A weakened energy market combined with slow job growth hasn’t done the Houston office market any favors. Over the past few years, Houston has struggled, but now the area is seeing signs of stabilization due to a decrease in available sublease space and a decline in energy sector layoffs.
A Year of Fluctuations – Q1 2016 to Q1 2017
At the end of Q1 2016, the Houston office market had a 15.3 percent vacancy rate. The average vacancy rate rose by 100 basis points during Q1 2017 for an 18.5 percent vacancy rate. So from Q1 2016 to the end of Q1 2017, the vacancy rate rose by 320 basis points.
Although vacancies rose across the board, this rate is not the same throughout the metro area. In suburban Houston, the Q1 2017 Class A vacancy rate was 20.5 percent, up from 16 percent in Q1 2016. Houston’s CBD (central business district) had a Class A Vacancy rate of 17 percent, up from 11.7 percent in Q1 2016.
At the same time, asking rates for office space also rose between Q1 2016 and Q1 2017:
- $33.11 to $33.26 for suburban Class A
- $42.15 to $42.46 for CBD Class A
- $27.98 to $35.79 for Houston Class A
Despite changes in vacancy rates, there was an increase in jobs during the same time period. Between February 2016 and February 2017, the Houston metro area created 19,300 jobs. These jobs spread throughout a number of sectors including government, education, retail, and the arts.
The Current State of the Houston Office Market
At the moment there is an oversupply of office space in Houston. According to NIA Partners’ monthly report, as of June 1, 2017, 2.7 million SF is currently in the construction pipeline. Almost 45 percent of this space is already pre-leased. However, even though 1.8 million SF of new office space was delivered in Q1 2017, the rate of delivery shrank by 50 percent since Q1 2016.
So far in 2017, 4.6 million SF of space has been leased – 3.8 million SF of direct leases and 750,000 SF of subleased space. In addition, there is currently 11.1 million SF available in the sublease market with leases for an additional 975,000 SF expiring this year.
8 Large Houston Subleases to Expire in next 2 years
Over the next 24 months, the Houston market will see even more changes in its occupancy rate due to the expiration of eight large subleases totaling over 1.5 million SF of potential vacancy. All but one of these tenants is an energy company. Altogether, Phillips 66 and ExxonMobil own half. Below is a list of these properties:
|Three Greenspoint Place – 233 Benmar Drive – Greenspoint||ExxonMobil||253K SF||12|
|Three Westlake Park – 550 Westlake Park Blvd. – Katy Freeway West||Phillips 66||222K SF||20|
|Pinnacle Westchase – 3010 Briar Park Drive – Westchase||Phillips 66||210K SF||24|
|Northborough Tower – 100 Glenborough – Greenspoint||Noble Energy||204K SF||10|
|Eight Greenspoint Plaza – 222 Benmar – Greenspoint||ExxonMobil||198K SF||12|
|Energy Center I – 585 North Dairy Ashford – Katy Freeway West||Amec Foster Wheeler||183K SF||14|
|Three Northborough – 12707 North Freeway – Greenspoint||FMC Technologies||151K SF||10|
|Pennzoil Place North Tower – 700 Milam – CBD||Freeport McMoRan||140K SF||14|