Home>Commercial Gateway>Houston’s Commercial Outlook Remains Healthy Entering the Second Half of 2014

Houston’s Commercial Outlook Remains Healthy Entering the Second Half of 2014

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Houston Office Market

Houston’s commercial real estate market continues to realize strong levels of absorption and construction activity as energy-related companies expand in proposed and under-construction projects, according to quarterly market research compiled by Commercial Gateway, the commercial division of the Houston Association of Realtors.

The second quarter brought office net absorption of almost 2.2 million square feet, representing the 13th quarter of positive absorption and about 1.6 million more than was recorded in the second quarter of 2013. Class A properties represent 92% of the net total due to Class B’s limited absorption and Class C’s struggle during a seventh quarter of negative net absorption.

Eight new buildings were delivered during the second quarter at a combined 89.6% leased. The largest were two Shell Westcreek buildings for a total 672,000 square feet in the Energy Corridor; Two Briarlake Plaza, a 331,689-square-foot building in Westchase; and Two Hughes Landing, a 197,719-square-foot building in The Woodlands. The eight buildings accounted for almost 1.5 million square feet of absorption, with another 200,000 square feet to be counted later in the year when Repsol moves into its newly completed Research Forest building in The Woodlands.

Other major move-ins during the second quarter include Frost Bank’s 42,000 square feet in the Blvd complex in Uptown, Noble occupying 88,000 square feet in Granite’s Briarpark Green in Westchase, and Texas Instruments’ move into its new 165,000-square-foot building on University Boulevard in Sugar Land in Fort Bend County.

The Energy Corridor’s many projects continue to take the lead as they are completed and occupied, with Technip’s move-in of 450,000 square feet counted in last quarter’s totals. The second quarter continued strong with Shell’s buildings heavily contributing to the submarket’s 1.2 million square feet of absorption. Only four other submarkets recorded more than 200,000 square feet of absorption for this quarter; projects in the five submarkets represented 69% of the almost 3.2 million square feet of absorption for the year. The 2014 mid-year total is similar to the totals recorded for both year-end 2013 and 2012.

Construction starts continued, but at a slower pace. Overall, the Houston under-construction office market boasts 50 properties with 72 buildings totaling almost 17.1 million square feet. Collectively, the buildings are 40.1% preleased, with 38 buildings classified as multi-tenant. The multi-tenant properties represent about 8.4 million square feet or 49% of the under-construction total and are about 20% leased.

Four major brokerage firms are responsible for leasing 57% of the total available space under construction. Colvill Office Properties grabbed the largest share at 28.9%, PM Realty Group represents 12.0%, Moody Rambin 8.7% and Stream Realty 7.4%. Radler Enterprises, currently developing Beltway Lakes 3 and 4, represents 8.0% of the total square footage.

The largest project under construction remains ExxonMobil’s 3 million-square-foot campus, although employees are starting to relocate there. Phillips 66’s 1.2 million-square-foot campus in the Westchase area is the second largest project underway. The largest spec building under construction with the largest availability remains Hines’ 609 Main at Texas building with1.05 million square feet.

New starts this quarter included Hilcorp’s 500,000-square-foot building in the Central Business District (CBD), Westway Plaza’s 425,000 square feet along the Beltway and six projects on the west side: Energy Center Four, Enclave Place, Mason Creek Office Center II, LaCenterra at Cinco Ranch Phase IV, Katy Ranch Phase I and Entrust Building II.

Proposed projects scheduled to break ground later this year include Westcreek Centre, a 21-story, 368,000-square-foot building inside Loop 610; CityPlace, formerly called Town Center in Springwoods Village, a 605,000-square-foot, two-building project in the North; Energy Center Five, a spec project consisting of 500,000 square feet in the Energy Corridor; and Hughes Landing Three, a 300,000-square-foot building in The Woodlands.

Four larger buildings are reportedly getting closer to offering competition to 609 Main in the CBD: Crescent’s 6 Houston Center, a proposed 30-story, 605,000-square-foot building is set to break ground soon; Skanska’s Capitol Tower, a 35-story, 750,000-square-foot building is currently undergoing site work and demolition work; Brookfield’s Five Allen Center, a proposed 50-floor, 1.2 million square-foot building; and One Market Square, a 41-floor, 750,000-square-foot project being developed by Stream and Essex.

The current 10.9% vacancy rate is a slight improvement from the 11.1% vacancy recorded during the same quarter a year ago and last quarter. Class A space overall is at 7.8%, with the Energy Corridor boasting a Class A vacancy of 1.1% and a submarket average of 3.0%. Nine of the 13 submarkets are recording single-digit vacancies in Class A space, with three of the 13 boasting single-digit vacancies overall.

