Houston Office Market Recovery: Q&A with Charles Herder of Colliers International
Charles Herder
HOUSTON – (Realty News Report) – True to its nickname, Space City has an abundance of office space, and vacancy numbers are rising. Colliers International reports that Houston’s citywide vacancy rate reached 21.7 percent in the second quarter, up from 18.8 percent in Q2 2017. A growing sublease overhang, intensified by Occidental Petroleum’s decision to place roughly 800,000 square feet at Greenway Plaza on the sublease market, casts a shadow over the office sector. Will companies continue to give up space? How will incoming new supply affect the market? While many segments of Houston’s real estate market remain healthy, uncertainty persists about when the office sector will fully recover. To explore these questions, Realty News Report spoke with Charles Herder, a principal shareholder and Co-Chairman of Colliers International in Houston. With more than 35 years in the business, Herder joined Colliers’ Houston office when it numbered just four people compared with today’s 175.
Realty News Report: What is the current state of the Houston office market?
Charles Herder: Significant vacancies exist across most submarkets, with the notable exceptions of stronger areas like The Woodlands and East Fort Bend County/Sugar Land. Those submarkets are healthier largely because development there has been more controlled.
Realty News Report: When might the office market turn around — 2020? 2021?
Charles Herder: The market is attempting to rebound now, but large moves such as Occidental’s planned sublease of about 814,000 square feet at Greenway Plaza complicate recovery. The real issue may not be a single “turnaround” moment but when supply and demand reach a healthy balance. That balance could easily be post-2021.
Realty News Report: How much new office space is currently under construction?
Charles Herder: Approximately 1.8 million square feet of office space is under construction, and about 55 percent of that is pre-leased. Build-to-suit projects account for 38 percent of the pipeline; the remainder is speculative, and roughly 60 percent of the speculative space is already pre-leased. Notable build-to-suit projects include two buildings for HP and one for ABS at the CityPlace development near Exxon Mobil’s north campus. Additionally, about 12 million square feet of office space are proposed, though I don’t expect most proposed projects to move forward soon without substantial pre-leasing—typically 50 percent or more.
Realty News Report: What will happen when this pipeline is delivered? Will rents drop and concessions rise?
Charles Herder: New construction is already coming online, but I’ve been surprised by the market’s resilience. The portion of space still under construction is relatively small—around 800,000 square feet—compared to Houston’s total office inventory of roughly 230.7 million square feet, so its immediate impact should be limited.
Realty News Report: The Energy Corridor has been among the hardest hit submarkets. What’s driving that?
Charles Herder: The Energy Corridor is dominated by oil and gas tenants. Even with oil prices on the rise, many firms in this sector have shifted toward a more cautious stance, and I expect that conservatism to persist for the foreseeable future.
Realty News Report: How do you see the Energy Corridor evolving over the next three to four years?
Charles Herder: The submarket will continue to recover, but a healthy supply-demand equilibrium is still years away.
Realty News Report: How is downtown Houston faring, especially after departures by Shell and Exxon Mobil? Do those moves indicate a trend?
Charles Herder: It’s hard to say definitively, but I believe downtown Houston will remain a strong market, reflecting the city’s ongoing importance in national and global commerce.
Realty News Report: Are concessions increasing? What’s the typical free-rent offer today?
Charles Herder: Concessions generally fall in the range of three to six months of free rent, often coupled with waived parking fees. For longer leases—ten years or more—tenants can negotiate additional free rent and larger tenant improvement allowances. During the energy downturn, landlords have preferred to offer concessions rather than reduce base rents, which has helped keep quoted rates relatively steady.
Realty News Report: What is your economic outlook for Houston for the rest of this year and into 2019?
Charles Herder: I expect Houston to perform well. The expansion of natural gas flows to the Gulf Coast, primarily for LNG exports, should supply feedstocks for new petrochemical and related manufacturing projects. Houston benefits from abundant raw materials, available labor, and supportive regulations, which should help cushion the city from severe economic downturns.
Realty News Report: Ten months after Hurricane Harvey, what impact has the storm had on Houston real estate?
Charles Herder: Harvey has unquestionably influenced planning, especially in residential development—and that influence is positive.
Realty News Report: What long-term effects do you foresee?
Charles Herder: I expect improved residential planning. While regulatory changes may play a role, I believe developers themselves will take lessons from Harvey into account and plan new projects more carefully to avoid repeat issues.
Realty News Report: Will investors avoid Houston?
Charles Herder: Some investors will be cautious for a time, but concerns will be mostly limited to areas that experienced flooding. Overall investor interest in Houston should remain intact.
