April 15 2021

Houston Office Market Report – First Quarter 2021

OFFICE MARKET ASSESSMENT

The Dallas-Fort Worth office market fundamentals continued to deteriorate with occupancy losses totaling 1.6 MSF of direct space in Q1 largely attributed to consolidations, bankruptcies, and downsizing, which comes on the heels of 2.7 MSF of red ink last year.

These significant occupancy losses, coupled with the delivery of 2.6 MSF of new product and renovation completions over the past year, has pushed the citywide direct vacancy rate up 240 bps to 21.8% yearover- year, reaching its highest level since the early 1990s.

The Class A property sector posted negative 311k SF of direct net absorption in Q1 and has experienced 1.6 MSF of occupancy losses over the trailing 12 months. Class B properties registered 1.2 MSF of occupancy losses in Q1 and 2.7 MSF of red ink over the prior 12 months as business contractions have severely impacted the sector.

Leasing volume totaled only 2.0 MSF in 1Q21 representing a 56.4% drop below its five-year quarterly average as many tenants have deferred leasing decisions. Even though leasing activity still lags its normal pace, inquiries and tour activity has recently picked up as users that had postponed leasing decisions are approaching their lease expirations and are re-evaluating their future space needs.

Sublease inventory slightly rose by 204k SF in 1Q21 but has jumped by 3 MSF over the past 12 months to reach an all-time high of 8.9 MSF. Additional sublease space could be added to the market in the months ahead as companies get back to work and determine post- COVID headcount and space needs.

Though office rent growth had begun tapering off prior to the on-set of COVID-19, rental rate contraction has been relatively modest, with many landlords offering greater concessions on tenant improvement allowances and free rent in order to preserve face rates.

With subdued demand and nearly 3.6 MSF of office space slated to deliver in 2021, we expect the vacancy and availability rates to rise through the end of the year. However, newer buildings will continue to perform better than the older inventory as the “flight to quality” continues.

Speculative construction projects that have yet to kick off are likely to remain sidelined in the near term, as demand and leasing activity are expected to remain below pre-Covid-19 levels until economic activity returns to normal levels.

The full impact of remote work has not yet been felt but occupiers will likely become more focused on flexibility and office utilization rates through termination and contraction rights to become more nimble as their workplace needs may change over time.

It remains to be seen when significant demand will return to pre- Covid-19 levels, but Dallas-Fort Worth is expected to outperform and recover faster than other major markets as pent-up activity and inbound corporate relocations will positively

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