Q2 Office Stats a Mixed Bag
Houston’s office market posted 537k SF of positive direct net absorption in Q2, but new supply outpaced demand for the fourth consecutive quarter. YTD direct absorption is 562k SF, well below the 2.5M SF absorbed in the first half of 2014. PMRG’s quarterly report shows that Class-A led the way, with 688k SF of occupancy gains, mostly in the Katy Freeway/Energy Corridor and FM 1960/SH 249 submarkets. (That’s largely driven by companies like Noble Energy, Sasol and GE Energy upgrading their office space, leases that were inked in new construction before the oil slump, director of research Ariel Guerrero says.) However, nearly 2.1M SF of construction deliveries still pushed Class-A occupancy down 110 bps to 87.1%. That’s still better than Class-B, which experienced 177k SF of losses, declining occupancy to 84.8%. That’s largely thanks to Exxon, which left behind 332k SF at 13501 Katy Fwy.
That's a trend Ariel's seen over the past three quarters: corporate office users (Exxon, Shell, Halliburton, Southwestern Energy, etc) have vacated roughly 2.5M SF of leased space as they moved into new corporate-owned projects. (That bumps them off the record--PMRG doesn't include corporate-owned projects in its competitive data.) The Galleria was a surprisingly ugly spot on the report—it posted 365k SF of negative absorption in Q2. That’s mostly Class-A, and Ariel says it’s largely attributable to Telecheck First Data vacating 119k SF at Galleria Place I (pictured) and GE Energy moving out of 145k SF at Park Towers. There’s a silver lining, though. Although maintaining this level of absorption would push us below our 20-year historical average (2.5M SF a year), it’d just bring us back to our long-term occupancy norm. For the past three years, the Class-A office market has been exceptionally tight. There's a high volume of leases expiring from 2017 to 2019, Ariel tells us, plus pent-up demand from tenants delaying office decisions now, so he expects leasing activity to return to increased levels over the next two years.