Houston Office Market Summary
Houston’s commercial real estate market finished out 2016 with decreased leasing activity in both office and industrial sectors, but more confidence and hope for the next few years, according to quarterly market research compiled by Commercial Gateway, the commercial division of the Houston Association of Realtors (HAR).
The fourth quarter reported direct negative net absorption of 445,245 square feet of office space primarily due to vacancies created by firms like Exxon Mobil whose vacant sublease space in Greenspoint converted to vacant direct space. Absorption for the year totaled 681,862 square feet, once again primarily due to multiple owner-occupied projects including Phillips 66 and National Oilwell Varco in Westchase, accounting for more than 1.6 million square feet in their new buildings, and Hillcorp with another 515,025 square feet in the Central Business District (CBD). Other recent completions including the Greater Houston Partnership’s building in the Central Business District and Regions’ Financial Center in Greenway Plaza helped to offset increasing vacancies in Class A properties. For the year, Class A properties recorded absorption of almost 2.1 million square feet, offset by Class B and Class C properties’ year-end negative absorption, a negative 1.3 million square square feet and a negative 109,534 square feet, respectively.
Space left behind by various firms occupying those new properties are showing up as direct space and affecting the vacancy rate, which continues to climb. The current 16.4% direct vacancy rate is up from the 15.9% vacancy recorded last quarter, and also up from the 13.9% recorded during the same quarter in 2015. Fort Bend County is the only submarket with a year-end single-digit vacancy rate at 9.4%, and only three submarkets, the CBD, Fort Bend and Southeast, are reporting Class A vacancy less than 10.0% at year-end. Class A space overall is 15.0% vacant, while Class B is overall 19.6% vacant and Class C is 12.3% vacant.
The huge subleases added to the market during 2016 are examples of the changing economy related to the energy downturn, which is clearly reflected in the record-level direct vacancy when combined with the additional 10.2 million square feet of available sublease space. Although total sublease space actually saw a decrease from third quarter, that drop resulted from Conoco Phillips taking back its new 600,000-square-foot building from the sublease market combined with both limited leasing activity and other sublease space coming back on as direct, like Exxon’s Greenspoint properties.
Currently at 10.2 million square feet, Houston’s office sublease market has almost doubled in the past year, when Fourth Quarter 2015 statistics reported by Commercial Gateway totaled 6.7 million square feet. Regarding location, more than 79% of all sublease space is located in five market areas. The CBD led the way with 25.5% of the total as Shell Oil added more sublease space at One Shell Plaza. The Energy Corridor is second with 17.6%, Uptown is third with 13.8%, Westchase follows closely at 12.8%, and Greenspoint now offers 9.0% of the total sublease space. Broken down by spaces, currently 44 sublease listings are marketing more than 50,000 square feet, with nine of those reporting contiguous blocks of more than 100,000 square feet.
Only one smaller building, the Dave Ward Crime Stoppers building, was completed during the fourth quarter. Absorption will be counted for that building during the first quarter of 2017 along with space from the new BHP Billiton’s Tower in Uptown. BHP Billiton will reportedly occupy that space during first quarter and has already added about 320,000 square feet of its current space to the sublease market. Year-to-date, 19 properties totaling more than 6.1 million square feet were completed in 2016; as of year-end, the buildings are collectively 72.1% leased.
Construction starts have halted for the most part since the first quarter, with only office buildings in mixed-use or boutique office projects breaking ground. Overall, the Houston under-construction office market has 10 properties totaling 2.4 million square feet, of which 609 Main at Texas represents almost half of the total and is the largest spec building. Collectively, the under-construction buildings are about 48.1% preleased. Scheduled for completion during first quarter, 609 Main has reported several new deals: one law firm, Kirkland and Ellis, has doubled its previously pre-leased space for a total of 105,000 square feet on the top four floors, while Russell Reynolds Associates, an international search firm, has preleased 15,000 square feet in the new tower. These firms join a couple other law firms who previously announced signing up for two floors each, and United Airlines, who committed to 225,000 square feet of the new building.
The most positive leasing activity for the year includes the largest office lease recorded for 2016: Houston-based American Bureau of Shipping, which will reportedly lease 303,127 square feet in a new building in Springwoods Village, a 60-acre mixed-use development in north Houston. Another major deal for that project was announced in early January: HP reportedly is committing to 378,000 square feet in two new buildings to house about 2,400 employees. Construction will be starting early this year on both projects, with completions scheduled for mid- to late-2018. No mention was made of either firm eventually adding any of their current space to the sublease market.
Concessions are becoming more commonplace in the market, even though quoted rental rates have remained steady. Rental rates showed a slight increase from the past quarter and an increase from the past year with the current overall averaged weighted rental rate of $28.27, up from last quarter’s $28.11 rate and up from $27.81 from last year’s fourth quarter. Class A rates, now at $34.26 citywide and at $42.78 in the CBD, experienced slight increases from last quarter. Quoted rents for sublease space increased 10.4% from $22.44 last quarter to $24.78 this quarter.
Houston Industrial Market Summary
Houston’s industrial market continued to expand during the fourth quarter with positive direct net absorption of 1.0 million square feet, according to statistics compiled by Commercial Gateway. Absorption for 2016 totals a positive 8.5 million square feet, with almost half of that attributed to the third quarter occupancy of Daikin Industries’ 4 million-square-foot manufacturing and distribution facility, reported as the largest concrete tilt-wall building in the world.
This quarter’s absorption represents the 28th consecutive quarter – over six years – of positive absorption, with seven quarters recording more than 2 million square feet each and more than half recording more than 1 million square feet. The year-end absorption totals include almost 5.7 million square feet of warehouse-distribution space along with 4.2 million square feet of manufacturing space. Light industrial space offset the positive levels with a negative 1.3 million square feet along with a negative 78,957 square feet for flex/R&D space.
Vacancy rates have increased slightly to 6.5% from 6.1% last quarter and the same quarter last year due to both slower leasing activity in some areas along with several projects coming online with no preleasing. Vacancy for warehouse/distribution space citywide is 6.7% with manufacturing space at 3.7%.
Almost 2.5 million square feet in 13 buildings came online during the fourth quarter, increasing the total square footage completed in 2016 to 11.5 million square feet in 52 buildings. The newly completed projects are collectively 68.5% leased with an average $9.13 rental rate. The new buildings contributed almost 7.7 million square feet of absorption.
Construction activity is still high, with many projects underway and many other projects proposed. Currently, 51 buildings representing 5.1 million square feet are underway. The largest build-to-suit is FedEx’s new 800,000-square-foot distribution facility in the Northwest near the Grand Parkway and west of U.S. Highway 290. The bulk of the remainder under construction is concentrated in the Southeast with 15 projects totaling 2.3 million square feet followed by the Northwest with 13 projects totaling 1.2 million square feet. Overall, the under-construction market is 75.0% preleased.
Rental rates have decreased this quarter to $6.84 from $7.10 last quarter and are also lower than the $7.25 recorded during the same quarter last year.
Sublease space had been steadily increasing each quarter during the last couple years, and jumped to almost 3.7 million square feet this quarter, representing 36.6% more space when compared to last quarter. The current quarter’s total is more than double the sublease square footage from the same quarter two years ago.