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| Houston’s Office Lease Space Third Quarter Market Summary |
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The quarterly research of Houston’s office lease space reveals a soft market that will continue to soften as supply exceeds demand. Landlords are becoming more aggressive and competitive as tenants look for opportunities to move into nicer space and lower their lease costs.
Even with the Houston office market showing signs of a leasing activity slowdown, many local brokers are still glad they are in Houston rather than other parts of the country. The downturn is now being experienced locally; negative absorption is being reported while new buildings come on line with few tenants. Brokers are still facing a wait-and-see attitude from many clients, with firms that were ready to make a move or even expand their space having now opted to wait until the economic picture stabilizes.
According to economic experts such as Harold Hunt, a senior economist with the Texas A&M Research Center, Houston’s office market will be in search of a new equilibrium until 2011. Negative absorption will continue to occur as tenants search for better lease rates, and new buildings come on line with an abundance of available space.
The soft market conditions are already being felt in certain submarkets such as the Energy Corridor, which has doubled its vacancy rate due to five large buildings coming on line this year. The five new buildings have a combined 61% vacancy rate as of the end of the third quarter with another available spec building scheduled for completion by yearend.
New project development has basically stopped, with few projects breaking ground. We are seeing more proposed projects placed on hold for the near term, with the wait-and-see attitude becoming the norm. Few buildings are scheduled for completion after 2011, which is when office construction development activity in Houston will also be completed.
Preliminary third-quarter asking rental rates appear to have generally stabilized with slight decreases of 50 cents to a dollar depending on location and class. Class A rates are still holding strong at $30 citywide and $34 for Class A space in the CBD and are not reflecting the downturn, yet. Industry-wise leaders, including a recent report from office brokers at CB Richard Ellis, agree that this stabilized Class A rate results from two factors: the higher rates reported by both new Class A buildings coming on line along with the additional second-generation Class A space becoming available due to market conditions.
Overall, few major concessions are currently being reported but to remain competitive, landlords are offering incentives such as increased tenant improvement allowances or a few months of free rent. These additional incentives have helped keep the quoted rates stable.
Class B and C projects appear to be suffering from the downturn the most, as landlords continue to look at ways to reposition their older projects to compete with new construction. Several firms have recently left their Class B space to take advantage of the incentives offered at the Class A buildings.
As firms continue consolidating and downsizing their operations and staff, building owners are looking at ways to counter increased operating costs and lower occupancy rates to keep their current tenants. Buildings with LEED certification and Energy-Star ratings appear to have the competitive edge against less energy efficient projects.
The amount of sublease space is also increasing, with more than 4.0 million square feet being reported, almost double what was reported a year ago. With 60% of that space in Class A buildings, tenants will opt to take advantage of both the reduced rates and shorter terms that sublease space normally offers as firms try to cut their own costs.
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