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Houston's Sublease Inventory Decreases For First Time In Over Two Years

Houston Office

Yes, you read that headline correctly. After growing by a net of 3.5M SF in 2016 alone, the sublease inventory decreased by 5%, according to JLL research. It's a strong sign for a market that's been in free fall since the oil downturn. 

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Houston skyline

The improvement is thanks to an increase in leasing activity and ConocoPhillips' decision to relocate its HQ to a space formerly available for sublease. 251 subleases have been signed year-to-date, taking down nearly 2M SF, JLL reports.

Four multi-floor subleases have been signed in Q4 so far, compared to only three in the past three quarters combined. Sublease activity is up across the board. 600k more feet have already been absorbed than 2015 and we've got a few more weeks to up that stat.

The uptick is in part due to the difference in rents. Sublease asking rents for Class-A buildings are the farthest they've been from direct asking rents in 17 years. The difference: $8.52/SF for Class-A and $4.29 for Class-B, according to research by NAI Partners. 

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The Downtown Houston skyline.

But don't get too excited—there's still 11.8M SF of sublease space available throughout the area, with the vast majority coming from the Katy Freeway, CBD, Galleria and Westchase. JLL international director Bruce Rutherford says that represents several years of leasing activity that won't be easy to recover. And they won't roll to direct vacancy soon, either: over 4M SF of sublease inventory has five-plus years of term remaining. The culprit is no mystery—all 20 of the largest sublease blocks belong to energy companies.

That could all be changing thanks to the recent OPEC deal. As the price of oil stabilizes above $50 on its way to $60, energy executives are improving their outlooks and there are signs things are picking up.

Short-term leases will be the focus in 2017 as we see more tenants get off the sidelines and sign long-term deals if the perception that we've hit the bottom holds.

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One factor that could positively impact deal volume is natural gas, but it'd be a slow burn.

For the first time, the US is a net exporter of natural gas. In Bruce's opinion, within three years there won't be a bus system in any city running on diesel or gas. Manufacturing is also consuming ever more natural gas to make plastics and chemical products. Bruce says the 21st century will be the century of natural gas, and Houston is once again positioned to be an energy leader in the industry.

With oil analysts optimistic about further price gains and speculators looking to cash in on America's abundance of natural gas, the future (albeit a little ways off) of Houston looks bright.