Houston Office Market Outlook: Q&A with Dan Boyles, NAI Partners
Dan F. Boyles Jr.
HOUSTON – (Realty News Report) – Houston’s office market continues to face headwinds. Vacancy remains high, though leasing activity has shown signs of improvement in recent months. In the third quarter of 2018, NAI Partners reported a 21.5 percent office vacancy rate in Houston, equal to roughly 50 million square feet of available space. About 8.8 million square feet of that inventory was listed as sublease space. Several new office buildings are under construction and additional projects are in the planning stages. To better understand market dynamics, Realty News Report spoke with Dan F. Boyles, Jr., a partner in NAI Partners’ Office Tenant Representation Group. With more than 29 years in commercial real estate and participation in over $1 billion of lease and sale transactions, Boyles specializes in office leasing and sales and offers a long-term perspective on Houston’s office landscape.
Realty News Report: What is the current state of Houston’s office market?
Dan F. Boyles, Jr.: Overall, the market is slowly improving but remains fragile. Demand drivers are limited, yet supply has been somewhat constrained by a relative slowdown in new deliveries and a reduction in fresh sublease listings compared with the high of the downturn. Certain sectors—such as coworking and executive suite operators like WeWork and WorkSuites, as well as law firms—are active and leasing space, but not at a pace sufficient to offset the large amount of vacancy that emerged during the downturn. Within the energy sector, which still heavily influences Houston’s office market, service companies appear stabilized while upstream activity remains muted. Petrochemical and midstream companies are active, but their presence has not yet translated into material office absorption.
Realty News Report: When will the office market fully recover, and what will drive that recovery?
Dan F. Boyles, Jr.: Right now the market is essentially treading water. There’s a flight-to-quality underway: developers are building amenity-rich, modern offices, and prominent firms are moving into those properties. While that benefits tenants who want newer product, it can extend the recovery by leaving older buildings with larger vacancies when major tenants relocate. For a true recovery, I’d like to see at least three consecutive quarters of meaningful positive absorption. The recent quarter showing nearly 800,000 square feet of positive absorption is encouraging, but we need a sustained trend to feel confident that recovery is underway.
Realty News Report: The Energy Corridor has struggled with significant vacancy and lots of sublease space. What’s your view for that submarket?
Dan F. Boyles, Jr.: The Energy Corridor will likely be among the slowest submarkets to rebound. A large concentration of oil and gas firms placed substantial space on the sublease market, and new construction added to available inventory. Much of the sublease space is being aggressively priced to lease, which should accelerate absorption. We’ve also seen major relocations into the area—firms including Oxy and Transocean have recently committed to space—illustrating that companies value the location and the presence of industry peers. Historically, energy-driven downturns have fostered long predictions for a slow recovery, but I’ve observed that absorption often happens faster than many expect.
Realty News Report: Some industry observers promoted the Spring/Woodlands area as a “New Energy Corridor” with big tenants like ExxonMobil and Anadarko establishing a strong presence. Can the north-side corridor overtake the traditional west-side Energy Corridor?
Dan F. Boyles, Jr.: ExxonMobil’s arrival certainly spurred activity and attracted companies that wanted proximity to the campus, but other major moves to the north side—such as ABS and Hewlett Packard—were driven by amenities and improved access, including Springwoods Village and completion of the Grand Parkway. In my view, the north side will not surpass the west side in every respect. The fundamental drivers are infrastructure, access, and amenities rather than a single corporate headquarters. Master-planned communities and amenity-rich environments exist across both sides of town, and many corporations simply want to be near those assets.
Realty News Report: What is your outlook for the Uptown/Galleria submarket?
Dan F. Boyles, Jr.: The Galleria area weathered the downturn better than some west-side submarkets and downtown. Less speculative construction occurred there during the cycle, and much of the new product was pre-leased or occupied by major tenants. That said, upcoming corporate moves could place new availability on the market—for example, Marathon Oil’s pending relocation to the CityCentre area will free up a large block of space in 2021, and there’s potential for other firms to place more space on the market. Nevertheless, the Galleria’s location, access, and range of amenities are strong competitive advantages. Those factors will continue to attract tenants and support demand.
Realty News Report: How will the new transit line on Post Oak Boulevard affect the area?
Dan F. Boyles, Jr.: The transit project is already having an impact—primarily through construction-related congestion. While the line may improve the neighborhood’s image and offer an alternative to driving for some commuters, I don’t expect it to dramatically change commuting patterns in the short term. Data show that Houston commuters overwhelmingly drive alone, and that habit has not diminished over the past decade. Transit infrastructure is limited outside downtown, and until broader changes in commuting behavior or technology occur—autonomous vehicles, for example—the practical effect of a single new route will be modest.
Realty News Report: Hines plans to relocate from its longtime Williams Tower headquarters in the Galleria to over 100,000 square feet in a new downtown tower they are developing on the former Houston Chronicle site. What do you make of this move?
Dan F. Boyles, Jr.: Hines’ relocation reflects the broader flight-to-quality trend rather than a simple downtown-versus-Galleria debate. They are choosing newer, amenity-rich space that better fits modern corporate needs. When Hines vacates Williams Tower, that block of space will become available in a quality property that’s currently well occupied; it’s likely that the space will be leased. Corporations are willing to pay a premium for contemporary amenities—food halls, increased daylight, larger floor plates, terraces, and integrated green space—so moves like Hines’ make strategic sense.
Realty News Report: With more amenity-rich buildings being developed, owners are renovating to remain competitive. How will this trend play out?
Dan F. Boyles, Jr.: Owners are actively repositioning assets to meet tenant expectations. Renovations and added amenities are common across Class A buildings in the Galleria, Greenway, and Downtown submarkets. Examples include lobby overhauls, new fitness and conference centers, upgraded food-service options, and activated public spaces. Owners recognize that modern amenities drive leasing demand and can justify higher rents, so expect continued investment in renovations and tenant-focused activations across the portfolio of downtown and suburban office properties.
Realty News Report: Downtown Houston contains more than one million square feet of Class C space. What will happen to those properties?
Dan F. Boyles, Jr.: Many older Class C buildings are strong candidates for conversion or redevelopment. Given the scarcity of buildable downtown sites, owners and developers will evaluate whether existing structures remain viable as office product. Some will be renovated and repurposed, while others may be demolished to make way for new development that better fits current market demand.
Realty News Report: Are you a native Houstonian, and what is your long-term view for the city’s growth?
Dan F. Boyles, Jr.: I was born in Houston, and I remain optimistic about its long-term prospects. The region’s business environment is resilient and dynamic, and while energy remains an important sector, Houston’s economy has diversified. Small and mid-sized businesses are growing, and the city’s overall fundamentals support continued long-term growth. Houston will adapt and thrive over time.
