Houston Office Market
Houston’s commercial real estate activity is slower but steady as the market adjusts to the energy downturn, slower job growth and the relocations of energy-related firms to campus facilities, according to quarterly market research compiled by Commercial Gateway, the commercial division of the Houston Association of REALTORS®.
The first quarter reported office net absorption of 405,058 square feet, representing the 16th consecutive quarter of positive absorption, to start off the year on a positive note despite low oil prices and slower job growth. The same quarter last year reported 1.1 million square feet. As in previous years, Class A properties represent the bulk of the growth, 861,555 square feet of positive absorption, offset by Class B properties reporting a negative 640,574 square feet; Class C properties reported 184,077 square feet of positive absorption.
The market activity is clearly tied to job growth, substantiated by the Greater Houston Partnership’s (GHP) just-released employment numbers: The Houston-The Woodlands-Sugar Land metro created 82,500 jobs in the 12 months ending March 2015, according to the Texas Workforce Commission (TWC). Every major employment sector in the Houston metro area reported job growth over the past 12 months, the GHP reported; “however, the March employment report tells a more sobering story when looking at monthly changes. The impact of the decline in oil prices is reflected in several energy-related sectors with mining and logging, which in Houston is mainly oil and gas, losing 700 jobs.”
For the quarter, 11 properties with 16 new buildings were completed, adding almost 3.7 million square feet to the market. The new buildings, including three owner-occupied or single-tenant, contributed almost 2.2 million square feet of absorption. Upon completion, the new properties collectively were almost 61.8% leased with rental rates averaging $35.93, higher than the Class A overall rate of $32.49.
Contributing heavily to the first quarter’s absorption were 1 million square feet attributed to ExxonMobil’s Phase II of occupied space in its new campus south of The Woodlands, 640,000 square feet for CyrusOne’s data center in the West along with Academy’s 200,000 square feet in its expansion building in Katy, also in the West. The largest multi-tenant building to be completed this quarter was Energy Tower IV at 450,552 square feet, which recorded almost 141,000 square feet of move-ins with Technip’s 103,987 square feet leading the way. The second largest multi-tenant building to be completed this quarter was Skanska’s West Memorial Place at 330,000 square feet; its largest tenant move-in was Petroleum Geo-Services (PGS) with 122,000 square feet. Two other larger multi-tenant projects, Westchase Park Building 2 at 300,000 square feet and Beltway Lakes Building 4 at 270,000 square feet, came onto the market without preleasing.
Construction starts continued during the fourth quarter, but at a slower pace. Overall, the Houston under-construction office market boasts 47 properties with buildings totaling almost 14.1 million square feet. Collectively, the buildings are 56.6% preleased, with 34 buildings classified as multi-tenant. The multi-tenant properties represent about 7.9 million square feet or 56.1% of the under-construction total and are currently reporting 23% preleased space.
The largest project under construction is Phillips 66’s 1.2 million-square-foot campus in the Westchase area, while 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 included Havenwood Office Park in the north sector with 240,470 square feet. Amegy Bank officially started construction on its new 350,000-square-foot headquarters off 610 Loop in the Galleria/Uptown submarket; Amegy plans to occupy all but 97,912 square feet, which is up for lease. The Greater Houston Partnership also broke ground on its new, 110,000-square-foot building near the George R. Brown Convention Center. Few new office projects have been announced this year, and a variety of proposed projects set to break ground late last year have been placed on hold pending a major tenant commitment.
The current 12.6% vacancy rate is an increase from the 11.2% vacancy recorded last quarter, and the 11.1% during the same quarter a year ago. Class A space overall is at 10.5% vacancy, with the North/The Woodlands/Conroe submarket showing the lowest Class A vacancy of 5.6% followed by the Westchase submarket at 7.4% and the Inner Loop submarket at 7.7%. The West submarket is recording the lowest overall vacancy of all submarkets at 7.3%. Seven of the 13 submarkets are recording single-digit vacancies in Class A space, with five of the 13 boasting single-digit vacancies overall.
Rental rates represent a 5.9% increase during the past year with the current overall averaged weighted rental rate of $26.18. Class A rates, now at $32.49 citywide and at $39.07 in the CBD, experienced a slight increase from the same quarter last year. CBD’s Class A rates increased 4.0% in the CBD from the same quarter last year. Rates overall have shown increases due to new space with higher rents entering the market along with increased operating expenses due to tax jumps. Concessions are reportedly being offered to entice some tenants, but none are being offered across the board.
