Click here to access complete statistics and broker commentaries.
Houston Office Market
Houston’s commercial real estate activity continues at a steady albeit slower pace as the market adjusts to changing economic factors, according to quarterly market research compiled by Commercial Gateway, the commercial division of the Houston Association of REALTORS®.
The second quarter reported direct office net absorption of almost 1.7 million square feet, representing the 17th consecutive quarter of positive absorption with a mid-year total of more than 2.1 million square feet of direct net absorption. As in previous years, Class A properties represent the bulk of the growth, almost 1.7 million square feet of positive absorption, offset by Class B properties reporting a negative 174,306 square feet; Class C properties reported 136,270 square feet of positive absorption.
Keeping the direct absorption positive primarily results from large companies occupying their new space in recently completed build-to-suit and/or owner-occupied properties. The largest at 1 million square feet represents the third and final move-in phase for ExxonMobil (which represents 2 million for the year) followed by Noble Energy’s 456,000 square-foot move. Other major moveins include GE Electric, 150,000 square feet in Westway Plaza; Sasol, 171,475 square feet in Woodbranch Plaza IV; Air Liquide, 145,000 in its new Memorial City building; and Nabors Industry, 98,400 square feet in Commerce Green. Only five submarkets recorded positive direct net absorption for the second quarter, and four of the five are attributed to large moveins, while the Southwest submarket saw more small positive deals than negative ones.
On the other side are the direct vacancies resulting from several company move-outs, which turned some key submarkets to experience negative absorption. These move-outs include BP in two Four Oaks Place buildings and one in the West, GE moving out of Park Towers, Repsol vacating its space in 2001 Timberloch and Southwestern Energy and ExxonMobil vacating their former spaces in the Greenspoint submarket.
The changing economy related to the oil and gas downturn is also shown by the increasing amounts of sublease space on the market; and when that sublease space enters the picture, the absorption totals do change dramatically. However, sublease space appears on the market for many reasons including downsizing and consolidations, but rent is usually being paid for the space whether it is occupied or vacant. And that situation could easily change if a company’s business volume changes. At the end of the second quarter, the Houston market currently has more than 5 million square feet of sublease space available, and another 1 to 2 million square feet being marketed but not yet available – with almost half Class A space. This total represents almost double the same period last year. Firms looking to move or expand will be able to take advantage of reduced rates with limited terms, which could affect both the overall leasing activity for the new buildings being completed in the next two years and certainly could play a factor in delaying the starts of new buildings.
For the quarter, 10 new buildings were completed, adding almost 3.2 million square feet to the market. The new buildings, including five owner-occupied or single-tenant, contributed almost 2.2 million square feet of absorption. Upon completion, the new properties collectively were almost 81.2% leased with rental rates averaging $32.70, marginally less than the overall Class A rate of $32.88. The largest building completed this quarter was Trammell Crow’s Energy Center Three at 546,604 square feet, which is 100% leased by ConocoPhilips with movein scheduled for August.
Other than those noted above, the largest multi-tenant building to be completed this quarter was Westway Plaza at 314,000 square feet, which was totally pre-leased to three tenants. The second largest multi-tenant building to be completed this quarter and 15% preleased was Legacy at Fallbrook, Liberty Property’s 206,754-square-foot property in the Northwest at 10720 West Sam Houston Parkway North.
Construction starts halted to just one new building started in the second quarter: Wildwood Corporate Center II in the north. However, two new buildings, one by MetroNational in Memorial City for Cemex and one in Pearland, were just announced with construction starts scheduled for the fall. Overall, the Houston under-construction office market boasts 36 properties with 38 buildings totaling almost 11.2 million square feet. Collectively, the under-construction buildings are 50% preleased, with 24 properties classified as multi-tenant. The multi-tenant properties represent almost 6.9 million square feet or 61.3% of the under-construction total and are currently reporting 20.2% preleased space. Of the multi-tenant spec properties, 16 of the 24 are less than 10% preleased.
The largest project under construction is Phillips 66’s 1.2 million-square-foot campus in the Westchase area, while the largest spec building under construction with the largest availability remains Hines’ 609 Main at Texas building with 1.05 million square feet.
