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Houston Office Is Looking Up, But Don't Get Out The Party Hats Yet

In a sign of possible turnaround for Houston's still-struggling office market, the sector has clocked its first quarter of positive net absorption since the coronavirus pandemic began.

But CRE analysts warn it is too soon to definitively say office is on the comeback trail.

An aerial view of downtown Houston

“While Houston remains a tenant-friendly market, Q4 saw some positive developments for office owners," CBRE Houston Office Occupier Executive Vice President Kevin Kushner said in a statement accompanying the company's latest office report, one of several Q4 updates released over the past week. "Oil and gas prices are holding steady, which remains critical to the confidence of the greater Houston business community. In addition, the city saw an influx of companies opening offices and relocating headquarters to the area." 

Though several major oil and gas companies downsized or moved during the last quarter of 2021, according to CBRE, that was balanced by new energy technology companies that opened offices in Houston, along with other new-to-town companies in technology, life sciences and aerospace. Overall, the city saw 53K SF of net absorption last quarter, compared to the negative 431K CBRE reported in the third quarter of 2021.

"Landlords with new projects and those that invested in renovating and adding amenities to existing assets have seen increased leasing activity," Kushner said. "Tenants continue to have many options when seeking office space. But landlords with differentiated product have reason for optimism despite the competitive marketplace.”

New deals signed in Q4 included ContourGlobal, which signed for 16K SF at new development Montrose Collective, and Jera Energy Americas, which doubled its space and relocated downtown, according to CBRE. The West Loop and Galleria area alone accounted for 54.7% of Houston's backfilled space in Q4.

Most Houston-area transactions, about 55%, were renewals, per a separate Savills report for Q4. The same report indicated 52% of major transactions involved energy companies and more than 76% of large transactions were in the CBD. That includes a Shell Oil lease renewal announced in November 2021 amounting to 258K SF alone. By comparison, the city's second-largest Q4 transaction was for Opportune LLP's 62K SF renewal and expansion in Downtown Houston.

Savills Vice Chairman and Southwest Region Lead Mark O'Donnell sounded a note of caution amid the optimism in written comments to Bisnow, pointing out that the supply of overall office space is still abundant while demand remains in question

"Energy commodity prices have recovered but remain volatile due to the Omicron variant and other variables," he said. "Energy analysts are mixed on the 2022 outlook for the industry. This leads us to believe that office users in the energy sector will remain conservative with their real estate decisions for the time being." 

O'Donnell added that newer, amenity-rich office product is faring better than older stock, with tenants willing to pay more per SF as they explore "workplace strategies that involve flexible and high-performance working models with efficient space design."

"The demand for newer buildings with updated amenities will in general continue to put enormous pressure on office product built prior to 2000," O'Donnell wrote.

The CBD still has the largest rental rates in Houston at an average of $37 per SF. Greenway Plaza, the Galleria and Midtown round out the top four.

Savills notes that vacancy in Houston has leveled off at 30% after spiking to record numbers throughout the pandemic. Availability is still higher in the office market than pre-pandemic, but Class-A rents have increased slightly to an average of $29 per SF, and industry experts say demand is slowly increasing.

“Q4 2021 showed continued signs our market is on the path to recovery, despite a possible setback from the Omicron variant, as a new sentiment of ‘moving on’ and shaking off the pandemic’s impact on the market took place," Chip Colvill, Cushman & Wakefield's executive vice chairman of agency leasing, told Bisnow in an email. "With pent-up demand resulting from deals that were put on hold in 2020 and 2021 as well as tenants that did short-term extensions during these years, 2022 leasing activity promises to be strong and is expected to decrease our record-high vacancy.”

CORRECTION, DEC. 14, 12 P.M. CT: Bisnow misstated the amount of net absorption in Q3 2021. The story has been updated for accuracy.