Q2 2015 Houston Office Market Research & Forecast Report
Houston’s office market leasing activity hit hard by oil price slump
Houston is known as the Energy Capital of the World, home to more than 5,000 energy related companies that make up just over half of the local economy. Houston’s Q2 2015 office market indicators reflect the dramatic drop in oil prices that occurred in Q4 2014 and the subsequent reevaluation and adjustments in growth plans implemented by the “upstream” sector of the energy market. The “mid” and “downstream” players remain very strong but tend to occupy less office space than the “upstream” companies.
Houston’s office leasing activity decreased 35.8% between quarters, recording only 1.8 million SF in Q2 2015. When compared to the very strong 5.5 million SF recorded 12 months ago in Q2 2014, leasing activity decreased by 67.5%.
Over 2.1M SF of new inventory delivered during Q2 2015. Fortunately, only 6.0% was vacant. Houston’s office construction pipeline totals 12.3M SF and 61.5% of the new product is pre-leased. The majority of the space is located in suburban submarkets and is scheduled to deliver over the next 12 months.
For the first time in 5 years, Houston’s office market posted negative net absorption, primarily due to tenants relocating to new buildings and companies placing excess space on the sublease market. For the most part, average rental rates remained flat, however, the average CBD Class A rental rate increased 2.7% from $41.96 per SF in Q1 2015 to $42.32 per SF.
The Houston metropolitan area created 62,300 jobs between May 2014 and May 2015, an annual increase of 2.1% over the prior year’s job growth. Sectors creating most of the jobs contributing to the annual increase include Professional & Business Services, mostly in legal services.
Vacancy & Availability
Houston’s citywide vacancy rate rose 110 basis points between quarters from 13.0% to 14.1%, and rose by 250 basis points from 11.6% in Q2 2014. Over the quarter, the average suburban vacancy rate increased 100 basis points from 13.0% to 14.0%, while the average CBD vacancy rate increased 150 basis points from 12.6% to 14.1%.
The average CBD Class A vacancy rate increased 50 basis point over the quarter from 9.5% to 10.0%, while the average CBD Class B vacancy rate rose 400 basis points from 18.3% to 22.7%. The average suburban Class A vacancy rate increased 160 basis points from 12.3% to 13.9%, and the average suburban Class B vacancy rate increased 50 basis points between quarters from 13.8% to 14.3%.
Of the 1,673 existing office buildings in our survey, 60 buildings have 100,000 SF of contiguous space available for lease or sublease. Further, 21 buildings have 200,000 SF of contiguous space available. Citywide, available sublease space totals 7.4 million SF or 3.3% of Houston’s total office inventory, but only 2.8 million SF of the available sublease space is currently vacant.
Available Sublease Space
Absorption & Demand
Houston’s office market posted 525,000 SF of negative net absorption in Q2 2015. The last time Houston’s office market posted negative absorption was in Q2 2010. Suburban Class A space posted the largest gain, with 522,000 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 Q2 include ExxonMobil Company (500,000 SF) moving into the third and last phase of its new north Houston corporate campus in The Woodlands submarket, Sasol (171,475 SF) moved into Woodbranch Plaza IV in the Katy Freeway submarket, Nabors Industries (98,400 SF) moved into One Commerce Green in the North Belt submarket, and Air Liquide USA Inc. (73,120) moved into a new building in the Katy Freeway submarket.
Although Houston’s office market has softened, the citywide average Class A and Class B rental rates remained flat over the quarter.
Surprisingly, the average CBD Class A rental rate increased 2.7% from $41.96 per SF in Q1 2015 to $42.32 per SF. In contrast, the average CBD Class B rental rate fell slightly by 1.0%.
The average suburban Class A rental rate remained steady while the average suburban Class B rental rate increased marginally over the quarter.
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