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If You Want To Lease Office In Houston Right Now, You’d Better Have Great Amenities

Office buildings in Downtown Houston.

It’s a challenging time to be leasing office space in Houston. Nearly a quarter of the city's inventory is sitting empty, reflecting the lingering effects of a previous energy downturn, the coronavirus pandemic and last year's crash in oil prices.

Contributing to the vacancy rate is a growing inventory of obsolete buildings thanks to the city's 1980s-era construction frenzy — a spate of development brought on by major tax reforms and a simultaneous oil boom that buoyed the local economy.

With so much vacant and aging space, it has become more important for owners to approach office in a similar fashion to multifamily — that is, focusing on providing the best amenities and services, according to Nitya Capital Head of Investments Mehul Chavada.

“Covid just accelerated the whole need for having amenities or having wellness centers. To have tenants and employees both feel that they are really productive and enjoying the space and collaborating,” Chavada said during Bisnow’s The Future of Houston Office event on Aug. 31.

Lincoln Property Co. Senior Vice President Kevin Wyatt said that building owners need to consider upgrades like a conference center, restaurant options, a hotel and other walkable amenities in order to lease up properties struggling with occupancy.

Wyatt pointed to Lincoln Property’s CityNorth complex in North Houston, formerly known as Greenspoint Place. After acquiring the property in 2017, the firm poured tens of millions of dollars into upgrading the complex. As a result, the buildings being leased have gone from 30% to nearly 80% occupied.

“If you've got a project with significant leasing to achieve over the next few years, I think you're going to have to compete on a quality-of-life basis,” Wyatt said.

Colliers International's Patrick Duffy, Nitya Capital's Mehul Chavada and Lincoln Property Co.'s Kevin Wyatt at Bisnow's The Future of Houston Office event on Aug. 31, 2021.

According to the latest market report from Colliers International, the city’s office market was a historically high 23% vacant at the end of Q2 2021, negative net absorption year to date was 1.2M SF and average asking rents were $28.51 per square foot, down 6.8% from a year prior.

Moody Rambin Managing Director Bob Cromwell estimates between 30M SF and 40M SF of office space is still counted as inventory but is functionally obsolete.

“When you see that 78% occupancy in Houston, it's about 10 points to where we get full. That is about 30M SF. So that's [what] we need to eat up over the next few years to get the market stabilized,” Cromwell said.

Despite the amount of existing inventory, Houston still has office projects under construction. As of Q2 2021, the city had 3.5M SF in the pipeline and 60% of that space is pre-leased, according to Colliers International.

Griffin Partners CEO Ed Griffin said that if a developer has an anchor tenant for a project, it’s feasible to build something new. However, to successfully lease a new building, developers need to be embracing new standards that have grown in popularity, including green certifications and top-notch amenities.

“People ask, how can we be building new buildings when there's so much vacancy in Houston? And the answer is, we have a ton of obsolete inventory. And the new buildings attract tenants anyway, away from those older products and at rates that they're willing to pay,” Griffin said.

Moody Law Group's John Moody Jr., Griffin Partners' Ed Griffin, Colliers International's Patrick Duffy, Nitya Capital's Mehul Chavada, Lincoln Property Co.'s Kevin Wyatt and Moody Rambin's Bob Cromwell at Bisnow's The Future of Office event on Aug. 31, 2021.

Class-A office buildings with amenities have an edge, but it’s not necessarily enough to guarantee lease-up right now, particularly as Houston is also recovering from an energy downturn. Certain submarkets like Downtown Houston, The Galleria and Westchase bore the brunt of that downturn during the pandemic.

Griffin said that outside of Downtown Houston, The Galleria is probably going to be the last submarket in Houston to see rent increases, as there are more than 104 full-floor office vacancies across that submarket. The Galleria doesn’t tend to attract large-scale office users, which means it will take longer to fill those vacancies, he added.

Oil prices are now on the rise, but that is unlikely to mean more office usage by the sector, as many firms continue to operate with caution. And without a healthy energy sector, experts said that Houston’s office recovery will be slow.

“I think as long as energy is in limbo — which it is, and it's going to be there for a while — it's going to be hard to move the needle other than building by building, micro-market to micro-market, as people just shift. Colliers International President Patrick Duffy said. "We're just rearranging chairs.”