July 08 2021

Houston Office Market Report – Second Quarter 2021

OFFICE MARKET ASSESSMENT

Houston’s office market fundamentals continue to face downward pressure resulting from the lingering effects of the COVID-19 pandemic. Leasing activity has slightly picked up but remains limited, as many tenants are still assessing their future needs regarding headcount, flexible scheduling, and space design.

The office sector posted negative absorption for the sixth consecutive quarter with 604k SF of direct space becoming vacant in Q1, pushing the YTD total to 1.5 MSF of red ink. This contraction combined with the delivery of new product, has pushed the overall direct vacancy rate up 110 bps to 23.1% since year-end 2020, reaching its highest level since the 1980s.

The Class A property sector registered 452k SF of red ink during the first half of 2021 but is showing signs of stabilization after recording 2.6 MSF of occupancy losses in 2020. Meanwhile, Class B properties have posted 997k SF of occupancy losses YTD as recent business contractions and a flight to quality trend continues to impact the sector.

Leasing volume totaled only 2.0 MSF in 2Q21 – representing a 50.3% drop below its 5-year quarterly average. Tour activity has risen due to increased business confidence but has yet to translate to notable deal volume.

It remains to be seen when significant demand will return to pre- Covid-19 levels, but pent-up activity is expected to emerge in the coming quarters and positively impact the market as those users that delayed decisions are approaching their lease expirations and evaluating their future space needs.

Sublease inventory rose for the fourth consecutive quarter by 821k SF to 8.0 MSF in 2Q21 but remains below its oil-crises peak of 12.1 MSF in 3Q16. Additional sublease space could be added to the market resulting from M&A activity and the COVID-related economic impact, but also as companies get back to work and determine post-COVID headcount.

Landlords continue to hold face rates relatively steady but the gap between asking and effective rates is widening. Concessions, such as rental abatement and tenant improvement allowances, were already quite generous prior to COVID-19, but have become increasingly aggressive for larger tenants with good credit seeking to effectively reduce their occupancy expense.

The full impact of remote work has not yet been felt but occupiers continue to explore ways to increase the flexibility of lease terms and obligations and some landlords are beginning to accept shorter-term lease renewals and extensions as a way to secure tenants.

The citywide direct vacancy rate is expected to climb through the end of the year with 3.0 MSF slated to deliver in 2021. Although Houston’s office sector will remain challenged for the remainder of the year, there are increased signs of stabilization as we move into 2022.

As the economic recovery continues and the office sector enters its much-anticipated recovery over the next 6 months, trophy and Class A buildings are expected to outperform the broader market and experience a faster recovery at the expense of older office buildings.

[Click here to download the full report]

©2021 Madison Marquette, A Capital Guidance Company. All rights reserved.

CapitalGuidance-Logo-KO

Site Design: Connect CREative