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Houston’s commercial real estate market appears resilient despite slower leasing activity as the downturn continues, fueled by plummeting oil prices. That’s according to quarterly market research compiled by Commercial Gateway, the commercial division of the Houston Association of Realtors®.

Houston Office Market

The fourth quarter reported positive net absorption of 380,758 square feet of office space, continuing the year’s positive trend to total more than 2.5 million square feet for the year. This annual absorption represents less than half of the previous year’s 6.0 million square feet. As in previous years, Class A properties represent the bulk of the growth, offset by both Class B and C properties reporting negative absorption for the quarter.

Keeping the direct absorption positive primarily results from large companies occupying their new space in recently completed build-to-suit and/or owner-occupied properties, which has been the norm all year. ExxonMobil moved into its two new properties in The Woodlands, Air Liquide occupied its new building in the west, Statoil occupied the rest of CityWest Place 2, and Lennar and its affiliated companies including Friendswood Development occupied their new building in Greenspoint. These companies added to the new building occupation from earlier in the year by Conoco Phillips Lower 48 Business of 547,628 square feet in Energy Center Three and Sasol North America in its new headquarters’ building, both in the Energy Corridor, along with ExxonMobil finalizing its move into the remainder of the 3 million-square-foot campus in the north.

For the quarter, only five of the 13 submarkets recorded positive absorption for the fourth quarter, but seven recorded positive net absorption for the year, with two submarkets recording more than 2.0 million square feet and two recording more than a negative 1.0 million square feet. Topping the list for the positive side was the North/The Woodlands/Conroe submarket with 2.2 million square feet of net absorption followed by the West submarket with more than 1.5 million square feet. On the negative side for the year was the Central Business District (CBD) with 1.6 million square feet of negative net absorption followed closely by the Greenspoint area with almost 1.1 million square feet of negative absorption. ExxonMobil accounts for much of both sides of the absorption totals as the company moved into its new space and left a couple million square feet in various markets across the city, including 800 Bell’s 1.1 million square feet in the CBD.

The changing economy related to the energy downturn is also shown by the increasing amounts of sublease space on the market. At year-end 2015, the Houston market had almost 6.7 million square feet of sublease space available and being marketed. Of that total, 4.6 million, or more than half, is Class A space. This total represents more than double the sublease space available at year-end 2014.

For the quarter, eight new buildings were completed, adding 2.1 million square feet to the market. For the year, 25 projects totaling almost 8.0 million square feet have been completed. Collectively, the new buildings are currently 67.4% leased and contributed more than 5.2 million square feet of net absorption.

Construction starts halted for the most part during the fourth quarter, with only one property, the new 240,000-square-foot CEMEX building in West Houston, breaking ground. Overall, the Houston under-construction office market has 21 properties totaling 7.4 million square feet. Collectively, the under-construction buildings are 76.5% preleased, with 13 properties classified as multi-tenant. The multi-tenant properties represent 3.7 million square feet or 59.2% of the under-construction total and are currently reporting 50.1% preleased space. Of the multi-tenant spec properties, four of the 13 are 100% available.

The largest project under construction is Phillips 66’s 1.2 million-square-foot campus in the Westchase area. The largest spec building under construction with the largest availability remains Hines’ 609 Main at Texas building with 1.05 million square feet and one recently reported 62,000-square-foot pre-lease.

Although construction overall slowed, one major commercial project got a jump-start in 2015. Generation Park, McCord Development’s 4,000-acre project on the Northeast side, currently has the headquarters for FMC Technology under construction along with multi-family projects. In addition, both Lone Star College and San Jacinto College have announced plans to build new facilities there.

The current 14.0% direct vacancy rate is up from the 13..3% vacancy recorded last quarter, and quite a jump from the 11.2% recorded during the same quarter at year-end 2014. Class A space overall is 12.2% vacant, with the North/The Woodlands/Conroe submarket increasing to 8.3% from the third-quarter vacancy of 4.7% due to new construction entering the market with little preleasing. Only the smaller Southeast submarket is posting a lower Class A rate of 8.2% with the CBD following at 8.4% and the Westchase submarket at 9.7%, rounding out all submarkets with less than 10% Class A vacancy. Only one of the 13 submarkets, the Fort Bend County submarket, registered an overall single-digit vacancy.

