Home>Commercial Gateway>Office Projects Halt Construction, Sublease Space Surges

Office Projects Halt Construction, Sublease Space Surges

New office-building groundbreakings have been slowing as the price of oil has slumped, and new construction is pretty much at a standstill today.

Currently, only 15 projects totaling slightly more than 3.9 million square feet are under construction, according to statistics compiled by Commercial Gateway. The largest competitive property underway is Hines’ 609 Main at Texas, which will bring 1.1 million square feet to the market later this year. The building is currently 28.3% preleased, with United Airlines and law firm Kirkland & Ellis recently committing to space.

Of those under construction, eight are scheduled for completion by yearend (please refer to list of properties). Three of those are not bringing any availability to the market: BHP Billiton will be occupying all 600,000 square feet of its tower in Uptown, the Greater Houston Partnership and other local governmental type groups will be occupying Partnership Tower’s 110,000 square feet, while Crime Stoppers will be occupying its new 28,000-square-foot facility.

The remaining buildings underway report three with no preleasing and four with preleasing ranging from 20.0% to 89.9%. Overall, the projects are 47.4% preleased.  The most recent groundbreakings have started a trend of mixed-use properties that include retail and multi-unit space with boutique office space.

This year alone, 12 projects totaling 4.5 million square feet have been completed. These projects are currently 54.3% vacant; four buildings came on line with little preleasing, increasing the total market’s available square footages by almost 1.3 million square feet.  And that total excludes Energy Center Four, which was originally preleased to ConocoPhillips Lower 48 Business Unit, but is now being marketed as 597,628 square feet of slab space.

The good news is that total also includes the 1.1 million square feet completed and soon-to-be-occupied Phillips 66’s headquarters’ building in Westchase. Four other companies – Hilcorp, FMC Techologies, National Oilwell Varco and Nalco Champion – completed and occupied almost 1.5 million square feet in their new buildings, keeping absorption levels steady.

The Houston market has led the nation in under-construction square footage in recent years, with 99 buildings totaling more than 25.7 million square feet completed. About 88% of that 5.5-year total were completed from 2013 through the second quarter of this year.  As you can see from the accompanying table, under-construction square footage reached a peak in 2014, mainly due to 3 million square feet represented by Exxon Mobil’s new campus along with several other large energy-related projects in the Energy Corridor and The Woodlands.

Today, the total 25.7 million square feet completed since 2011 is 25.3% vacant on a direct basis.  Although those buildings also show available sublease space of 1.5 million square feet, only 854,551 square feet has been reported as vacant, which would bring the total vacancy to 28.6%.  The overall direct office market vacancy is around 15%.

Many of these newer buildings were built and preleased by energy-related firms when Houston and oil were experiencing unbelievable and unsustainable growth.  In addition to the downturn, many companies occupying new properties are also leaving behind millions of vacant square footage in their former buildings.

Unfortunately, the energy downturn continues to darken the outlook as the sublease market also continues to grow.  Currently at 10.4 million square feet, Houston’s office sublease market has doubled in the past year, when Second Quarter 2015 statistics reported by Commercial Gateway totaled 5.1 million square feet.

As can be seen in the chart, the numbers have risen substantially since 2013.  Many brokerage firms are predicting even more sublease space being marketed during the rest of this year and next as energy-related companies continue to merge or downsize, cutting their office space requirements. Currently, there are 25 sublease listings with blocks of 100,000 square feet or more each available in the marketplace.

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