorption, the majority of which occurred in The Woodlands submarket.
Some of the larger tenants that moved into new space during Q1 include ExxonMobil Company (1,500,000 SF) moving into the second phase of its new north Houston corporate campus in The Woodlands submarket, EOG Resources, Inc. (248,411 SF) moving into Heritage Plaza in the CBD submarket, Shell Oil (336,000 SF), Academy Sports and Outdoors, LTD (200,000 SF) and PGS (139,778 SF) which both moved into buildings located in the Katy Freeway submarket .
Although Houston’s office market has softened somewhat, the average citywide rental rate increased slightly between quarters. The average citywide rental rate for Class A space rose marginally, while the average citywide Class B rental rate increased 1.7% from $20.64 per SF to $20.98 per SF between quarters.
The average CBD Class A rental rate decreased 1.9% from $42.75 per SF in Q4 2014 to $41.96 per SF. The average suburban Class A rental rate rose 1.6% from $32.36 per SF in Q4 2014 to $32.88 per SF. The average CBD Class B rental rate decreased marginally while the average suburban Class B rental rate rose 1.9% from $19.94 per SF to 20.31 per SF between quarters.
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