Houston Vacancy Climbs for 11th Consecutive Quarter

November 10, 2017  /  commercial office leasing

Across the nation, the overall commercial real estate market is strong. However, Houston is currently between a falling phase and a bottoming-out phase. Below is an overview of the current state of commercial real estate in Houston.

Leasing Activity

At present, the weakest part of the Houston commercial market is leasing. According to JLL’s Q3 2017 report, Houston’s total vacancy rose for the 11th consecutive quarter, rising 40 basis points from 22.4% in Q2 2107 to 22.8%. Also, the average deal size reached its lowest point (4,700 SF). JLL also reports that in Q3 2017:

  • The average asking rent was $30.55, down from $30.79 in Q2 2017
  • YTD net absorption was -2,400,147 SF compared to -1,376,620 SF the previous quarter
  • There was also 2,440,278 SF of space under construction in Houston as of Q3 2017

Despite rising rental vacancies, sublease inventory decreased for the fourth consecutive quarter to 10.4 million SF. Two 100,000 plus SF deals helped put a major dent in Houston’s sublease inventory:

  • One Shell Plaza – NRG signed a 431,000 SF sublease deal
  • Two Allen Center – Motiva signed a 173,000 SF sublease deal

Yet in spite of these and a few other large subleases around town, the third quarter was still down. For the seventh consecutive quarter, Houston’s leasing activity failed to surpass its 10-year quarter. At the same time, the sheer amount of available space has given tenants the upper hand in lease negotiations. Given the current conditions in Houston, the market may continue to favor tenants into 2018.

Subleases so Far in Q4 2017

Since the Q3 2017 JLL report was released, new activity has lowered sublease inventory even more. The most recent information shows that Houston’s sublease space dropped below 10 million SF for the first time since 2015. At the moment, there is 9.2 million SF of sublease space available, about 4% of Houston’s overall office inventory. Also, with this new activity, direct available space is now around 52 million SF, a current vacancy rate of 22.5%. Some of the most recent sublease deals include:

  • Costello Engineering’s 35K SF deal in CityWest Place
  • Wortham Green’s 26K SF deal
  • 25K SF of sublease space absorption at Research Forest Lakeside

Pricing has played a role in this decrease. Since the beginning of the oil downturn in Q3 2014, average gross rental rates for sublease space in Class-A buildings built since 2014 has dropped 36% to $24.17.

Sales

However, despite slow leasing activity and rising rental vacancies, investors have re-entered the Houston market driving up sales of commercial properties. Compared to 2016, office sales volume is up over 430%. Three large transactions helped buoy sales:

  • Spear Street Capital’s $274 million acquisition of Columbia Property Trust’s Houston portfolio
  • Brookfield’s $875 million acquisition of Houston Center from JPMorgan Asset Management
  • TH Real Estate, Silverpeak & CPPIB’s $512 million 49.0 partial interest acquisition of Greenway Plaza from Parkway Properties
Houston on the Upswing

The cyclical nature of real estate has moved Houston into a bottoming out phase. Contrary to some people’s fears, Hurricane Harvey had less of an effect than expected on commercial real estate activity. There are positive signs of the market’s health in Houston such as the return of investors and an increase in sales. Also, the fourth consecutive quarter of decreased sublease vacancy show Houston’s potential to reverse its 11-quarter overall vacancy trend.

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