Houston’s office market ended the first quarter with a total of 699,266 square feet of positive net absorption, according to quarterly market research compiled by Commercial Gateway, the commercial division of the Houston Association of REALTORS®.

Reversing last year’s trends, Class B space accounted for 86.3% of the first quarter’s positive activity, recording its second consecutive quarter of positive activity. This year paints a different picture for Class B properties than in recent years; absorption in First Quarter 2011 was a negative 468,093 square feet for Class B and overall negative 264,293 citywide.

This quarter, Class A buildings citywide recorded negative absorption after seven consecutive positive quarters. Overall, seven of the 13 market areas, including the Central Business District (CBD), recorded more space coming on the market than being taken off, with several large former sublease spaces entering the direct market during the first quarter.

The three submarkets which recorded the largest gains in absorption were the Energy Corridor, North/The Woodlands/Conroe and the Northwest. One large lease committed in the Northwest but not yet counted as absorbed was Noble Energy’s 497,447 square feet in a former HP building; the building is reported to be undergoing renovations with the company planning a move in Second Quarter 2013, which is when the space will be recorded as absorbed.

The current 12.6% vacancy rate is the lowest vacancy since Second Quarter 2009’s 12.5% rate, and 1.3% lower than that same period last year. Selected buildings are seeing slight increases in rental rates, but the overall annual, weighted averaged, gross rental rate quoted for this quarter of $22.78 is slightly lower than last quarter’s $22.90 rate and lower than the same period last year, which was $23.19. The CBD’s quoted rates also showed minimal decreases from the same period last year, reporting $31.46 today vs. $31.60 then.

Overall sublease space, at 2.2 million square feet, decreased almost 300,000 square feet from last quarter, and a total 21.5% decrease from the same quarter a year ago. Sublease space is either being leased at very competitive rates or returned as direct space as lease terms move closer to expiration dates.

Construction activity is looking up with nine buildings currently under construction, four in The Woodlands, two each in both the Uptown and West submarkets, and one building in the North Belt West submarket. Scheduled for completion in 2012 are the two properties in the West and the one property in the North Belt West submarkets. Total under construction is 1.97 million square feet, following completions in 2011 of six buildings totaling 2.2 million square feet. The Woodlands is home to the largest number and size of buildings and includes the 549,260-square-foot Anadarko Tower II, the 234,589-square-foot Waterway 3, and two 32,000-square-foot buildings in the Black Forest Technology Park. Several other projects in the West, The Woodlands and Westchase have been announced for starts later this year.

Commercial Gateway Member/Broker Comments on the Houston Office Market

“The office market is continuing to build positive momentum with growth in all employment sectors. There continues to be a flight to quality but the large spaces in the better quality, better located buildings, like in the Energy Corridor, are getting leased, pushing the demand to the better Class B buildings. Tenants are signing shorter term deals in those buildings, anticipating Class A space becoming available as new buildings take shape. Several new projects have been announced but as yet, no large spec buildings have actually broken ground.

“We expect the office market to continue to strengthen and become more a landlord’s market in 2012.”
– David Baker, Executive Vice President, Houston Operations, Transwestern

The Houston office market continued its rapid shift in market fundamentals during the first quarter as the market continues to tighten and swing in the building owners’ favor. We are seeing compression in the required marketing time for new vacancies and in many cases, multiple tenants vying for the same space opportunities, particularly in core submarkets. As a result, there is real price appreciation in actual rental rates and diminished concessions being offered by building owners. In addition, while leasing activity is not as brisk in secondary markets, there is a general improvement in overall conditions across the board.”
– Coy Davidson, Senior Vice President, Colliers International

“The office and industrial commercial real estate market in Montgomery and North Harris counties remains hotter than a Houston afternoon in August, with Class A office vacancy at 2% in The Woodlands.

“Some recent deals and activity include:

  • Repsol is signing a 200,000-square-foot lease in Building 5 at The Woodlands Lakeside Campus.
  • Strike has leased 27,253 square feet in Sierra Pines off Sawmill and Sawdust.
  • Southwestern Energy has committed to a 20-plus-acre mini-campus next to Exxon.
  • Huntsman is in talks with Howard Hughes to build a possible Class A facility to re-locate.

“The Woodlands ‘super block’ is getting tons of attention as an estimated 1,000-plus companies will move north due to ‘the Exxon/Mobil factor’ in short order. If The Woodlands had a building for Noble Energy, who’s to say they would not have come further north instead of committing to the former HP building on SH 249.

“Our BANDIER development team is also in preliminary discussions to deliver another 200,000 square feet of office space, around I-45 and Hardy Toll Road with freeway frontage, to the mix in late 2013.

