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Houston Office and Industrial Markets Strengthen with Positive Absorption and New Spec Construction

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Houston’s office and industrial markets report significant leasing activity with positive net absorption and several speculative construction projects breaking ground, according to quarterly market research compiled by Commercial Gateway, the Commercial Division of the Houston Association of REALTORS®.

Citywide, the office market recorded overall positive net absorption of 1.3 million square feet in the third quarter of the year, with Class A space recording its sixth quarter of positive absorption of 1.4 million square feet. This quarter’s absorption is primarily due to two major tenants occupying space in their new, namesake buildings in the Central Business District (CBD): Hess moved into its 844,763-square-foot building, and BG Group occupied its 354,175 square feet in its new building along with a couple other tenants. Absorption is the difference in occupied square feet, so the Hess and BG Group spaces were not counted as absorbed until they actually moved in this quarter.

Positive office absorption will continue as two significant leases were signed in the last days of the quarter. GE Oil & Gas is taking over Westway Park III, an 181,814-square-foot building, along with additional space in the adjacent Westway Park II, while BP has signed for all of Three Eldridge Place, a 305,885-square-foot building; both buildings were finished in 2009 and were not previously occupied. The two companies are reported to begin moving in their space during fourth quarter.

Class B buildings offset the leasing activity in Class A, accounting for negative absorption of 104,582 square feet, the fifth consecutive quarter of negative absorption, with a total negative 704,272 square feet to date. The effects of company mergers and downsizings especially in the CBD are still on the horizon, although there are indications that some Class A space is being taken before it hits the direct market.

Construction activity is continuing in the suburban markets after last quarter’s Uptown/Galleria BBVA Compass building broke ground. Nexen Tower at 945 Bunker Hill is the latest building to start construction, along with CityCentre III and IV, all three in the West submarket. Other projects in the North submarket have been discussed but none yet started.

Both vacancy rates and rental rates showed minimal drops this quarter. The current 14.0% vacancy rate is marginally lower than last quarter’s but is slightly higher than the 13.9% vacancy rate of a year ago. The overall annual weighted averaged gross rental rate quoted for this quarter of $22.70 per square foot is 1.9% lower than the same quarter last year, which was $23.13. By contrast, the CBD’s quoted rental rates showed a 3.5% increase to $30.63 per square foot from a year ago’s $29.58.

Rental rate concessions vary across the board, but sublease rates in quality spaces with long terms are close to matching rates quoted for direct space. Overall sublease space increased to over 3 million square feet this quarter, but this amount is lower than the 3.4 million reported a year ago. Sublease space continues to fluctuate as long-term, quality space is added and then leased before it enters the direct market.

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Patsy Fretwell is a senior market analyst with Commercial Gateway and has more than 20 years of experience in real estate market research. She can be reached at patsy@commgate.com.

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