Houston's Midtown Submarket Update - CXRE Commercial

The Midtown submarket has seen a lot of growth this past cycle with office space, luxury high rise apartment developments, and retail. Demographics also play a key role in development in this area, with millennials occupying Heights, Montrose/Museum District, Upper Kirby, and Rice Village. This has pushed developers into creating more live/work environments and multifamily projects in the Midtown submarket.

Key industries in this area are finance and education with Houston Community College and The Federal Reserve Bank of Dallas-Houston being two of the largest tenants occupying office space in Midtown. Located between the Central Business District and Texas Medical Center with multiple universities, this market will continue to change and move forward in the coming years.

Leasing Opportunities in Midtown Houston

Midtown is currently outperforming the metro Houston average with a low vacancy rate of 9.7% as of Third Quarter 2019. Net absorption the last twelve months has been a different story with the submarket only absorbing -11,000 SF and putting Midtown in the bottom five submarkets in Houston. While demand for office space has remained steady, we’ve also seen demolition and rehab of multiple office buildings. As a result, these are no longer active in Midtown’s inventory.

Looking forward we see continued growth for Midtown in the next five years with vacancy rates staying steady around 10% or slightly lower. Let’s take a look at some of the more active buildings leasing office space in the last 12 months.

Four- & Five-Star Buildings

  • America Tower-2929 Allen Parkway leased 131,823 SF
  • San Felipe Place-2229 San Felipe Street leased 17,318 SF

Three-Star Buildings

  • 601 Sawyer Street leased 53,214 SF
  • 5151 Katy Freeway leased 13,847 SF
  • Midtown Plaza-5225 Katy Freeway leased 10,535 SF

Asking Rents in Southwest Beltway 8

Asking rents for office space in Midtown are some of the highest in Houston averaging around $30.00/SF putting it in the top 10 submarkets. 2018 was a slow year for rent growth in Midtown. However, looking at overall growth since 2010, Midtown rents grew 20%, double the growth in metro Houston.

Midtown managed to avoid losing tenants in the oil downtown which has helped this submarket stay strong. We see rent gains in Midtown averaging around 1-2% over the next couple of years so this market will continue to stay strong in the future.

Construction

Midtown Submarket UpdateDevelopment in Midtown has been relatively slow over the past couple of years, and not a single office property has been delivered. Vacancy rates have stayed steady due to demolitions, rehabs of older buildings and very little development. Construction has begun on an innovation hub which will be completed by late 2020. Rice University is also converting a 270,000 SF building in Midtown that will be another hub for start-ups in technology.

With these two projects under construction, we could see Midtown start to attract tenants in the biotech and sciences industries. Although Midtown has a small pipeline there is currently 591,580 SF of proposed projects that could lead the submarket into more growth.

Recent Deliveries

  • Buffalo Heights, 3663 Washington Avenue – delivered 35,363 SF
  • 5301 Katy Freeway – delivered 9,399 SF

Under Construction

  • River Oak Medical – 3720 Westheimer Road is scheduled to deliver 130,000 SF; February 2020 completion
  • Rethink Co-Working – 1512 Center Street is scheduled to deliver 37,046 SF; June 2020 completion

Proposed

  • Regent Square-Allen Parkway- 240,000 SF building; May 2021 completion

Sales Activity in Midtown Houston

Sales in Midtown have been robust over the last two years with almost 50 transactions completed in 2018. What’s more, 2019 should bring similar numbers. Also, most of the purchased and sold properties are small office buildings under $4 million. On top of that, these have average cap rates of 8% and an average sales price of $229/SF. Average vacancy rates at time of sale are low sitting at 1.6%. In addition, its location and ease of access make the Midtown submarket a popular submarket for small business owners to buy properties.

Midtown Submarket UpdateMidtown has become a popular submarket the last couple of years. And we don’t see any signs of slowing. Owner/users of commercial office space will have to pay a premium price to be in Midtown. At the same time, the demographics and amenities make up for it with a great location and live/work developments. Investors also have opportunities here to buy up smaller office buildings and re-develop them to attract tenants.

Undoubtedly, our team of experienced brokers can advise you on the best real estate strategy for your business and help you find space. To learn more, contact CXRE today!

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