Q4 2015 Houston Office Market Research & Forecast Report
Houston’s office market vacancy rate continues to rise amid more energy industry lay-offs
Known as the Energy Capital of the World, Houston is home to most major energy companies and its economy is negatively affected by low oil prices. Houston’s Q4 and YE 2015 office market indicators are, in large part, a response to the dramatic drop in oil prices that occurred in Q4 2014 and the subsequent reevaluation of and to adjustments in growth plans implemented by the “upstream” sector of the energy market. The “mid” and “downstream” players remain strong but tend to occupy less office space than the “upstream” companies. Further, other industries that provide services and goods to the energy industry, such as engineering, finance, manufacturing and law firms, are also feeling the effects, and the majority of these companies are office users.
Although Houston’s city-wide vacancy rate rose by only 80 basis points over the quarter, the annual rate rose significantly, increasing by 430 basis points from 11.1% in Q4 2014 to 15.4% in Q4 2015. The increase in the amount of sublease space placed on the market during 2015 was a major factor. Houston’s available sublease space more than doubled between Q4 2014 and Q4 2015, increasing from 3.8M SF to 8.0M SF. The majority of this space was previously leased by growing energy companies addressing their future expansion needs. Houston’s office leasing activity declined 53.5% over the year. Tenants are renewing existing leases, but in today’s market, more companies are contracting, not expanding.
Over 3.2M SF of new inventory delivered during Q4 2015 and 58.3% of the space is pre-leased. Houston’s office construction pipeline totals 8.0M SF and 64.3% is pre-leased, which is significantly less than the 17.0M SF under construction one year ago. The majority of the new space is located in suburban submarkets and is scheduled to deliver over the next 12 months.
Houston’s office market posted 652,900 SF of positive net absorption in Q4 2015. This pushed year-end positive net absorption to 1.7M SF, an annual total less than previous year’s average net “quarterly” absorption. Average office rental rates have remained relatively flat over the year.
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