2018 was a big year for the Houston commercial office market. Specifically, this marks the first year since 2014 that Houston has experienced a positive net absorption in square footage.
Of the 12,690,148 square feet in leasing activity in the Houston office leasing market in 2018, more than 25% went to the top 10 largest leases in the market. In fact, Houston’s largest leases were signed by large companies looking to attract or keep high-end talent.
Every lease mentioned in the top 10 is Class A or Class A+, This means that high-end amenities, such as green spaces, fitness centers, dry cleaning, and restaurants, are available to tenants.
1. Hewlett Packard Enterprise Co.
The largest lease of the year was a prelease signed by Hewlett Packard Enterprise Co.
… (NYSE: HPE) in October for 568,000 square feet.
This is a CityPlace space in Springwoods Village Campus, owned by Patrinely Group, a joint venture between USAA Real Estate and CDC Houston Inc. According to a press release, the development will consist of two buildings. Amenities may include a fitness center, cafe, and adjoined open courtyard space.
More About CityPlace
CityPlace has attracted other large corporations, such as anchor tenant Exxon Mobil Corp (NYSE: XOM), Southwestern Energy Inc. (NYSE: SWN), American Bureau of Shipping, and HP Inc. (NYSE: HPQ). (HP Inc. is not to be confused with Hewlett Packard Enterprise Co., which spun off of HP Inc. in November 2015.)
When complete, CityPlace should have over 4.4 million square feet of Class A office space and 400,000 square feet of retail space.
CityPlace, a 60-acre, mixed-use development, has also attracted a 337-room, 10-story Marriott hotel along with three other hotels.
Other businesses here include a cinema, many high-end restaurants, and attractive amenities such as walking trails and a nature preserve. All these are housed within the 2,000-acre Springwoods Village planned development.
2. Apache Corporation
In April, Apache signed a five-year extension of its lease at Post Oak Central, 2000 Post Oak Boulevard, for 524,342 square feet. Currently, the lease is extended until December 31, 2024. Harris County assessed Post Oak Central at $46,928,700.
Apache plans to construct a headquarters on land it purchased at 1770 Post Oak Boulevard in BLVD Place once economic and market conditions improve. The Canada Pension Plan Investment Board is the owner of the property, which was built in 1975.
3. McDermott International Inc.
In December, McDermott International leased Energy Center Five
… at 915 North Eldridge Parkway. McDermott, the only tenant, entered the 16-year lease with TCH Energy Venture Corridor.
Harris county assessed Energy Center Five at $100,514,386 in 2018. McDermott is combining operations from five different buildings into the 524,323-square-foot, 18-story, Class A office space, which will house over 1,700 employees.
According to the Houston Business Journal, “The facility has amenities such as an active greenspace, a fitness center, cafeteria, multi-purpose rooms for large meetings, on-site parking garage and a water feature to provide outdoor areas for employee enjoyment. The building is certified as a Gold LEED building. The building is located in the energy corridor in Houston, with close access to Beltway 8, Interstate 10 and key decision makers.”
The trend of large companies signing leases for high-quality Class A and A+ properties is repeated throughout this report, as companies seek properties with high-quality amenities to attract and retain talent.
According to CBRE, the Energy Corridor’s vacancy rate in the third quarter of 2018 was 27.3%, which has since dropped to lower than 25%.
4. Total S.A.
France-based Total S.A. renewed its lease for 305,000 square feet of office space at Total Plaza in the fourth quarter of 2018.
Located at 1201 Louisiana Street, Total Plaza is a 32-story, Class A office built in 1971. According to county records, this property has a net rentable area of 843,533 square feet and an assessed value of $151,600,000.
Transocean signed Houston’s fifth-largest commercial office lease for the 300,000-square-foot, 11-story, Class A office space owned by Piedmont Office Realty Trust Inc. (NYSE: PDM). Enclave Place, 1414 Enclave Parkway will be Transocean’s new headquarters when the company occupies the property in 2019.
The 17-year agreement will take up the entire building, which has sat vacant for years after the oil market’s plunge in 2014.
According to Harris County, Enclave Place has an assessed value of $49,320,170 and was completed in 2016.
