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Houston Office Leasing Declined 35% Last Quarter As Tenants Vet Landlord Finances

Houston’s office market hit a five-year low in leasing activity in the fourth quarter of 2023 as occupiers grow increasingly cautious about landlord finances.


Quarterly leasing activity totaled 1.6M SF, a 35% decrease from the previous quarter, according to Savills’ Q4 2023 Houston office report released Tuesday. Overall leasing volume decreased about 12% from 2022 to 2023, the report shows.

The decrease is partly due to natural fluctuation, but other factors are extending the timeline of a typical deal, Savills Research Manager Deandre Prescott said. 

“Occupiers are taking a little longer to close deals,” he said. “You might see more negotiation in terms between occupiers and landlords.” 

That is partially due to a trend Savills is calling “flight to capital.” Concerns about office loan defaults or landlords being able to uphold their tenant improvement obligations has led occupiers to be more cautious with their site selection and request assurances about landlords’ finances before executing a lease, the report states.

“You’re seeing occupiers being more concerned with landlords’ financial standings, especially as you’re seeing more CMBS debt coming due,” Prescott said.

Trepp data shows that Houston ranks fifth in CMBS office delinquencies among the 10 largest metropolitan statistical areas by population size. Houston’s office delinquency rate is 13.38% with about $555M of CMBS debt considered delinquent, the Savills report states.

Deals are taking longer to get across the finish line, but they are still happening, Prescott said. There are likely numerous deals still on the table that began last year, he said, adding it wouldn’t be surprising if Q1 2024’s deal volume increased and looked more like the first half of 2023.

Because of occupier concerns and high vacancy rates — Savills reports a 28.7% availability rate in Q4 2023 — tenants retain the upper hand in Houston's office market.

“Landlords are still giving concessions,” Prescott said. “If one landlord wouldn’t, another landlord would, so right now it’s still a tenant’s market.”  

It’s difficult to project how long this environment will last, but it will probably last as long as sublease and other availability remains elevated, he said.

Available sublease space sat at 5.5M SF in Q4 2023, down from 8.1M SF a year earlier but still relatively high, Prescott said. While the sublease space decreased, most of 2023’s major deals leased direct space, he said.

The biggest lease in Q4 2023 was law firm Clifford Chance leasing 60K SF in Texas Tower, according to the report. Other large leases in 2023 came in the first half of the year, including Fluor’s lease for 308K SF at Three Eldridge Place in a relocation from Sugar Land, and Kiewit’s expansion to 277K SF in Energy Center I.

Class-A offices continue to prop up Houston’s office market, according to the report. Overall asking rents increased 6.8% year-over-year, while Class-A rents increased 7.2%. Despite the bump in asking rents, net effective rents are expected to be lower considering the lengthy free rent and significant construction allowances being offered.