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Houston Office Market Summary
Houston’s commercial real estate market continues to adjust as the economy recovers and space options multiply, according to quarterly market research compiled by Commercial Gateway, the commercial division of the Houston Association of Realtors (HAR).
The second quarter reported direct negative net absorption of 214,995 square feet of office space; Class A showed a slight positive absorption of 25,704 square feet, while Class B and Class C reported negative absorption. Move-ins at 10100 Katy Freeway and 609 Main, two new buildings completed this year, along with companies moving into space at Remington Square III accounted for some of the Class A positive absorption. Year-to-date overall totals are positive for the year primarily due to the first quarter occupancy of 600,000 square feet by BHP Billiton in its new headquarters building, leaving behind more than 320,000 square feet currently on the sublease market.
Space left behind by various firms occupying those new properties along with sublease spaces showing up as direct space continues affecting the vacancy rate. The current 17.2% direct vacancy rate is slightly up from 17.0% last quarter, and also up from the 15.3% recorded during the same quarter in 2016. Class A space overall is 16.2% vacant, while Class B is overall 20.2% vacant and Class C is 11.9% vacant.
Total sublease space saw a slight decline this quarter with more than 9.3 million square feet compared to first quarter’s 9.9 million square feet and year-end’s 10.2 million square feet. Although some of those spaces have been leased, others have turned into direct availability and some spaces have been taken off the market although still available.
The amount of sublease space is playing a large role in the dynamics of the marketplace as landlords have to compete. With almost 2.2 million square feet of the current sublease space expiring and moving to direct by yearend, more sublease space continues to enter the market as companies merge or downsize. When combined with the current direct availability, the availability percentage jumps to 23%. Regarding location, more than 85% of all sublease space is located in six market areas, with each totaling more than 700,000 square feet. The CBD leads the way with 25.3% of the total, while the Energy Corridor is second with 16.1%. Westchase has the next highest amount at 14.1%, followed closely by Uptown with 12.7%, Greenspoint has 9.1% and the West market has 7.9% of the total sublease space. Broken down by spaces, 19 sublease listings are currently marketing more than 50,000 square feet; the largest sublease available is Shell Oil’s space totaling 877,026 square feet in One Shell Plaza.
The under-construction market in Houston jumped to 12 buildings and 2.1 million square feet during second quarter as Skanska re-started construction on its new Capitol Tower, a 754,000-square-foot building in the Central Business District, after securing a 210,000-square-foot commitment from Bank of America. Three other single-tenant, build-to-suit properties also broke ground in Springwoods Village, the 60-acre mixed-use development in north Houston. The new buildings include one with 303,127 square feet for Houston-based American Bureau of Shipping and two buildings totaling 378,000 square feet for HP; completions are scheduled for mid- to late-2018 with Skanska’s building taking two years to be completed in 2019.
Other than Capitol Tower, two additional properties underway have more than 100,000 square feet available. The Post Oak in Uptown, scheduled for completion in January 2018, is 0% preleased with 140,000 square feet available; The Kirby Collection at 3200 Kirby, with 188,696 square feet and scheduled for completion by the fourth quarter, is 2.1% preleased. Overall, the under-construction market is 54% preleased. The totals represent a 57% drop in the construction pipeline from a year ago and an 81% drop from two years ago.
Concessions are becoming more commonplace in the market, even though quoted rental rates have remained steady. At $28.34 overall, rental rates showed a slight decrease from the past quarter but remained constant from a year ago. Class A rates, now at $34.30 citywide and at $41.50 in the CBD, experienced slight decreases from last quarter’s $34.75 citywide and $41.89 in the CBD. Quoted rents for sublease space increased from $24.75 last quarter to $25.42 this quarter.
Houston Industrial Market Summary
Houston’s industrial market continued to expand during the second quarter with positive direct net absorption of 2.3 million square feet, according to statistics compiled by Commercial Gateway.
This quarter’s absorption represents the 30th consecutive quarter – more than seven years – of positive absorption, with nine quarters recording more than 2 million square feet each and more than half recording more than 1 million square feet. The second-quarter absorption totals were positive for all types and included almost 1.6 million square feet of warehouse-distribution space along with 349,773 square feet of net absorption of light industrial space. Manufacturing properties recorded 190,213 square feet while flex/R&D space absorption was 215,577 square feet.
Vacancy rates have decreased slightly to 6.1% from 6.4% last quarter and recorded the same rate in Second Quarter 2016. Vacancy for warehouse/distribution space citywide is 6.6% with manufacturing space at 3.0%.
About 2.1 million square feet in 25 buildings came online during the first half of 2017. The newly completed projects are collectively 82% leased and contributed almost 1.6 million square feet of absorption.
Construction activity has slowed when compared to previous years, with only 37 projects totaling more than 5.2 million square feet underway. The mid-year total is about 50% of under-construction projects both a year ago and two years ago. Similar to office, the largest projects currently underway are build-to-suit projects, including the largest to break ground during second quarter, Amazon’s 1.0 million square-foot project in Katy. FedEx’s 1.1 million square-foot distribution facility in the Northwest near the Grand Parkway and U.S. Highway 290 is scheduled for completion in August, as is Amazon’s 855,000-square-foot fulfillment center off the Beltway in Pinto Park.
The largest spec building under construction is Cedar Port’s 501,020 square-foot building, which broke ground during second quarter after Ikea’s leasing and occupancy of the first two buildings totaling almost 1 million square feet. The bulk of the remainder under construction is concentrated in the North/Northwest with 2.4 million square feet or 46.7% of the total in 11 buildings followed by the Southeast with six projects totaling 1.1 million square feet or 20.3% of the total. Overall, the under-construction market is 69.0% preleased.
New projects recently announced include another Amazon project, this one a bit smaller for Amazon Fresh, 110,000 square feet in Fallbrook Pines, to join its almost 2 million square feet currently underway. Another media report announced a prelease of 465,851 square feet by Kuraray America, a global supplier of chemical, fiber and resin products, in Avera’s new Bayport Logistics Park. DHL Supply Chain has also announced a third building off State Highway 225.
Rental rates have increased slightly this quarter to $6.41 from $6.33 last quarter but are lower than the $7.24 recorded during the same quarter last year.
Sublease space also decreased slightly this quarter by about 120,000 square feet, representing a slight decrease when compared to the same quarter last year.
Founded in 2001, Commercial Gateway, the commercial division of the Houston Association of REALTORS® (HAR), is a commercial information exchange of commercial real estate professionals engaged in every aspect of property sales and leasing, appraisal, property management and counseling.