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Houston’s Commercial Outlook Solid as Job Growth Remains Strong Through 2014

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Houston Office Market

Houston’s commercial real estate market stayed solid as job growth remained strong, resulting in positive absorption and unparalleled construction activity, according to quarterly market research compiled by Commercial Gateway, the commercial division of the Houston Association of Realtors.

The third quarter reported office net absorption of more than 1 million square feet, representing the 14th consecutive quarter of positive absorption. The year-to-date absorption total of almost 4.2 million square is more than the 3.5 million square feet recorded for the previous year. As in previous quarters, Class A properties represent the bulk of the growth while Class B and Class C properties show limited absorption. The market activity is clearly tied to job growth, with The Greater Houston Partnership’s just-released employment numbers: 119,400 jobs created for the 12 months ending in September for the Houston-Sugar Land-Baytown Metro Area, as provided by the Texas Workforce Commission. This job growth leads all areas within the state.

Nine new buildings were delivered during the third quarter at a combined 68.8% leased. The largest were Westgate III, a 225,885-square-foot building that Mustang Engineering preleased entirely and Greenhouse Office Park Phase I, a 203,149-square-foot building with 135,000 square feet preleased to UBS. The nine buildings accounted for more than 700,000 square feet of absorption including Jacobs Engineering’s 81,181-square-foot move into its new namesake building at 12140 Wickchester in the Energy Corridor and Devon Energy’s 64,000 square feet in the newly completed Wildwood Corporate Center in The Woodlands.

Other major single-tenant move-ins during the third quarter in The Woodlands include Repsol’s 200,000 square feet in its built-to-suit Research Forest Building, which was completed last quarter, and Kiewit Energy, who ended up taking the entire 95,078-square-foot building at 3831 Technology Forest. CGG Veritas also occupied its new expansion building of 106,992 square feet in Westchase.

Construction starts continued, but at a slower pace. Overall, the Houston under-construction office market boasts 43 properties with 64 buildings totaling almost 17 million square feet. Collectively, the buildings are 61% preleased, with 34 buildings classified as multi-tenant. The multi-tenant properties represent about 9.1 million square feet or 53% of the under-construction total and are about 30% leased.

The largest project under construction remains ExxonMobil’s 3 million-square-foot campus, although employees are starting to relocate there. Phillips 66’s 1.1 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 spec starts this quarter with no preleasing included Energy Center Five, a 594,000-square-foot building; West Memorial Place II, a 382,000-square-foot sequel, both in the Energy Corridor; and Grandway West Building I, the first of five buildings with 86,800 square feet. The 56-acre Grandway West project, a joint venture between InSite Realty Inc. and Urban Construction Southwest Inc. will total 780,000 square feet when complete. Numerous projects concentrated in the north markets and Central Business District (CBD) have announced upcoming dates to break ground.

The current 11.0% vacancy rate is a slight increase from the 10.9% vacancy recorded last quarter, but still slightly better than the same quarter a year ago. Class A space overall is at 7.9%, with the Energy Corridor showing a Class A vacancy of 2.6% and a submarket average of 4.7%, the lowest of all submarkets. Eight of the 13 submarkets are recording single-digit vacancies in Class A space, with four of the 13 boasting single-digit vacancies overall.

Rental rate increases are becoming more modest overall, the overall averaged weighted rental rate of $24.97 representing a 3.4% increase during the past year. Class A rates, now at $32.57 citywide and at $38.35 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. 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 but perhaps more modestly in all but the premier projects.

Overall sublease space took a small dip from last quarter to just over 3 million square feet this quarter compared to 2.3 million square feet a year ago, which represents a 32.3% increase during the 12-month period. Sublease space has seen gradual increases over the last two years as tenants expanding opt to pay more and move into brand new office space.

 

Houston Industrial Market

Houston’s industrial market continues to expand with strong positive net absorption of 1.7 million square feet during the third quarter of 2014, according to statistics released by Commercial Gateway.

This quarter’s absorption represents the 19th consecutive quarter — four years plus — of positive absorption, with 14 quarters recording more than 1 million square feet each. This absorption is slightly more than the absorption recorded in the same quarter in 2013 and last quarter. However, vacancy overall is 6.2%, the lowest vacancy on record in recent years, and down from the 7.3% during the same quarter last year. Vacancy for warehouse/distribution space citywide is 6.3% with manufacturing space 3.6%. 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 76% of the total, or 1.3 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.

More than 2.2 million square feet in 32 buildings came online during the third quarter bringing the total new buildings for the year to more than 6.8 million square feet. Collectively, the new buildings are currently 51.1% leased and represent about 2.5 million square feet of absorption, or about half of the absorption recorded for the year. New buildings completed this quarter include Silver Eagle Distributor’s 400,000 square feet in the Southeast and Liberty Property Trust’s Fallbrook Distribution Center’s 400,250-square-foot spec property in the Northwest.

Construction activity is still setting records, with warehouse/distribution projects accounting for almost 7.2 million square feet, or 83%, of the total under construction. Currently, 83 buildings are underway in 71 projects and represent 8.7 million square feet. Major projects include a 150,000-square-foot building in Kenswick AirFreight and Logistics Centre that is already totally preleased to DB Schenker, a second phase of DCT’s Northwest Crossroads project which will add 320,430 square feet, a third 77,987 square-foot building in West Road Building Park, and the breaking ground of two buildings totaling 416.930 square feet called Interstate Commerce Center in North Houston.

Rental rates increased steadily during the past year and currently average $7.42 per square foot per year citywide, representing a 13.5% increase from the same quarter last year. More importantly, rents quoted for all new space completed in 2014 to date, about 6.8 million square feet, average $9.74 per square feet. 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 decreased slightly this quarter to almost 1.4 million square feet, but is still much lower than the almost 2.3 million square feet reported during the same quarter a year ago.

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