“Our heads are spinning up here and the next five years definitely looks promising in north Houston.”
– L.S. Trey Halberdier, Managing Principal, BANDIER Realty Partners, LLC

“Currently, top-tier Class A assets now post single-digit vacancy rates across the major submarkets in Houston. Large blocks of this space are becoming particularly scarce, creating an imbalance in supply and demand.  Due to the current situation, numerous developments are being marketed across the city, particularly in west Houston. The earliest any of this new construction will deliver is 2013, so look for continued tightening in the market with increasing rental rates and fewer concessions.”
– Stewart L. Lyman, Vice President, Stream Realty Partners, L.P.

Houston Industrial Market

Houston’s industrial market continues to improve with positive absorption recorded and limited major construction on the horizon, according to statistics released by Commercial Gateway. With a ninth 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 down to 7.2%, compared to 8.4% a year ago.

Net absorption in the first quarter totaled almost 1.3 million square feet, which is triple the amount noted in First Quarter 2011, but down from last quarter’s almost 2.6 million square feet. Warehouse/distribution properties recorded about 1.1 million square feet this quarter, continuing a five-year trend of positive absorption and accounting for 85.5% of all absorption.

Properties classified as manufacturing are reporting the lowest vacancy rate of 4.6%, with crane-ready buildings still in short supply. Properties classified as warehouse/distribution represent about 72.5% of the total market. The two largest leases of the quarter were Gulf Winds International’s 247,240-square-foot lease at Port Crossing and Francesca’s Collection’s 217,869-square-foot lease at ClayPoint Distribution Park.

Rental rates have increased marginally during the last four quarters, with this quarter’s quoted, weighted averaged annual rental rate of $5.65 per square foot slightly higher than reported a year ago. Sublease space has not fluctuated much during the last two years, with 1.8 million reported in the first quarter, which represents a slight drop from fourth quarter but is about the same as this time last year.

Construction activity is still brisk, with build-to-suits leading the way.  Currently, 43 buildings in 33 projects totaling about 2.2 million square feet are under construction, with only the largest, 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, with 13 properties slated for completion in the second quarter. 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.

Commercial Gateway Member/Broker Comments on the Houston Industrial Market

“Houston’s industrial market continued to expand during the first quarter of 2012, absorbing just over 1.3 million square feet of both direct and sublease space. Although this was a lower absorption than during the third and fourth quarters of 2011, vacancy rates for all product types dropped to 7.2%, the lowest rate in almost five years, according to Commercial Gateway’s statistics.

“Continued expansion of energy-related firms as well as their suppliers played a major role in the absorption of space. Houston’s continued job and population growth should lead to more positive absorption for the balance of 2012. Currently there is more than 2.1 million square feet of new industrial construction underway in the City.”

– J. Michael Boyd, CRE, SIOR, Boyd Commercial

“Houston shot out of the gate in the first quarter of 2012 as strong tenant demand pushed vacancy rates below pre-recession levels while limited access to debt has kept new speculative developments in check.

“With an increase in demand and lack of new supply in the market, I expect that landlords will hold the line and take more aggressive positions as they look to push rents and cut back on other tenant concessions. I anticipate that the market will see more build-to-suit activity as tenants respond to market conditions by being proactive and working in advance to take control of their future real estate needs.”

– Graham D. Horton, SIOR, CCIM, Managing Director of Corporate Services,
Stream Realty Partners, L.P.

“Industrial market activity is strong and is especially solid for those marketing crane-served buildings. Companies are finally pulling the trigger on finalizing transactions. Demand has been strong but there has been a trend to sit on some proposals, perhaps in a holding pattern due to a pending merger or acquisition or even the upcoming election.

“We have had multiple proposals for the buildings we are marketing, both the smaller properties and the larger, 56,000-square-foot property that is breaking ground in a few weeks. This latter property already has three proposals out and one company in particular flew in from Washington State to tour the site. All are credit-worthy and appear to be ready to make a deal.

“The area’s under-construction properties will probably all be leased soon with new properties on the horizon, including some companies new to the industrial market game. United Equities is developing several industrial properties after a 30+-year span in retail development. Many projects are being built in the north/northwest areas. With major oil and gas companies such as Schlumberger, Halliburton and G&E Oil and Gas there, vendors and suppliers want to be nearby. We also have a couple deals working in the Pinto Ranch project in the north, which is a wonderful site attracting new excitement as Hines takes over as the developer.

“One trend we are seeing is that many developers are not addressing the need for larger sites, constructing 20,000- to 40,000-square-foot buildings on 1.75- to 3.0- acre site. The spec buildings are not offering enough additional land. Two current projects we are marketing for Capital Commercial are allowing for up to 23 acres of additional available land, which makes the property much more desirable.

“Overall, the industrial market is experiencing strong activity which will continue for the rest of the year.”

– Mark G. Nicholas, SIOR, Senior Vice President and National Director, Jones Lang LaSalle