Several recent significant office deals reported in completely new, unoccupied buildings continue to fuel the optimistic forecast for Houston’s commercial real estate market through the end of this year and next.
Preliminary third-quarter statistics point to positive absorption area-wide; this positive absorption will likely continue in the fourth quarter and early next year as several large tenants, such as Hess this quarter, begin occupying space in the buildings for which they signed large leases earlier this year or last year. Absorption is the difference in occupied space from one period of time to the next and can be recorded months after a lease is signed while the tenant waits for the space to be built out for them. The number will be positive or negative absorption based on the amount of space they formerly occupied, but space available after move-out and space absorbed in the new lease should all be recorded during the same time frame to avoid double-counts.
Larger tenants responsible for this recent absorption in the Central Business District (CBD) include Hess, who officially moved into its new 844,763-square-foot building, having taken a year to build out its space, and BG Group, with 354,175 square feet, in its namesake building and the newest property to be completed this year. Other recent large deals include British Petroleum (BP), with 305,885 square feet, which is taking over the entire Three Eldridge Place building in the Energy Corridor submarket; and GE Oil & Gas, also set to occupy the entire Westway Park III building of 181,814 square feet. GE Oil & Gas also is reported to have signed up for an additional 50,000 square feet at Westway Park II, an adjacent building where they currently lease space. Both Three Eldridge Place, completed in June 2009, and Westway Park III, finished in December 2008, were unoccupied.
Rental rates remain constant, although many properties are reporting slight fluctuations both up and down depending on building class and location. Class A rates, however, are inching up due to demand by both engineering and energy firms, in addition to rising costs during the last five years. Commercial real estate brokers Griff Bandy with NAI Houston and Ryan Bishop with Stream Realty, who both recently spoke at an office forecast luncheon, agreed that tenants looking to renew now are experiencing sticker shock. Rents overall have increased substantially during the last five years, with Class A rates climbing an average of $10 per square foot. Coupled with the shift to triple net leases in many Class A properties, tenants are now also responsible for the majority of expenses, which creates additional escalations in total rates. Both brokers said companies are comparing less costly options such as sublease space or moving down to Class B or C properties to keep their rental costs level and their overall bottom line profitable.
Sublease space, which currently totals slightly over 3 million square feet, continues to play a large part in the market as companies consolidate and downsize. Five buildings currently offer more than 95,000 square foot each, and three of those buildings, with terms up to 2020, are available in the CBD. Although not counted in the vacancy rates statistically, lower-priced options for shorter terms can help firms while they plan their long-range strategy to prosper in an unfavorable economy.
By the time this article is printed, detailed third-quarter statistics on both Houston’s office and industrial markets along with broker commentaries will be available on www.commercialexchange.com.
For a more comprehensive overview of the area’s economy and the real estate market, come hear Ted C. Jones, Ph.D, Senior Vice President and Chief Economist for Stewart Title, at the UH Fall Real Estate Forecast Symposium on Tuesday, November 8, at the Hyatt Regency Hotel, 1200 Louisiana. His presentation, “Houston – The Teflon® Economy and Real Estate Markets: A Few Scratches, But the Bad Stuff is Not Sticking and We Keep on Cooking,” compares and contrasts Teflon, a non-stick coating from DuPont™, to the Houston economy and real estate market. The bi-annual event is sponsored by the Institute for Regional Forecasting at the University of Houston will take a look at the past, current and future of the area’s current economy, discussing such issues as oil and gas prices, housing, commercial markets, the deficit and interest rates. For registration information, check out the links in the calendar at www.commgate.com.
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Patsy Fretwell is a senior market analyst with Commercial Gateway and has more than 25 years of research experience in the real estate market. She can be reached at patsy@commgate.com.
