Office Space In Houston Remains In Surplus
A new report by PMRG predicts landlords will have to propose generous concession packages such as free rent and tenant improvement allowances to attract tenants while keeping rental rates steady.
The office space sector posted negative 789K SF of direct net absorption in Q2, pushing the year-to-date total to over 1.2M SF of occupancy losses.
Exxon Mobil and NALCO Champion were behind much of the empty space increase in the Class-A sector, returning 583K SF of direct vacancy to the market. Overall, the asset class recorded 134K SF of occupancy losses, but still managed to post 586K SF of direct net absorption over the last 12 months.
The Class-B market logged 600K SF in occupancy losses to bring the year-to-date absorption beyond negative 1.3M SF.
The largest vacancy came by way of Exterran Holdings and Worley Parsons, which combined to put 299K SF back into the market.
Not all of Houston is inundated with overstocked office space; some submarkets are showing signs of stabilization and improvement.
The Central Business District recorded 45K SF of quarterly losses, but the Class-A sector recorded 108K SF of direct absorption as Talos Energy expanded into 98K SF at Three Allen Center. Due to the vacancies of Interactive Response Tech (90K SF) and Amegy Bank (35K SF), the Class-B sector Downtown noted 158K SF of occupancy losses.
Midtown recorded 40K SF of direct net absorption, driven by 69K SF of leasing gains within the Class-A sector. The majority of the gains came from iQor occupying 36K SF at Central Square and Energy & Minerals and Timmons Advisors' combined 22K SF at San Felipe Place.
The Woodlands recorded 63K SF of direct absorption, led by the Class-A sector, which accounted for 82K SF of the leasing gains. The largest leasing volume was in newly built projects, including APTIM leasing 27K SF at Three Hughes Landing.
The Southwest submarket recorded 120K SF of quarterly gains, largely due to AT&T Wireless moving into 73K SF at Southwest Corporate Center.
Greenway Plaza recorded 141K SF of negative absorption with NALCO Champion returning 129K SF of sublease space at Phoenix Tower. The largest move-ins involved Hancock Whitney Bank and other tenants collectively occupying 42K SF at Kirby Collection.
Westchase recorded 107K SF of occupancy losses, with the bulk of the negative absorption due to Worley Parson’s 94K SF lease expiring at 10500 Richmond.
The Katy Freeway/Energy Corridor posted 40K SF of occupancy losses, but the Class-A sector recorded 53K SF of leasing gains. The largest move-ins included FairNodal (47K SF), Solaris Management (24K SF) and Envoy Mortgage (40K SF).
North Houston/North Belt posted negative 593K SF of direct net absorption, bringing the year-to-date total up to 612K SF of occupancy losses. The largest direct vacancies resulted from lease expirations by Exxon Mobil totaling 453K SF at CityNorth 1 and Eight Greenspoint, while Exterran gave back a combined 205K SF at 16666 Northchase Drive and Belchase Building.
Overall, leasing activity increased to 16.9M SF over the last 12 months, up 11.3% since the critical low in 2016.
Though Class-A is typically healthier than Class-B in leasing activity, rents are another story. Gross asking rent for Class-A decreased by $0.10 to $34.94/SF for the quarter and have decreased by 0.3% year over year. Class-B asking rents rose slightly (by $0.34) to $21.91/SF, a 1.4% increase over the prior 12 months due to new construction and renovated properties entering the market.