Downtown Houston Leads City's Office Recovery, But Future Remains Uncertain Amid Interest Rate Hikes

Amid slight improvement in the Houston office market, downtown is seeing the most activity, claiming Houston's largest new office leases as tenants demand newer spaces.

The five largest Houston office leases in the last quarter were signed in downtown buildings, including two in Texas Tower: Cheniere Energy's 153K SF lease and Trafigura's 31K SF deal, according to Avison Young's Q2 report. Downtown is also seeing the most office development in the city, with about 386K SF under construction.

Most of the citywide activity, both in leasing and new construction, is in Class-A offices. There was 159K SF of positive absorption during the quarter, and almost all of it — 156K SF — was in Class-A properties, according to Madison Marquette data. About 1.3M SF of Class-A space was absorbed over the past 12 months, compared to Class-B buildings, which saw negative absorption of 403K SF.

Avison Young found that Class-A buildings constructed after 2005 had a 17.1% vacancy rate at the end of the second quarter, compared to 25.6% vacancy for all Class-A product.

"Many of these buildings have completed major renovation programs adding amenities to successfully compete with new buildings," Avison Young's report states. "Professional firms representing law, finance and energy industries have signed the most new leases this year as they search for quality space and amenities to encourage their top talent to come back into the office."

Houston has generally seen positive absorption for the past three quarters, but Houston researchers are wary of possible upcoming headwinds from interest rates.

"Houston’s office market continued to see incremental improvement in market fundamentals through midyear," a Q2 JLL report states. "However, the Fed’s recent efforts to combat inflationary pressure through increased interest rates could create headwinds for office investment and development in the coming quarters."

Interest concerns have killed deals and otherwise affected the investment market elsewhere in the U.S., Bisnow reported previously. The Federal Reserve hiked interest rates by 0.75% in June to try and quash rapid inflation, and is expected to do so again this month, The New York Times reports.