Houston Office Market Summary
Houston’s commercial real estate market carried over slow-moving activity from the end of last year into 2017, with confidence increasing but leasing options still plentiful for the near future, according to quarterly market research compiled by Commercial Gateway, the commercial division of the Houston Association of Realtors (HAR).
The first quarter reported direct net absorption of 120,524 square feet of office space primarily due to the 600,000 square-foot occupancy of BHP Billiton’s new building. Amegy also occupied its new 269,258-square-foot space in its namesake building, leaving behind its former 248,985-square-foot space at Five Post Oak Park. Other recent completions include Hines’ 1.06 million-square-foot 609 Main at Texas office building in the Central Business District (CBD); although no move-ins yet, the building is 63.1% preleased with United Airlines the major tenant along with five other firms. For the quarter, Class A properties recorded positive absorption of 322,363 square feet, offset by Class B properties’ negative absorption of 400,575 square feet. Class C reported positive absorption of 198,736 square feet.
Space left behind by various firms occupying those new properties along with sublease spaces showing up as direct space is affecting the vacancy rate, which continues to climb. The current 17.0% direct vacancy rate is up from 16.4% last quarter, and also up from the 14.3% recorded during the same quarter in 2016. Fort Bend County is the only submarket with a first-quarter, single-digit vacancy rate at 8.3%, and only two submarkets, Fort Bend and Southeast, are reporting Class A vacancy less than 10.0% during the first quarter. Class A space overall is 15.8% vacant, while Class B is overall 20.4% vacant and Class C is 11.3% vacant.
Total sublease space is currently reporting more than 9.9 million square feet, which represents a decrease from yearend’s 10.2 million square feet. Although some spaces have been leased, others have turned into direct availability while some spaces have taken off the market as economic conditions have showed some signs of recovery.
The amount of sublease space is playing a large role in the dynamics of the marketplace as landlords have to compete. When combined with direct availability, the availability percentage jumps to 21.6 percent. Regarding location, more than 76% of all sublease space is located in five market areas. The CBD leads the way with 22.2% of the total, while the Energy Corridor is second with 15.1%. Westchase has the next highest amount at 14.8%, followed closely by Uptown with 13.3%, and Greenspoint has 11.4% of the total sublease space. Broken down by spaces, 40 sublease listings are currently marketing more than 50,000 square feet, with 13 of those reporting contiguous blocks of more than 100,000 square feet. The largest sublease available is Shell Oil’s space totaling 877,026 square feet in One Shell Plaza.
The under-construction market in Houston has reached the lowest square footage total in many years, with only seven buildings totaling 736,951 square feet currently underway. The largest, at 188,696 square feet, is The Kirby Collection at 3200 Kirby. But construction totals are about to change with the recent announcement by Skanska that its long-proposed 750,000-square-foot Capitol Tower will soon break ground in the Central Business District after securing a 210,000-square-foot commitment from Bank of America. In addition, three build-to-suit properties will be breaking ground soon in Springwoods Village, the 60-acre mixed-use development in north Houston. The new buildings include one with 303,127 square feet for Houston-based American Bureau of Shipping and two buildings totaling 378,000 square feet for HP; completions are scheduled for mid- to late-2018 with Skanska’s building taking two years to be completed in 2019. In addition to the Bank of America commitment, Targa Resources signed for 127,734 square feet in 811 Louisiana, perhaps the largest deal in an existing multi-tenant building this year.
Three buildings were occupied or completed this quarter: 609 Main at Texas in the CBD, Amegy Bank Tower in Uptown, and 10100 Katy Freeway in the West market. Collectively, the almost 1.7 million square feet hit the market with preleasing of 44%.
Concessions are becoming more commonplace in the market, even though quoted rental rates have remained steady. Rental rates showed a slight increase from the past quarter and an increase from the past year with the current overall averaged weighted rental rate of $28.74, up from last quarter’s $28.33 rate and up from $27.83 from last year’s first quarter. Class A rates, now at $34.75 citywide and at $41.89 in the CBD, experienced slight increases from last quarter. Quoted rents for sublease space decreased from $25.35 last quarter to $24.79 this quarter.
Houston Industrial Market Summary
Houston’s industrial market continued to expand during the first quarter, with positive direct net absorption of almost 3.6 million square feet, according to statistics compiled by Commercial Gateway.
This quarter’s absorption represents the 29th consecutive quarter – over six years – of positive absorption, with eight quarters recording more than 2 million square feet each and more than half recording more than 1 million square feet. The first-quarter absorption totals were positive for all types and included almost 2.2 million square feet of warehouse-distribution space along with 1.1 million square feet net absorption of light industrial space. Manufacturing properties recorded 250,531 square feet while flex/R&D space absorption was 68,506 square feet.
Vacancy rates have increased slightly to 6.8% from 6.6% last quarter and from 6.0% in the same quarter last year due to both slower leasing activity in some areas along with several projects coming online with no preleasing. Vacancy for warehouse/distribution space citywide is 7.4% with manufacturing space at 3.9%.
About 2.1 million square feet in 20 buildings came online during the first quarter. The newly completed projects are collectively 79% leased and contributed almost 1.6 million square feet of absorption. The largest projects to be completed and occupied during first quarter include IKEA’s two buildings in Cedar Port totaling 996,482 square feet; Maintenance Supply Headquarters of 209,000 square feet and Homelegance’s 175,000 square feet, both in Beltway Southwest Business Park, along with Aker BioMarine Manufacturing’s 144,800 square feet at 4494 Campbell.
Construction activity has slowed, with only 32 projects totaling more than 3.5 million square feet underway. The largest build-to-suit is FedEx’s new 800,000-square-foot distribution facility in the Northwest near the Grand Parkway and west of U.S. Highway 290. The bulk of the remainder under construction is concentrated in the Southeast with 14 projects totaling 1.1 million square feet followed by the Northwest with 12 projects totaling 1.3 million square feet. Overall, the under-construction market is 75.0% preleased. Warehouse distribution projects are the major projects under construction as e-commerce giants come to Houston. Amazon has also announced another 1 million-square-foot project in Katy in addition to the 855,000-square-foot project in Pinto Park in north Houston, and DHL Supply Chain is adding another building, this one 222,000 square feet, to its two buildings on State Highway 225.
Rental rates have decreased this quarter to $6.42 from $6.65 last quarter and are also lower than the $7.23 recorded during the same quarter last year.
Sublease space had been steadily increasing each quarter during the last couple years, but decreased slightly to 3.4 million square feet this quarter, representing a 48% increase from the same quarter last year.