Conditions Are Ripe For A Houston Office Turnaround This Year, Report Says
2022 could mark a turning point for Houston’s office market, which has been saddled with some of the highest vacancy rates in the country due to fallout from the pandemic and resulting challenges for its make-or-break energy industry.
A new office investment forecast from Marcus & Millichap indicates Houston entered the year with the third-highest urban office vacancy rate in the nation at 25.7%, behind No. 1 Dallas and No. 2 San Diego. It led all major metros when it came to suburban office vacancy, clocking in at 23%, far above the national rate of about 15%.
But, analysts said, the city is poised for a comeback. Not only is development of new office product expected to slow to fewer than 500K SF, reducing a chronic oversupply issue, the energy sector is showing signs of coming back strong. As of late 2021, the report said, the number of rotating rigs remained 25% below pre-pandemic levels, though it had already started to trend upward despite what report authors called a regulatory environment that “discourages major investments in new projects.”
“Demand is rising worldwide for fuel,” the report noted — demand that could be accelerated by world events, including the current conflict in Ukraine, which has the U.S. government mulling possible oil sanctions.
The report also cites a sense of optimism among value-add office investors.
“The disconnect between economic and demographic tailwinds amid an elevated vacancy rate has buyers moving back into the Houston market seeking properties with operational-improvement potential,” the report said, pointing to a forecast showing office job growth set to surpass pre-recession level by the end of this year.
“Additionally, new household formation will trail only Dallas-Fort Worth this year, encouraging space demand in population-serving office buildings. This will keep investors active in suburban office areas, where vacancy is approximately 250 basis points below the CBD.”
Medical office properties near the Texas Medical Center could attract particular investor interest, according to the report.