6. Waste Management
Waste Management preleased nine floors, a total of 284,000 square feet, of the 754,000-square-foot Capitol Tower on a 15-year lease.
Located at 800 Capitol Street, Capitol Tower is being marketed as “tomorrow’s workplace, today” with attractive amenities such as a rooftop terrace and Downtown Houston’s first “skypark,” which will be a 24,000-square-foot green roof.
Capitol Tower sits a block away from the METRORail stations and boasts a LEED v4 Platinum certification. When completed, it will be a 34-floor, Class A office space that should come online by 2020.
Harris County appraised the Skanska development at $72,460,118.
7. Schlumberger Technology Corp.
Schlumberger renewed and expanded a 10-year lease for 226,000 square feet at 1430 Enclave Parkway with owner Piedmont Office Realty Trust (NYSE: PDM).
According to Harris County, 1430 Enclave Parkway has a 312,564-square-foot net rentable area. Built in 1993, the property appraised at $64,991,364 in 2018.
8. Vinson & Elkins LLP
In July, Vinson & Elkins became the anchor tenant of the new 47-story, 1-million-square-foot Hines Tower located on the 800 block of Texas Avenue.
Vinson & Elkins preleased 212,000 square feet of Class A office space at Hines Tower.
The company will be vacating more than 300,000 square feet in its current lease at 1001 Fannin when the Hines Tower comes online in 2021.
9. Ernst & Young
Ernst & Young leased three floors of 5 Houston Center for a total of 120,827 square feet. The office at 5 Houston Center, located at 1401 McKinney Street, is a 27-story, Class A Office owned by Spear Street Capital (lease terms undisclosed).
According to HCAD, this space has a 580,875-square-foot net rentable area and was appraised at $198,883,662 in 2018.
10. PROS Holdings Inc.
PROS Holdings (NYSE:PRO) leased 118,000 square feet of Class A office space at 3200 Kirby Drive in December.
3200 Kirby is a part of the Kirby Collection, which includes a 199-unit, Class A apartment building and 65,000 square feet of retail space.
Constructed in 2017, the 13-story office building at 3200 Kirby has a total of 186,000 square feet. According to marketing materials for the building, the rooftop features a putting green and lounge.
Harris County assessed this property at a value of $123,457,737.
An Overview of the 2018 Office Leasing Market in Houston
2018 has been a big year for Houston’s Commercial Office leasing market, producing positive numbers in net absorption. For example, net absorption was 541,562 square feet for all classes of non-owner-occupied commercial office real estate. This is a massive improvement from the over –2.1 million of net absorption from 2017 and –3.2 million from 2016.
The Houston office-leasing market is improving. The majority of new construction is Class A+ towers that mostly preleased before delivery.
A new report by DNV GL said 30% of oil executives are planning to expand their head count. This is up from 20% last year. Additionally, 85% said there would be an increase in drilling.
According to Transwestern, the Houston job market grew by 85,000, or nearly 4%, from December 2017 to December 2018.
In 2018, we saw oil companies and other large companies capitalizing on the concessions and incentives offered by leasing companies. Entire buildings were leased with favorable terms; landlords offered free rent; and other tenants received attractive incentives to fill vacancies.
Overall, there is still an oversupply of Houston office space for lease. Specifically, there is 32 million square feet of availability (including office space available directly from property management and through sublease), or 30.5%, in Class A Office Space, and over 26 million square feet of vacancy, or 21.6%, according to CoStar.
Moving forward, we expect to see even more leasing of vacant office space by large corporate tenants and companies fleeing high tax and regulation areas like California. Also, large tenants will likely take advantage of the incentives for office space for lease in Houston.
The number of deliveries of offices for rent in Houston should remain low this year. This is partially due to the completion of owner-occupied buildings and large towers this year. Not only that, but we also see many more proposed buildings on the back burner.
Vacant square footage of Houston office space for lease will likely decline in 2019.
Due to projected positive jobs numbers, a low amount of square footage coming to market, a flexible federal reserve, diversifying employment opportunities, and (hopefully) a stable or increasing WTI price in 2019, we can hope for another year of positive absorption for Houston office leases.