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Houston Office Market

Houston’s office market ended 2011 with a total of almost 2 million square feet of positive net absorption, rallying in the fourth quarter with 1.1 million square feet, according to quarterly market research compiled by Commercial Gateway, the commercial division of the Houston Association of REALTORS®.

Class A space accounted for 73.9% of the fourth quarter’s positive activity, recording the seventh consecutive quarter of positive activity for an annual Class A total of 2.6 million square feet absorbed. Shell Oil’s December announcement of its renewal of the company’s space in One and Two Shell Plaza in the Central Business District (CBD), noted as the largest lease in the world, created even more optimism for leasing Class A space and for attracting energy-related companies to the CBD.

Class B buildings continue to account for the most red ink year-to-date, recording 737,771 square feet of negative absorption for the year. However, fourth-quarter stats did reverse a five-quarter trend of negative absorption by recording a positive 200,277 square feet of absorption for Class B properties.

Overall, the five submarkets which recorded the largest annual gains in absorption during 2011 were the CBD, Energy Corridor, North/The Woodlands/Conroe, West and Westchase; all but four submarkets recorded positive absorption for the year. This year is a vast improvement over the previous two years, which ended with overall negative absorption in both 2010 and 2009.

The current 13.5% vacancy rate is similar to Fourth Quarter 2010’s 13.6%, and rental rates are showing a slight increase. The overall annual, weighted averaged, gross rental rate quoted for fourth quarter of $22.88 per square foot is 7.9% higher than the same quarter last year, which was $22.70. The CBD’s quoted rates increased 3.4% to $31.09 from a year ago’s $30.06.

Overall sublease space has fluctuated during the last year. Year-end statistics show 2.5 million square feet, a decrease of almost 500,000 square feet from last quarter and a 21.2% decrease from the same quarter a year ago. The effects of several ongoing company consolidations and mergers in the marketplace have not yet been fully realized by Houston’s office market.

Construction activity is looking up with five buildings currently under construction totaling 1.2 million square feet. Two properties are in the Uptown submarket and scheduled for completion in 2013; the remaining three properties are in the West submarket and scheduled for completion by year-end 2012. Six buildings came online in 2011, totaling 2.2 million square feet. The two largest buildings completed in 2011 include BG Group Place and Hess Tower in the CBD. Although Hines and Skanska have reported plans for additional buildings in the CBD, more recent reports from Anadarko and others in The Woodlands seem closer to breaking ground on several new buildings within the next three months.

Houston Industrial Market

Houston’s industrial market continues to rebound with positive absorption recorded and leasing activity ongoing, according to statistics released by Commercial Gateway. With an eighth consecutive quarter of positive absorption, the industrial market has seen a gradual decrease in its vacancy rate and a stabilization of rental rates. Vacancy overall is 7.4%, compared to 8.5% a year ago.

Net absorption in the fourth quarter totaled 2.7 million square feet, representing 54.4% of the total for the year, almost 5 million square feet. This compares favorably to 2010’s almost 4.9 square feet of absorption, although warehouse/distribution properties recorded about 1.1 million square feet more absorption this year than last.

Properties classified as manufacturing are reporting the lowest vacancy rate of 4.3%, with crane-ready buildings in short supply. However, warehouse/distribution property types are experiencing the most leasing activity this year, with several large leases signed this year and accounting for the majority of the annual absorption. Properties classified as warehouse/distribution represent about 72.5% of the total market.

Rental rates have increased slightly, about 3.0%, over the last year, with a quoted, weighted averaged, annual gross rental rate of $5.49 per square foot reported this quarter compared to $5.44 a year ago. Sublease space reported in fourth quarter represents a slight drop from third quarter but an increase of 116,682 square feet from the same time last year.

Construction activity is ongoing, with build-to-suits leading the way. Currently, 27 buildings totaling 2.2 million square feet are currently under construction, with most slated for completion this year. The exception is the largest property, the 475,000-square-foot, build-to-suit for Ben E. Keith Food Distribution Center, scheduled for completion in 2013. All others should be completed in 2012. This past year also recorded the completion of 22 buildings totaling 1.6 million square feet, with nine of those representing 802,027 square feet built specifically for individual companies.


Patsy Fretwell is a senior market analyst with Commercial Gateway and has more than 20 years of experience in real estate market research. She can be reached at