HOUSTON – (Realty News Report) – Inflation concerns and rising office vacancies have challenged Houston’s commercial real estate market, yet Colliers Houston—one of Texas’s largest commercial real estate firms—cites multiple reasons for optimism. The region posted 5 percent job growth in 2021, a strong foundation for recovery.
Although improvements in the office sector may take time, other segments of Houston’s market demonstrated notable strength last year, particularly industrial real estate and warehouse space.
“Our industrial team just crushed it last year,” Colliers Houston President Patrick Duffy said during the Colliers Trends 2022 market update event.
Colliers reported a record 44.5 million square feet of leasing volume in Houston in 2021. Even with robust construction—about 17 million square feet currently under development—the industrial vacancy rate fell. By year-end, vacancy for industrial space was 7.1 percent, down from 8.5 percent at the end of 2020.
Large-scale distribution facilities continue to come online. Avera and Hines each announced roughly 1 million-square-foot projects along Highway 290 near Waller. In late 2021, Stream Realty Partners began work on six buildings totaling 2.3 million square feet at Empire West Business Park in Brookshire, about 30 miles west of Houston.
The rapid expansion of e-commerce—accelerated by the COVID-19 pandemic—has driven demand for massive distribution centers designed to speed deliveries to consumers.
Busiest Year Ever at the Port of Houston
The Port of Houston, one of the nation’s largest ports, is another major driver of industrial real estate demand.
“Houston’s port has seen its busiest year ever. In November, the port surpassed its previous high-water mark of 3,001,164 TEUs (shipping containers) by nearly 16 percent,” Colliers principal Robert L. Alinger wrote. “Full-year estimates exceed 3.4 million TEUs. Material shortages, increased consumer demand, and labor constraints in other port markets are contributing factors to this record growth. Developers continue to seek land positions in Houston’s east and southeast submarkets to serve expanding port activity.”
Backlogs of container ships waiting off the California coast have worsened the supply chain crisis, contributing to shortages of parts and consumer goods across the United States.
At Colliers Trends 2022, K.C. Conway suggested the Port of Houston could gain further advantage if logistics shift away from Southern California. In a presentation titled “The Importance of Rail: Rail Connectivity Will Remake the U.S. Supply Chain,” Conway explained that enhanced rail connectivity in Texas and the southern U.S. could elevate Houston’s logistics role. He noted that the Kansas City Southern railroad, which runs along East Texas, offers the only direct rail route to all of Mexico, and potential rail mergers could be transformational for supply chains.
While industrial, multifamily, retail, and medical real estate segments are showing health, the office sector faces more pronounced challenges.
The Office Market Condition
Houston’s overall office vacancy rose to 23.1 percent in the fourth quarter of 2021, up from 21.8 percent a year earlier, according to Colliers. Class A vacancy approached 25 percent—an underperformance by industry standards.
“The fourth quarter showed some life with nearly 200,000 square feet of net positive absorption, but we expect 2022 to show little expansion in net occupied office product,” Duffy said in his year-end commentary. “High vacancies will continue to push landlords toward highly competitive offerings.”
For the year, the Houston office market experienced a net loss of 1.9 million square feet of occupied office space—what the industry refers to as “negative absorption.”
Remote work trends that emerged during the pandemic, combined with contraction related to the economic slowdown, have weighed on office leasing. Many companies remain cautious about leasing new space, and those that do often reduce their footprint.
Still, the office market produced several bright spots in 2021. Hines completed the 47-story Texas Tower, adding a new landmark to downtown Houston’s skyline. In a headline downtown deal, Shell renewed a 259,000-square-foot lease in the 1000 Main tower—the largest central business district renewal of the year.
In The Woodlands, NYDIG and Lancium Technologies each took full floors of 26,530 square feet at The Woodlands Towers at The Waterway, located at 9950 Woodloch Forest Drive. Colliers handles leasing for the 31-story building, once an Anadarko Petroleum tower and now owned by The Howard Hughes Corporation.
“The Woodlands office market continues to show strong demand as companies choose to locate in this growing submarket,” Colliers principal Bob Parsley said. “The Woodlands vacancy rate was 16 percent in the third quarter of 2021, well below the Houston metro and CBD average of 26.4 percent.”
Feb. 3, 2022 Realty News Report Copyright 2022.
Image: 9950 Woodloch Forest Tower in The Woodlands. Courtesy: Howard Hughes Corp.
File: Colliers Houston Commercial Real Estate Update
File: (2) Houston Commercial Real Estate Update. Colliers Trends 2022. Patrick Duffy. K.C. Conway. Bob Parsley.