Houston’s office market, particularly Class A, is recovering quicker than expected due to increased activity in the first three months of 2011, according to the quarterly market research compiled by Commercial Gateway, the Commercial Division of the Houston Association of REALTORS®.

Citywide, the office market recorded overall negative net absorption of 64,608 square feet in the first quarter of the year, with Class A space recording its fourth quarter of positive absorption of 203,564 square feet. Class B buildings account for most of the quarter’s red ink, with negative absorption of 285,249 square feet, the third consecutive quarter of negative absorption. Only five submarkets — Energy Corridor, Fort Bend, Northeast, Northwest and West — started the year with positive absorption. The Energy Corridor, with a positive 311,871 square feet of absorption, was the only submarket showing over 100,000 square feet of new occupied space.

The current 13.6% vacancy rate matches the vacancy rate of a year ago although rental rates have decreased slightly. The overall annual, weighted averaged, gross rental rate quoted for this quarter of $23.48 per sq.ft. is 2.5% lower than the same quarter last year, which was $24.07. The Central Business District’s (CBD’s) quoted rates showed minimal change, decreasing 0.6% to $31.60 from a year ago’s $31.79.  BG Group Place, CBD’s first new building in two years, came on line during first quarter and is currently 54.6% leased.

Rental rate concessions vary across the board, with tenants negotiating for the lower rates ahead of an anticipated increase in sublease space hitting the market. Overall sublease space decreased marginally from last quarter, but, at 2.7 million square feet, shows a decrease of almost 1 million square feet from the sublease square footage reported in the same quarter a year ago. But with the consolidation of Continental and United Airlines, the move of Hess into their new building, Devon Energy and other firms’ ongoing space realignment, the effects of anticipated sublease space on the Houston office market have yet to be fully realized.

Commercial Gateway Member/Broker Comments on the Houston Office Market

David Baker, Executive Vice President, Houston Operations, Transwestern
“The office market velocity is ticking upwards at a modest and measured pace. We are seeing tenants expand in virtually all properties, and specifically the new hiring growth in the energy and engineering industries has led to a fueling in absorption. According to Transwestern’s First-Quarter 2011 Houston Outlook Report, Metro Houston’s economy strengthened with 12-month employment growth at 56,600 through January 2011, the second most in the nation. Based upon Delta Associate’s job growth projections in Houston, we expect the trend in corporate expansions to continue and result in significant positive absorption over the next three years.”

Jim Cockrill, Broker Associate, Coldwell Banker Commercial United, REALTORS
“Asking rents for office and office/warehouse space in both the Northwest and Southwest submarkets have dropped slightly. Companies in the oil and gas service industry are moving here from other parts of the country, seeing a move to Houston as the next step in expanding their business. I’m also seeing other oil and gas service industry firms from Mexico and South America looking for Class A office space under 5,000 square feet just to be near a major client.

The market continues to suffer from reduced operating income, property values, and equity. The new Financial Accounting Standards Board (FASB) rule changes scheduled for implementation in 2013 would impact leases in a negative way. The new rule could affect both the terms of leases and refinancing options since a tenant would be forced to carry an operating lease on their balance sheet as a capital lease or a liability.”

Charles Gordon, Executive Vice President, CB Richard Ellis
“We are seeing a tremendous amount of deal activity in leasing and sales, with six vacant office buildings recently sold. And there is a lot going on in the world that could be good for Houston in the long term. The energy business is still driving the market here. There are still questions regarding leased vs. occupied space and Continental’s vacancy downtown, but we are much more optimistic today than we previously thought due to the increased activity level.

“With no new construction, it is good to see vacancy rates steady with job growth coming back.  Houston is on the verge of a sooner-than-expected recovery.”