When Will Houston’s Office Market Fully Recover? Timeline & Forecast
Colliers International Houston President Patrick Duffy addresses the audience at the Colliers Houston Trends 2020 event. Photo credit: Ralph Bivins
HOUSTON – The timeline for a full recovery in Houston’s office market remains uncertain. Energy companies, historically major consumers of local office space, are not expanding right now. Some analysts suggest the office sector may not fully rebound until after 2030—or potentially even later.
“We have roughly a 12-year supply of office space,” said Colliers International’s Houston president Patrick Duffy at the Colliers Houston Trends 2020 event in late January.
There are exceptions. Submarkets such as The Woodlands and Fort Bend County are performing well. High-quality Class A properties and newly completed buildings are seeing strong leasing activity and solid occupancy levels.
Citywide, however, the office vacancy rate stands at 19.3 percent, according to Colliers—only a slight improvement from 19.4 percent a year earlier.
Additionally, about 3.6 million square feet of new office construction is currently underway.
“If you do the math, it’s not real pretty,” Duffy said. “The office market is going to be a little ugly for a while.”
New office construction aimed at the “flight-to-quality” trend is modest relative to Houston’s total office inventory of 229.2 million square feet, according to Colliers. Still, since 2015 the market has added roughly 23.1 million square feet of new space, plus the 3.6 million now under construction.
Sublease availability has declined over the past three years. A notable development is Occidental Petroleum’s recent lease of an additional 92,000 square feet in Greenway Plaza—confirmation that the company has committed to Greenway and that its previously available 814,000 square feet there is no longer on the sublease market.
At the same time, Occidental (Oxy) is expected to vacate the former Anadarko Hackett Tower in The Woodlands, a 30-story, 595,854-square-foot office tower at 9950 Woodloch Forest Drive. Colliers will manage leasing for that property.
Colliers’ fourth-quarter report highlights a stark fact: 73 office buildings in Houston currently offer 100,000 square feet or more of contiguous sublease space.
Meanwhile, corporate tenants continue to gravitate toward new developments and prime Class A buildings. These modern spaces help companies attract and retain talent.
Looking across the commercial real estate landscape, Duffy said Houston should see a positive year overall, with steady growth across most sectors in 2020.
There are brighter areas that offset some of the office market’s challenges.
In January, Colliers’ Kent Willis reported that roughly 21 million square feet of industrial space was under construction in the Houston region.
Major industrial projects are launching rapidly. Clay Development and Construction is building a 1.3 million-square-foot distribution center for Medline Industries. Ross Stores has a 2 million-square-foot project underway. Hines is developing a large speculative industrial project along the southern stretch of Beltway 8 near Highway 90.
Industrial space continues to be absorbed at a steady pace, though vacancy rose to 6.9 percent in the fourth quarter, up from 5.4 percent at the end of 2018.
Duffy suggested industrial brokers may want to “tap the brakes” on new construction to avoid oversupply.
Investor demand for Houston industrial assets remains strong. While the industrial market is showing signs of caution—a “yellow light” in 2020—there are no immediate emergency signals.
Overall, Duffy expects 2020 to be a reasonably good year for Houston commercial real estate, with pockets of strength that balance areas of weakness.
