Click here to access complete statistics and broker commentaries.

Houston Office Market Summary

Houston’s commercial real estate market offers mixed readings, as office continues to struggle and industrial continues to build. That’s according to quarterly market research compiled by Commercial Gateway, the commercial division of the Houston Association of REALTORS® (HAR).

The third quarter reported direct positive absorption of 575,726 square feet of office space primarily due to Phillips 66 occupying its new 1.1 million square-foot campus in Westchase. If not included, the absorption number would be negative. That move-in, along with several other recent completions including the Greater Houston Partnership’s building in the Central Business District and Region’s Financial Center in Greenway Plaza, helped to offset increasing vacancies in Class A properties. Class B and Class C properties both reported negative absorption for the quarter, a negative 592,992 square feet and a negative 156,008 square feet, respectively.

Absorption year-to-date is running at almost 1.5 million square feet, once again primarily due to multiple owner-occupied projects including Phillips 66 and National Oilwell Varco in Westchase, accounting for more than 1.6 million square feet in their new buildings, and Hillcorp with another 515,025 square feet in the Central Business District.

Space left behind by various firms occupying those new properties are showing up as direct space and affecting the vacancy rate, which continues to climb. The current 15.5% direct vacancy rate is up from the 15.2% vacancy recorded last quarter, and also up from the 13.3% recorded during the same quarter in 2015. No submarket is reporting a single-digit vacancy rate, and among the larger submarkets, only the Central Business District is reporting single-digit vacancy in Class A space. Class A space overall is 14.2% vacant. One of the larger spaces to hit the market was Halliburton’s 560,000-square-foot building at 10200 Bellaire, part of the company’s Oak Park Campus. Halliburton completed its employee relocation to its corporate headquarters in North Houston during the third quarter and placed the entire 48.9566-acre campus on the market.

Halliburton’s decision is just one example of the changing economy related to the energy downturn, which is clearly reflected in the record-level direct vacancy when combined with the additional 10.7 million square feet of sublease space. During the third quarter, 84 new sublease spaces totaling almost 1.9 million square feet were added to the list, according to Commercial Gateway statistics. The positive side of that is the net gain in sublease space was only 700,000 square feet for the quarter, which means the other listings were either leased, taken off the market for some reason – some may have been retained by the current tenant, or the sublease term expired.

Currently at 10.7 million square feet, Houston’s office sublease market has doubled in the past year, when Third Quarter 2015 statistics reported by Commercial Gateway totaled 5.7 million square feet. Regarding location, almost three-fourths of all sublease space is located in four market areas with the top two representing almost half of the overall total. The Energy Corridor leads the way with 27.0%, the Central Business District with 22.1%, followed by Westchase and Uptown markets at 12.8% and 12.0%, respectively. Broken down by space, currently 26 sublease listings are marketing more than 100,000 square feet, with 10 of those reporting contiguous blocks of more than 100,000 square feet. However, recent reports have increased the sublease total to around 12 million square feet and growing.

For the quarter, six new buildings were completed, adding almost 1.6 million square feet to the market and 66.0% preleased. All but one of the six had preleasing; the largest to be completed was BHP Billiton’s 600,000-square-foot Tower in Uptown. BHP Billiton will be occupying that space either later in the year or early next year and has already put some of its current space on the sublease market. Year-to-date, 18 properties totaling 6.1 million square feet were completed in 2016.

Construction starts have halted for the most part since the first quarter, with only office buildings in mixed-use or boutique office projects breaking ground. Overall, the Houston under-construction office market has 10 properties totaling 2.3 million square feet, of which 609 Main at Texas represents almost half of the total and is the largest spec building. Collectively, the under-construction buildings are about 45.3% preleased, with 13 properties classified as multi-tenant. Of those under construction, two are scheduled for completion by yearend.

Concessions are becoming more commonplace in the market, even though quoted rental rates have remained steady. Rental rates showed a slight decrease from the past quarter and an increase the past year with the current overall averaged weighted rental rate of $28.15, down from last quarter’s $28.22 rate but up from $27.20 from last year’s third quarter. Class A rates, now at $33.49 citywide and at $42.67 in the CBD, experienced slight increases from last quarter. Quoted rents for sublease space decreased almost a full $2, or 7.4%, from $24.31 last quarter to $22.41 this quarter.

Houston Industrial Market Summary

Houston’s industrial market continued to expand dramatically during the third quarter with positive direct net absorption of 6.1 million square feet, according to statistics compiled by Commercial Gateway. Daikin Industries’ manufacturing and distribution facility, reported as the largest concrete tilt-wall building in the world at 4 million square feet, accounts for about two-thirds of the quarter’s absorption. Located off U.S. Highway 290 about three miles west of State Highway 99, the $417 million campus represents the consolidation of four existing facilities in the U.S. Built by the Japan-based HVAC manufacturer, the facility will eventually employ up to 5,000 people.

This quarter’s absorption represents the 27th consecutive quarter – over six years – of positive absorption, with seven quarters recording more than 2 million square feet each and more than half recording more than 1 million square feet. Even without Daikin’s property, the current quarter’s absorption compares favorably to the 1.7 million square feet recorded in third quarter last year. The current absorption total includes 2.3 million square feet of warehouse-distribution space along with 4.1 million square feet of manufacturing space. Only light industrial space offset the positive levels with a negative 364,831 square feet.

Activity is slowing for some product in some areas but due to the large property coming online totally leased, the vacancy rate decreased slightly to 6.1%, compared to 6.3% the previous quarter. Vacancy for warehouse/distribution space citywide is 6.3% with manufacturing space at a low of 3.0%.

Almost 6 million square feet in 11 buildings came online during the third quarter, contributing about 5.1 million square feet to the absorption total coming on line at 85.4% leased. Year-to-date, 39 industrial buildings totaling almost 9 million square feet were completed in 2016 and are collectively 79.1% leased.

Construction activity is still high with many projects underway and other build-to-suit (BTS) projects getting ready to start construction before the end of the year. Currently, 42 buildings representing 6.4 million square feet are underway. The largest BTS 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 more than 3.1 million square feet followed by the Southwest with eight projects totaling more than 1.1 million square feet. Overall, the under-construction market is 54.5% preleased.

Rental rates have decreased slightly this quarter to $7.10 from $7.21 last quarter but are lower than the $7.77 recorded during the same quarter last year.

Sublease space had been steadily increasing each quarter during the last couple years, and increased slightly to 2.6 million square feet this quarter. The current quarter’s total is still almost double the square footage from the same quarter a year ago.