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The Worst Is Behind Us: Houston's Office Vacancy Rate Fell In Q2

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The Worst Is Behind Us: Houston's Office Vacancy Rate Fell In Q2
Top Office Metros Snapshot, Q2 2018

In a long battle against the oil downturn, the Houston office sector is finally turning the corner. It made a sharp momentum swing in Q2 with a rise in demand, thanks primarily to a renewed interest in the central business district, according to an office report released by Colliers International. 

Net absorption was positive at 785K SF last quarter, a dramatic boost from about negative 1M SF in Q1. With average asking rent steady at $35.16/SF, Houston still has one of the lowest average rents of the top U.S. markets. 

The city still touts the highest vacancy rates among the top 10 by a margin of over 500 basis points. In Q2, vacancy rates lowered by 70 bps to 20.9%. 

The worst of the energy plunge is behind Houston, Belvoir Real Estate Group Managing Director Matthew Goldsby said. 

“Investor-owners remain bullish on the Houston market," he said. "It is yet another indicator that now is the time for investors or owners looking to make an acquisition to enter the market, particularly as the transaction count of office space sales continues to improve.”

Class-A office space in the CBD, despite ample sublease space, is an emerging submarket with vacancy lowering by 90 bps to 18.9%. It is also the only submarket where Class-A asking rents exceed $40/SF. 

A few major deals assisted the submarket's rebound. Harris County Veterans Service Office inked a 118K SF lease at 500 Jefferson. Talos Energy signed a 101K SF lease at Three Allen Center and law firm Sidley Austin expanded from 50K to 80K SF at 1000 Louisiana. 

Avison Young principal and Managing Director Rand Stephens said two major trends in Houston are promoting stronger office fundamentals: the strength of the national economy, which Houston heavily relies on, and increased activity in offshore exploration and drilling. 

“The office market has bottomed out and is turning upward largely due to the available space after the oil downturn has stabilized,” he said. “We need to see more offshore business because it drives a lot more office jobs.”

Join us Aug. 28 for Bisnow's Houston Workplace of the Future event, where experts will discuss office leasing activity.