HOUSTON – Houston’s office market saw a sharp rise in vacancy during the first quarter, with negative net absorption totaling 789,000 square feet, according to a report from NAI Partners.
In plain terms, more office space became available for lease since the start of the year, reversing hopes that the market had already stabilized. Several large lease terminations and property sales pushed significant blocks of space back onto the market, producing an unexpectedly weak quarter.
One of the largest contributors to the negative absorption was Freeport-McMoRan’s buyout of its lease at 717 Texas Avenue in downtown Houston. That transaction added roughly 366,000 square feet of vacant space to the market, NAI Partners reported. Another major change came when 500 Jefferson was sold, resulting in about 277,000 square feet becoming vacant. An additional 93,000 square feet was vacated at 1401 McKinney, adding further pressure to downtown availability.
The first-quarter results were more disappointing than many had anticipated. Several positive announcements earlier in the quarter had suggested momentum: Hines’ new office tower at 801 Texas secured numerous new tenants and opened with about half of its space leased, a notable achievement amid broader softness. Targa Resources’ 128,000-square-foot lease at 811 Louisiana also signaled demand. Developers announcing new projects contributed to a sense that the market might be trending toward recovery.
Despite those encouraging signs, overall vacancy rose and asking rents softened. NAI Partners reported that Houston’s office availability rate—which includes traditional vacancies and vacant sublease space—reached 25.7 percent in the first quarter, up from 23.6 percent a year earlier.
CBRE has similarly warned that Houston’s vacancy rate is at a multi-decade high, one of the highest in the nation. That elevated supply backdrop means the market faces headwinds, and some property owners may experience significant financial pressure before conditions improve.
On the positive side, new construction activity has slowed, which will limit the flow of additional space coming online. With fewer buildings under development, supply growth is moderating, which could help rebalance the market over time. However, there is no quick fix: absorption will need to improve before vacancy and rent trends show sustained recovery.
At a Houston press luncheon earlier this year, CBRE’s Hal Holliday—one of the country’s most experienced voices in commercial real estate lending—noted that most Houston building owners are well-capitalized and able to service debt during the downturn. Still, Holliday observed that some owners may decide it is more prudent to convey properties to lenders through a deed in lieu of foreclosure or other means; several such cases have already occurred.
Another challenge is the large volume of sublease space. While sublease inventory can temporarily absorb demand, these arrangements often expire, returning space to direct vacancy and creating renewed pressure on building owners when sublease terms end.
April 10, 2017 Realty News Report Copyright 2017