Houston Central Business District Submarket Update

The Houston Central Business District submarket has the largest amount of office space in the metro area, coming in around 50 million square feet. As is the case with downtown markets in big cities, the CBD also has the highest rental rates due to two major factors:

  • an abundance of 5-star inventory
  • landlords upgrading older generation space to compete with demand

In the past couple of years, billions of dollars have been invested in major projects. Some of these projects include Minute Maid Park, Toyota Center, and the redevelopment of Houston Center, a 4.2 million SF mixed-use building. Overall, government, energy, and professional services make up the majority of tenants in the Central Business District. This is partially thanks to Houston’s Downtown Living Initiative which has helped the area to become one of the best examples of a live/work/play environment.

Leasing Opportunities in CBD Houston

The CBD has an unusually high vacancy rate of 19.5% with an availability rate of 25% as of 3rd Quarter 2019. Although leasing has turned positive over the past 12 months with the submarket absorbing 370,000 SF and will likely compress even more with a forecast of 16% vacancy by 2024. Despite some negatives in downtown Houston, developers have not been deterred.

For example, Hines’ Texas Tower is set to deliver 1 million SF by late 2021. What’s more it is already 35% preleased. On top of that, one of the largest office leases recorded took place earlier this year with Direct Energy leasing 105,000 SF in Two Houston Center. Below are some of the most active office buildings in the Central Business District over the past twelve months.

Four- & Five-Star Buildings

  • 609 Main Street leased 318,685 SF
  • One Shell Plaza-910 Louisiana Street leased 80,380 SF
  • 600 Travis Street leased 277,891 SF
  • 1100 Louisiana Street leased 233,981 SF
  • 1301 Fannin Street leased 202,038 SF

Three-Star Buildings

  • Medical Place One-1315 Saint Joseph Parkway leased 21,739 SF
  • Commercial Bank Building-917 Franklin Street leased 17,396 SF
  • Scanlan Building 405 Main Street leased 8,696 SF

Asking Rents in CBD Houston

Asking rents for office space in this market are the most expensive in Houston averaging around $36.00/SF. Although, in the past twelve months, we’ve only seen 1.3% rent growth. Additionally, one- and two-star buildings that are hard to come by in CBD saw the most growth at 29%. At the same time, this is good news for tenants looking to lease office space in this submarket. Specifically, landlords are willing to make some concessions given an uncertain energy market and a full pipeline of inventory to be delivered.

Construction

It comes as no surprise that downtown Houston has 1,300,000 SF of inventory under construction. Compared to other submarkets in Houston, this is the most amount of space in the pipeline. Below are a couple of commercial developments being built:

  • Texas Tower – 1.1 Million SF with completion in October 2021
  • Lovett Commercial’s POST – a mixed-use building with almost 150,000 SF of office space

Also, Bank of America Tower delivered 780,000 SF in May 2019 with developer Skanska. Now, Bank of America is the building’s key tenant with 210,000 SF of leased square footage. On top of that, Waste Management signed on to occupy 284,000 SF. Generally speaking, the Houston Central Business District Submarket continues to be the city’s main office corridor. And it has morphed into the best live/work submarket in the city.

Sales Activity in CBD

Recent sales in the Houston Central Business District Submarket have been fairly flat with about 90% of the sales volume attributed to four and five-star properties. Only three transactions have been recorded the last twelve months and none have disclosed a sale price. In addition, the average vacancy at time of sale has been 49.6%. Currently, cap rates are around 6%, the lowest in Houston. This is not a surprise considering the area’s high-end real estate and expensive land. However, the lowest recorded sales volume took place last year with only $90 million in sales transactions.

Strong and Steady in the Houston CBD

We see this submarket staying strong and steady but little room for rent gains over the next couple of years. This makes now an ideal time to lease office space in the Central Business District of Houston. Also, investors looking for deals in this market seem to be doing well buying older office space and upgrading to attract new tenants. At CXRE, our team of experienced brokers can advise you on the best real estate strategy for your business and help you find space. Contact CXRE today to learn more!

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