HOUSTON – (Realty News Report) – Houston’s competitive office market is showing signs of modest improvement, though a full recovery could still take several years.
CBRE reports that 5.2 million square feet of Houston office space has been leased so far this year, compared with 4.2 million square feet during the same period in 2018.
“Leasing activity has been strong,” said CBRE Senior Vice President Jason Presley at the firm’s third-quarter press briefing. Presley noted that leasing has been driven by a diverse group of tenants rather than heavy reliance on the energy sector.
Overall, the Houston office market recorded 228,000 square feet of positive absorption in the third quarter, reversing recent negative trends, CBRE said. Year-to-date, however, the market still shows over 605,677 square feet of negative absorption.
The market took a hit in the third quarter when Southwestern Energy consolidated its operations and vacated 289,000 square feet in Springwoods Village in north Houston.
The overall vacancy rate in the third quarter was 19.3 percent, up from 18.5 percent in the third quarter of 2018, CBRE reported.
Houston’s office vacancy issues began in late 2014 when oil prices began to fall. In the months that followed, energy companies reduced staff and paused expansion plans as oil dropped to below $30 a barrel in early 2016. That downturn coincided with delivery of numerous new office buildings into an already slow market, pushing vacancy rates higher. By 2016, sublease availability had grown to 11.4 million square feet. By the third quarter of 2019, sublease inventory had declined to 6.7 million square feet. While reducing sublease supply was seen as key to recovery, it did not produce an immediate turnaround.
With roughly 50 million square feet of office space still vacant, Houston—long known as the Energy Capital of the World—will not recover quickly.
Presley added that new construction remains muted. Although several office projects are underway, most are under 200,000 square feet, with the notable exception of Hines’ 1 million-square-foot Texas Tower downtown. In total, about 2.34 million square feet is under construction—insufficient to create a major oversupply.
Newer buildings continue to attract tenants through a flight-to-quality trend. To remain competitive, older properties are undergoing substantial renovations; more than a dozen downtown skyscrapers currently have major upgrade programs in progress.
Corporations are prioritizing buildings that offer attractive amenities, thoughtful design and modern finishes to recruit and retain talent. In downtown Houston, tenants are increasingly seeking locations near high-quality food halls, Metro rail lines, fitness centers, bicycle facilities, rooftop gardens and other green spaces.
Competition among office buildings will be intense in the coming years. “The truth is,” Presley said, “there will be winners and losers.”
Oct. 18, 2019 Realty News Report Copyright 2019
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