OFFICE MARKET ASSESSMENT
Houston’s office market fundamentals show continued signs of improvement as key drivers of the economy strengthen. The office sector registered positive absorption for the second straight quarter with 1.2 MSF of direct space absorbed in Q1. The strong quarterly gain, the largest since the pandemic’s onset, helped reduce the direct vacancy rate by 60 bps to 23.3% in Q1 after hitting a new high in 4Q21.
The Class A sector accounted for the bulk of the gains with nearly 1.1 MSF of direct net absorption in Q1, marking the second consecutive quarter of absorption growth – which helped push direct vacancy levels down by 70 bps to 24.9%.
Newly completed construction projects captured three-fourths of the quarterly absorption gains with the largest move-in involving Hewlett Packard Enterprise occupying 440k SF in CityPlace in a relocation from their corporate-owned 2 MSF campus which just sold to an affiliate of Mexcor International. The new owners will immediately occupy a portion of the space, but a fraction of the campus is expected to become part of the competitive inventory after redevelopment.
Other noteworthy move-ins contributing to the absorption gains included Vinson & Elkins (215k SF at Texas Tower), Healthstore Holdings (126k SF at Millennium Tower), Cadence Bank (82k SF at Park Towers South), and Buckeye Partners (73k SF at 200 Park Place).
Sublease availability remains elevated at 7.7M SF but has managed to modestly decline since hitting its peak at mid-year 2021. Many companies have already rightsized their footprint to meet the challenges of the pandemic so limited shadow-space remains on the sidelines as potential sublease space.
Leasing volume totaled 2.3 MSF in Q1 but remains 49.6% below the pre-pandemic quarterly average from 2017-2019 largely due to the lack of large new deals in the market. The largest deal inked in Q1 involved Enbridge’s 293k SF sublease at Energy Center Five, which will relocate from the Galleria and downsize their footprint by almost half.
The impact of hybrid and remote work strategies is still unclear, but many occupiers are still exploring ways to optimize and reconfigure their workspace to meet new challenges and work patterns.
Landlords continue to hold face rates relatively steady but the gap between asking and effective rates remains wide as landlords are offering aggressive concession packages, such as rental abatement and tenant improvement allowances, aimed at attracting and retaining tenancy.
Developers delivered 738k SF of new product in Q1, with the largest completion involving HPE’s build-to-suit comprised of two buildings totaling 440k SF in CityPlace. New construction remains active with 2.0 MSF underway currently 19% pre-leased with 528k SF of this new product slated to deliver by year-end 2022.
Touring activity has risen due to increased business confidence though it has yet to translate to notable deal volume. But, as the office market recovery gathers steam in 2022, newer and amenity-rich Class A office product in prime locations are expected to capture the recovery in demand, occupancy, and rents at the expense of older buildings. Pent-up activity should help improve leasing fundamentals and generate more occupancy as companies execute on previously delayed long-term space decisions.