Rental rate increases are making the news with the overall averaged weighted rental rate of $24.76 representing a 5.7% increase during the past year. Class A rates, now at $32.06 citywide and at $37.53 in the CBD, have experienced the largest increases as supply tightens. Most properties are quoting net rates, with operating expenses rising as property values continue their upward trend.

Overall, office rents have increased almost 9% in the last two years, from $22.75 per square foot to the current $24.72 per square foot. All quoted gross rental rents are weighted and averaged based on available space. When broken down by class, rents have shown a 12.1% increase, from $28.65 per square foot two years ago to $32.06 this quarter for Class A properties. Smaller escalations were reported for the lower classes, with an 8.8% increase in Class B, from $18.95 to $20.63 per square foot, and a 4.8% increase for Class C, from $14.70 to $15.41, over the last two years.

Within selected submarkets during the last two years, The Woodlands reported the largest percentage increase, 17.0%, for overall rates with Uptown showing a 15.4% increase and Westchase a 14.2% increase. For Class A space, rents have reported a 21.8% jump in Westchase and a 13.0% jump in Uptown over the last two years; Class B rates also show double-digit increases with Uptown’s 24.2% increase leading the way, followed by The Woodlands’ 22.0% and the Energy Corridor’s 13.7% increase.

With few signs that the area’s economy will be hitting any major roadblocks in the near future, rental rates will continue on the upswing.
Overall sublease space increased to almost 2.8 million square feet this quarter compared to 1.7 million square feet a year ago, which represents a 63.6% increase during the 12-month period. Sublease space has seen gradual increases over the last year as tenants expanding opt to pay more and move into brand new office space; however, many of the better spaces are being leased quickly.

Houston Industrial Market

Houston’s industrial market continues to expand with strong positive net absorption of almost 1.9 million square feet during the second quarter of 2014, according to statistics released by Commercial Gateway.

This quarter’s absorption represents the 18th consecutive quarter — four years plus — of positive absorption, with 13 quarters recording more than 1 million square feet each. This absorption is a third more than the absorption recorded in the same quarter in 2013 and slightly less than last quarter. However, vacancy overall is 6.3%, the lowest vacancy on record in recent years, and down from the 7.0% during the same quarter last year. Vacancy for warehouse/distribution space citywide is also 6.3% with manufacturing space 4.3%. Houston has been described as one of the healthiest industrial markets nationwide due to its balance of supply and demand.

Warehouse/distribution properties continue to record the lion’s share of absorption with 85% of the total, or 1.6 million square feet, of absorption this quarter, continuing a six-year trend of positive absorption. Properties classified as warehouse/distribution represent about 73% of the total market. This total will increase even more as Grocers Supply, a locally-based wholesale supplier, recently announced plans for a 1.7 million-square-foot warehouse and distribution facility in Pinto Business Park. Phase I is scheduled to start soon with completion by the end of 2015. Other major land sales have been announced in business parks from the west to the north with building schedules still in planning.

More than 2.4 million square feet in 21 properties came online during the second quarter bringing the total new 2014 buildings to 4.8 million square feet. Collectively, the new buildings are currently 50.5% leased and represent almost 2.0 million square feet of absorption, or about half of the absorption recorded for the year. New buildings completed this quarter include three properties in Pinto Business Park: HD Supply’s new building along with two smaller spec buildings in the North and Dover Energy’s 150,000 square feet in the Southeast.

Construction activity is still thriving, with warehouse/distribution projects accounting for almost 7.0 million square feet, or 88%, of the total under construction. Currently, 90 buildings are underway in 70 projects and represent almost 8.0 million square feet. Several multiple-building projects have started this year with the largest projects concentrated in the Northwest and Greenspoint areas. The five largest projects currently under construction with additional buildings planned include Interstate Commerce Center, 717,706 square feet; Beltway Crossing Northwest, 663,600 square feet; Fallbrook Pines Business Park, 650,040 square feet; Reed’s Landing Business Park, 517,382 square feet; and Gateway Northwest, 472,687 square feet. One of the largest buildings to break ground this quarter was First Northwest Commerce Center’s Building 1 at 350,820 square feet along with Beltway Crossing Northwest’s 441,000-square-foot building.

Rental rates increased steadily during the past year and currently average $7.09 per square foot per year citywide, representing a 12% increase from the same quarter last year. Rental rates quoted are grossed up and weighted and averaged based on available space. Most new buildings are now quoting net rents and passing on the increased taxes and operating costs.

Sublease space rose slightly this quarter to almost 1.5 million square feet, but is still much lower than the almost 2.2 million square feet reported during the same quarter a year ago.

Founded in 2001, Commercial Gateway, the commercial division of the Houston Association of Realtors (HAR) is a commercial information exchange of commercial real estate professionals engaged in every aspect of property sales and leasing, appraisal, property management and counseling.

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