Rental rates represented a 12.6% increase during the past year with the current overall averaged weighted rental rate of $28.54. Class A rates, now at $34.54 citywide and at $40.88 in the CBD, experienced a 6.4% and 3.1% increase, respectively, from the same quarter in 2014. Sublease space overall is continuing to increase but the rental rate for sublease decreased 10.7% from third quarter, reporting a current average of $22.94. During the past year, the average sublease rate dropped 21.7%.

Houston Industrial Market

Houston’s industrial market continued to expand with positive direct net absorption of almost 662,889 square feet during the fourth quarter of 2015 despite economic uncertainty, according to statistics released by Commercial Gateway.

This quarter’s absorption represents the 24th consecutive quarter – six years – of positive absorption, with seven quarters recording more than 2 million square feet each. The fourth quarter’s net absorption clearly represents a slowdown when compared to last year’s fourth quarter, which recorded 3.2 million square feet. However, comparing year to year, the 6.8 million square feet of net absorption for 2015 is still a healthy amount when compared to the 8.9 million square feet from 2014.

Major recent announcements for large build-to-suits and speculative projects have added to several large deals recorded during 2015, which included CVS Health Corp.’s new 328,020-square-foot lease in Imperial Distribution Center, Foxconn Corp’s 400,250-square-foot deal at Fallbrook Distribution Center, McKesson’s 357,887-square-foot lease at Gateway North Business Park, and a 207,000-square-foot deal by Niagara Water in Bayou Bend Business Park.

Net absorption was shared by all industrial types throughout the year with warehouse/distribution properties accounting for the bulk of absorption this quarter (571,788 square feet) and for the year, ending with 5.5 million square feet or 81.1% of the overall annual total.

Activity is slowing, but not enough to cause a large bump in the vacancy rate, which increased to 6.0% from 5.4% the previous quarter. This rate is a slight increase from the vacancy rate of 5.8% recorded during the same quarter a year ago. Vacancy for warehouse/distribution space citywide is 6.3% with manufacturing space at 4.2%.

More than 6.7 million square feet in 73 buildings came online during the year, with just three breaking ground during the fourth quarter. Collectively, all industrial buildings completed in 2015 are currently 34.0% leased and represent more than 2.1 million square feet of absorption for the year. The majority of construction occurred in the Northwest and Northeast, which accounted for 23 buildings in 2.2 million square feet and 18 buildings in 1.0 million square feet, respectively.

Construction activity is still high with many proposed properties announced. Currently, 27 projects representing almost 8.0 million square feet are underway. The two largest BTS projects remain Daiken’s 4 million square foot facility off Highway 290 and FMC’s new project at Generation Park in the Northeast.

Despite the downturn, there is still major activity in the industrial sector, especially in the South, Southeast and even in the Northwest for both build-to-suit and speculative projects. FedEx recently announced an 800,000 square-foot distribution building off Highway 290 in Cypress, which will become the company’s largest distribution warehouse in Texas. Keystone Automotive Industries is reportedly working with Nelson Commercial to build a 200,000+ square-foot facility near Bush Intercontinental Airport, and Clay Development is starting a 1.5 million square-foot, three-building speculative project called Cedar Park Distribution Park. The first 500,000 square-foot building is scheduled to break ground early this year. The Pearland area is also seeing activity with a couple projects: Tool Flo’s 80,000-square-foot facility in Spectrum Business Park and the Lonza Group’s 100,000 square-foot biotechnology facility in the lower Kirby district.

Rental rates have taken a slight drop this quarter to $7.16 from $7.74 last quarter and slightly less than the $7.57 recorded during the same quarter last year.

Sublease space has been steadily increasing throughout the year, and took a higher jump in fourth quarter to almost 2.5 million square feet, a 32.4% jump from third quarter. This quarter’s total is an increase of 61.5% from the same quarter a year ago, and is starting to rival the larger 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.