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30% Vacancy, -1.3M SF Of Absorption — Houston's Office Market Hurt In Q2, But Landlords Expect Q3 Turnaround

Office buildings in Downtown Houston.

In the wake of significant negative net absorption, the office market vacancy rate in Houston continued to tick up during the second quarter of 2021, but growing leasing activity is expected to turn the tide later this year. 

Houston’s overall office availability rate was 29.9% for Q2, a 30-basis point increase from the prior quarter, according to new data from Cushman & Wakefield. Direct space accounted for 26.2%, while sublease space accounted for 3.7%.

Net absorption in the office market for Q2 was -1.3M SF, nearly triple the -500K SF in Q1, and nearly double the -770K SF during the same quarter a year ago. Class-A space accounted for -448K SF, while Class-B space accounted for -629K SF. Overall, direct space accounted for 65% of the total net absorption during Q2.

Cushman & Wakefield Associate Director, Research Sherra Gilbert said that Q2 marked the fifth consecutive quarter of negative absorption in Houston’s office market, and was in line with the -4.4M SF of absorption posted during 2020. 

In particular, the Greenway submarket experienced higher-than-usual negative absorption in Q2, as Direct Energy vacated a large block of space in Twelve Greenway Plaza to take occupancy in its new location, 2 Houston Center in Downtown Houston

Gilbert said that although both direct vacancy and overall availability increased during Q2, there has also been a notable increase in leasing activity. The firm expects that activity to begin moving office market statistics during the last two quarters of 2021 and into 2022.

Gilbert said Cushman & Wakefield has already seen a 45% increase since January in the number of tenants actively looking for office space in the Houston market.

“Tenants have come to realize now is the time to get out and strike a deal to capitalize on current market conditions. We expect this trend to continue through the rest of 2021, and into the following years, as there is a significant amount of pent-up leasing demand across all submarkets in Houston,” she said.

Industry experts previously said that despite the ramp-up in activity, lengthy deal transaction times, tenant interest in downsizing and expiring sublease space could send the vacancy rate higher before it comes down again.

The Houston market has 2.7M SF of office space under construction at the moment, but no new office deliveries occurred during Q2, Cushman & Wakefield data showed.

Rental rates also fell during Q2. Average asking rents were $30.89 per SF, down from $30.95 per SF in Q1. For Class-A, average asking rent was $37.08 per SF, down from $37.17 in Q1.