HOUSTON – (Realty News Report) – The Houston office market is experiencing significant strain as vacancy rates climb amid current economic challenges.
Nearly 50 million square feet of office space in Houston now sit vacant, and many industry observers fear a large portion of that space may remain unfilled for an extended period.
Owners of downtown towers and suburban office buildings are grappling with a pandemic-driven recession and a weak energy sector. Longer-term structural questions also cloud the outlook: corporate tenants are reassessing remote work, the effectiveness of virtual meetings, and optimal workplace density as attitudes toward infectious disease, health, and wellness evolve.
Second Quarter 2020: Houston’s office vacancy rose to 21.6 percent in Q2 2020, up from 19.4 percent in Q2 2019, according to CBRE. Average asking rents have slipped as well: $28.94 per square foot in Q2 2020 versus $29.47 in Q2 2019, CBRE reported.
CBRE also recorded negative absorption of 1.1 million square feet in the second quarter, reflecting a substantial increase in available space.
Several large, high-profile moves contributed to rising vacancy. In The Woodlands, Occidental Petroleum (OXY) vacated a major block of the former Anadarko space. National retail Chapter 11 filings have also added to supply: Stage Stores, which filed in May, is leaving about 200,000 square feet along the West Loop.
New supply continues to come online. Approximately 4.7 million square feet of office space is currently under construction, led by Hines’ proposed 47-story Texas Tower in downtown Houston. While these flagship projects are expected to attract tenants, industry experts warn that existing Class B buildings may struggle to compete with newly completed, class-leading towers.
Leasing activity has slowed across the market. Madison Marquette reported second-quarter leasing at roughly half the level seen a year earlier. The firm cautions that prolonged coronavirus spread and ongoing volatility in energy markets could lead to more layoffs, bankruptcies, and downsizings—factors that typically drive lower rents, higher vacancies, and in some cases loan defaults.
Local brokers see recovery prospects as gradual. Griff Bandy, a partner at NAI Partners, believes a rebound in 2020 is unlikely but anticipates improvement in 2021. NAI’s recent data show year-to-date negative absorption of about 1.7 million square feet, indicating a sizable volume of space has become available this year.
Houston has begun to regain jobs lost earlier in the pandemic, recovering more than 100,000 positions since the spring downturn. Still, the energy sector remains under pressure: domestic drilling activity sits near record lows, even as West Texas Intermediate (WTI) prices have steadied in the low-$40s per barrel—an improvement from April’s historic lows but still below levels that signal a full rebound for many producers. Reduced driving and weaker global demand continue to limit a robust recovery.
Bankruptcies in the energy sector have been frequent. Rystad Energy projected that, without a meaningful increase in oil prices, as many as 150 additional energy firms could file Chapter 11 by the end of 2022. For the remainder of 2020, Rystad forecasted roughly 29 additional energy-related Chapter 11 filings.
Mergers and acquisitions present another risk to office occupancy. Corporate consolidations often produce redundant office footprints. For example, Chevron’s offer to acquire Noble Energy could lead to further office space being vacated in Houston’s market.
The energy industry remains a dominant occupant of Houston office space, and its ongoing contraction makes reversing a two-decade low in the market particularly challenging.
“The oil and gas sector has created a vacuum,” said Dan Boyles, a longtime office leasing specialist and partner at NAI Partners. “Many companies have excess space. Clients and prospects are actively seeking ways to exit leases—either through subleasing or lease restructurings.”
Sept. 1, 2020 Realty News Report Copyright 2020
File: Houston Office Market Challenged by Pandemic and Energy Industry Woes
