How Hurricane Harvey Upended Houston’s Office Market and Sublease Recovery
Ralph Bivins, Editor
HOUSTON – (By Ralph Bivins, Realty News Report) – Earlier optimism that Houston’s sublease office inventory had finally fallen below 9 million square feet may have been premature. Recent developments pushed that total back above 9 million square feet.
The surge came when TechnipFMC placed roughly 376,000 square feet of space on the market in the Energy Corridor, reversing the modest gains the market had shown.
According to the NAI Partners Sublease Index, which tracks sublease availability, the sublease rate rose to 15.5 percent in February, up from 15 percent in January.
Sublease availability hit its peak at around 12 million square feet in 2016, making Houston one of the hardest-hit markets nationally. Conditions improved somewhat in 2017, a rebound that was influenced in part by displacement caused by Hurricane Harvey.
The hurricane’s effect on the office market has often been understated. Some industry observers noted that only about 50 buildings out of Houston’s roughly 230 million square-foot office inventory experienced damage and that many tenants were able to return within 30 days.
However, those figures typically excluded Class C buildings—older, smaller properties that provide more affordable office options. If Class C properties were fully accounted for, the number of damaged buildings could have been closer to 100, or about 7 percent of the market.
Many companies displaced by flooding temporarily relocated into the abundant sublease space available across the city.
As a result, the market’s apparent improvement in the fourth quarter of 2017 was at least partially driven by hurricane-related moves. The reduction in sublease inventory and the small amount of positive absorption recorded in that quarter may not have occurred without Harvey’s influence.
Some sizable tenants permanently changed locations after the storm. For example, Saudi Aramco vacated its Meyerland building near Brays Bayou and leased approximately 200,000 square feet in Allen Center downtown—a deal that involved several floors of sublease space previously occupied by Devon Energy.
In northwest Houston, Hewlett-Packard’s campus on Compaq Center Drive suffered significant damage, and the Energy Corridor also saw notable storm impacts.
Overall, the effect of Hurricane Harvey on Houston’s office market was likely underestimated. Any early optimism about a strong recovery should be tempered. Houston’s real estate markets can shift rapidly, and current signs suggest the recovery will be gradual rather than swift.
As Colliers president Patrick Duffy observed in a recent address, “We expect the office market to remain a little ugly and bounce along the bottom for a while. It’s going to be a long crawl out.”
