Houston’s Premier Office Buildings Still Outperforming the Market

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A Down Market in Houston

Houston’s commercial real estate market continues to be slightly down, reflecting a national trend. Industrial and retail properties have fared better than the office market which has been slow to rebound. At the same time, Houston’s premier office buildings are still outperforming the market.

Houston’s commercial real estate market closely follows energy market trends. Because of this, low oil prices affect the city. Global oil futures continue to trade below $50 a barrel. As a result, energy companies make cutbacks like reducing their workforces. A decrease in the number of employees leads these companies to place commercial spaces on the market resulting in higher vacancy rates.

At the same time, there are positive factors buoying Houston’s commercial real estate market:

  • The completion of several large projects in the construction pipeline that had been put on hold due to the energy slump
  • The creation of 45,300 jobs between May 2016 and May 2017
  • Signing 3.2M SF of office leases in Q2 2017
Citywide Vacancy Rates

Yet even with these positive signs, there are still increased vacancies in the Houston office market. A recent report by Colliers International shows that Houston vacancy rates have risen over the past year continuing a trend of the past several years.

Over the previous year, the citywide vacancy rate rose from 16.5% in Q2 2016, an increase of 230 basis points. More recently throughout Houston, the citywide vacancy rate rose from 18.4% in Q1 2017 to 18.8% in Q2 2017, an increase of 40 basis points.

The CBD (central business district) and suburban markets saw different vacancy rate changes in Q2 2017. The average CBD vacancy rate increased from 19.3% to 19.8% (up 50 basis points) and the average suburban vacancy rate increased 18.2% to 18.5% (up 30 basis points).

Below is a more specific breakdown of Houston office leasing vacancy rates by class and location in Q2 2017:

  • CBD Class ABetween Q1 2017 and Q2 2017, class A vacancy rates in Houston’s CBD only rose 20 basis points from 17.1% to 17.3%.  
  • CBD Class B – The average CBD Class B vacancy rate rose 100 basis points from 27.7% to 28.7%.
  • Suburban Class A – The average suburban Class A vacancy rate rose 60 basis points from 20.8% to 21.4%.
  • Suburban Class B –  The average suburban Class B vacancy rate dropped 30 basis points from 16.7% to 16.4%.
Houston’s ‘Trophy Market’ Stays Strong

However, despite this increase in vacancies throughout Houston, skyline inventory continues to be strong, outperforming other segments of the commercial real estate market. Also referred to as the ‘Trophy Market,’ these properties are Houston’s premier office buildings. These top-tier Class A spaces are larger than half-a-million SF, non-owner occupied and located in Houston’s core. BisNow reports:

Houston’s eight trophy buildings attracted 64% of deals larger than 20K SF since 2016 despite comprising only 36% of the skyline inventory. Skyline buildings command rents that are on average 28.8% higher than non-skyline Class-A rents in the CBD.

Looking Forward to the Upswing

Due to its concentration of energy companies, Houston has experienced a downturn in its commercial office market. Yet local experts believe that within the next year, this trend will reverse. At the same time, Houston’s premier office buildings continue outperforming the general commercial market.

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