The current 12.4% direct vacancy rate is an increase from the 12.3% vacancy recorded last quarter, and the 10.9% during the same quarter a year ago. Class A space overall is at 10.4% vacancy, with the North/The Woodlands/Conroe submarket showing the lowest Class A vacancy of 5.0% followed by the Westchase submarket at 6.9% and the Inner Loop submarket at 8.2%. The West submarket is recording the lowest overall vacancy of all submarkets at 8.2%. Six of the 13 submarkets are recording single-digit vacancies in Class A space, with four of the 13 boasting single-digit vacancies overall.
Rental rates represent a 6.0% increase during the past year with the current overall averaged weighted rental rate of $26.49. Class A rates, now at $32.89 citywide and at $40.02 in the CBD, experienced a slight increase from the same quarter last year. CBD’s Class A rates increased 3.4% from the same quarter last year. Rates overall have shown increases due to new space with higher rents entering the market along with increased operating expenses due to tax jumps. Concessions are reportedly being offered to entice some tenants, but none are being offered across the board.
Houston Industrial Market
Houston’s industrial market continues to expand with positive direct net absorption of more than 3.3 million square feet during the second quarter of 2015 despite economic uncertainty, according to statistics released by Commercial Gateway.
This quarter’s absorption represents the 22nd consecutive quarter – over five years – of positive absorption, with seven quarters recording more than 2 million square feet each. This absorption is almost double when compared to the same quarter last year and is clearly a positive sign in today’s marketplace of energy layoffs and cutbacks.
Major deals recorded during the quarter include McKesson Corporation’s 357,887-square-foot lease at Duke’s Gateway Northwest One Building; Slay Industries (SI Warehousing) and GLT Fabricators Inc., both at 100,000 square feet to totally lease up 2902 E. 13th Street; Frontier Logistics’ 600,000-square-foot move into its new building at 225 Railport; DB Schenker’s 150,000 square-foot move into its new building at Kenswick AirFreight Center; Pathmark Transportation’s 76,234-square-foot move into Airtex Industrial Center Building; and Tesla’s 33,525- square-foot move into DCT’s Airtex Business Center, both in the Greenspoint area.
Net absorption was shared by all industrial types during the first quarter with warehouse/ distribution properties accounting for the bulk of absorption, 2.9 million square feet or 86.7% of the total. Flex/service center space represented 237,466 square feet of absorption, or 7.1% of the total. Manufacturing space accounted for 140,275 square feet, or 4.2% of the total while high tech/R&D space represented 67,164 square feet, or 2.0% of the total.
The rate of absorption cased the vacancy rate’s slight decrease to 5.6% from 5.9% last quarter and below the 6.3% of the same quarter a year ago. Vacancy for warehouse/distribution space citywide is 5.7% with manufacturing space at 4.3%. Houston is still considered one of the healthiest industrial markets nationwide due to its balance of supply and demand.
More than 1.8 million square feet in 33 buildings came online during the second quarter. Collectively, the new buildings are currently 41.0% leased and represent about 1.2 million square feet of absorption, or 36.4% recorded for the quarter. The largest spec buildings completed during the second quarter and without preleasing include Beltway North Commerce Building in Greenspoint at 352,680 square feet and DCT’s Northwest Crossroads Building along the North Belt at 320,430 square feet. All other completed spec buildings were smaller than 100,000 square feet with 15 buildings less than 20,000 square feet.
Construction activity is still high and may get higher with over 30 proposed properties, half of which are planned for more than 100,000 square feet. Currently, 60 buildings are underway in 55 projects representing more than 10.1 million square feet. Major spec projects without major preleasing include Fallbrook Pines’ 560,312 square feet, Fallbrook 1 Pinto Business Park’s 500,400 square feet, Interstate Commerce Center’s 416,930 square feet, Bayou Bend Business Park’s 378,380 square feet, and Mason Ranch Industrial Park’s 373,860 square feet. The two largest BTS projects include Daiken’s 4 million square foot facility off Highway 290 and FMC’s new project at Generation Park in the Northeast.
Rental rates have taken a minimal drop this quarter to $7.67 from $7.80 last quarter but are still 7.9% higher than the $7.11 recorded during the same quarter last year. Rental rates quoted are grossed up and weighted and averaged based on available space. Most new buildings are now quoting net rents and passing on the increased taxes and operating costs.
Sublease space increased 14.0% from last quarter to more than 1.8 million square feet. This quarter’s total is an increase of 26.4% from the same quarter a year ago, but is still below square footage totals in 2013 and back through 2010.