Overall sublease space has increased 25% from the same quarter last year. Almost 3.5 million square feet of sublease is available today; additional listings being marketed and available at a future date total another 2.3 million square feet. Sublease space has gradually increased over the last two years as tenants expand into newly built space and leave their old space in addition to other firms just trying to reduce their bottom lines as their workforce is also reduced. If this trend continues, firms will be able to take advantage of possible reduced rates with limited terms while the market continues to adjust.
Houston Industrial Market
Houston’s industrial market continues to expand with positive net absorption of almost 1.4 million square feet during the first quarter of 2015, according to statistics released by Commercial Gateway.
This quarter’s absorption represents the 21st consecutive quarter – five years – of positive absorption, with 16 quarters recording more than 1 million square feet each. This absorption is considerably less than the same quarter last year and any quarter during the previous two years but is a positive sign in today’s marketplace of energy layoffs and cutbacks.
Major deals recorded during the quarter include Professional Packaging Systems’ 171,000 square feet and Woodfield Distribution’s 48,600 square feet in Sugar Land Interchange Distribution Center in the southwest sector along with three deals to fill up DCT’s Northwest Crossroad’s Logistics Centre Phase I: Lenox International’s 190,000 square feet, Rittal’s 171,000 square feet and Hesselbein Tire’s 73,000 square feet. The Hardy Distribution Center also reported a 144,000-square-foot deal with Texas Tissue Converting during the first quarter.
Net absorption was shared by all industrial types during the first quarter with warehouse/ distribution properties accounting for 479,460 square feet of absorption, or 35.6% of the total. High tech/R&D reached a high of 422,098 square feet, or 31.4% of the total. Flex/service center space represented 352,081 square feet of absorption, or 26.2% of the total.
Vacancy marginally increased to 6.0% from 5.9% last quarter but below the 6.4% of the same quarter a year ago. This could be attributed in part to 1.2 million square feet of finished, vacant product entering the market along with a marketwide slowdown. Vacancy for warehouse/distribution space citywide is 6.2% with manufacturing space at 4.1%. Houston is still considered one of the healthiest industrial markets nationwide due to its balance of supply and demand.
More than 1.7 million square feet in 24 buildings came online during the first quarter. Collectively, the new buildings are currently 28.3% leased and represent about 476,000 square feet of absorption, or 35.4% recorded for the quarter. The largest spec buildings completed during the first quarter and without preleasing include Building 7 in Beltway Crossing Northwest at 441,000 square feet in the Northwest and Building One in Beltway North Commerce Center at 352,680 square feet in the Greenspoint area. Completed owner-occupied space includes Data Foundry’s new data center of 350,000 square feet also in Greenspoint and Mitsubishi’s new 100,000-square-foot project in Pearland. All other completed spec buildings were smaller than 100,000 square feet with 14 buildings less than 20,000 square feet.
Construction activity is still setting records. Currently, 120 buildings are underway in 73 projects representing more than 7.8 million square feet. Major spec projects without major preleasing include Fallbrook Pines’ 709,045 square feet, Mason Ranch Industrial Park’s 656,740 square feet and Fallbrook 1 Pinto Business Park’s 500,400 square feet.
Proposed industrial buildings are continuing to be announced.
- On the west side, Daikin Industries announced plans in January for a major expansion, a 3- to 4-million square foot manufacturing/R&D facility on 90 acres in Northwest Harris County. Parkside Capital is looking at building expansions in West 10 Business Park.
- In the north, Duke Realty is expanding the Point North Cargo facility, and KTR Capital has announced plans for over 400,000 square feet of planned space. New buildings have also been announced in Pinto Business Park, including a recent build-to-suit for Alfa Laval, Inc., which will include both office and manufacturing space for the U.S. subsidiary of Alfa Laval AB.
- The southwest corridor around Beltway 8, Highway 90 and Highway 288 will be a hotbed of new activity in the coming months if even some of the proposed space breaks ground. Trammell Crow and Artis REIT are gearing up for Park 8Ninety, which could offer up to 1.75 million square feet, and NAI Partners just announced the first groundbreaking in Gateway Southwest with plans for more than 400,000 square feet. The Levey Group has also announced plans for 5 Corners Business Center, a potential 750,000 square-foot project, and CRESA has started marketing its 500,000+-square-foot project called the Lower Kirby District off 288.
Rental rates increased steadily during the past year and currently average $7.85 per square foot per year citywide, representing an 18.1% increase from the same quarter last year. More importantly, rents quoted for all new space completed in the first quarter averaged $10.23 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 increased 7.2% from last quarter to more than 1.6 million square feet. This quarter’s total is an increase of 20.6% from the same quarter a year ago, but is still below square footage totals in 2013 and back through 2010.
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.