For well-capitalized owners willing to upgrade amenities and hold on to their properties longer, betting on Houston's quarter-vacant office market is starting to pay off.

The flight to quality isn’t new, but buildings that are more than 90% leased and revenue gains of up to 40% would have been hard to imagine in the early days of the pandemic.

Panelists at Bisnow’s The Future of Houston Office event at Sugar Creek on the Lake on Tuesday said demand is driving landlords to raise rents and boost occupancy rates — even as they warn that a large share of the region’s aging Class-B and Class-C stock will “never come back to life,” and Houston's office vacancy rate remains one of the highest in the country.

DML Capital has repeatedly seen the fundamentals of well-located Class-B buildings improve since it acquired its first office asset, a 171K SF, two-building office complex in Sugar Land that was about 84% leased in 2024.

The property is now fully occupied and will stay that way for at least two years, DML partner Saleem Lakhani said, adding that new tenants are expected at that point. DML now has five office properties and doubled its assets under management from $300M to $600M in less than a year. 

“Most of our offices are close to 90% or high 80s,” Lakhani said. “Some even at 100%. Now we're seeing that we can push rents, as much as the market will allow.”

Granite Properties, which owns Houston office buildings including the 302K SF 3151 Briarpark Drive in Westchase and the 510K SF Weslayan Tower in Greenway Plaza, has gotten occupancy “where it needs to be” in all of its buildings, Granite Senior Managing Director Paul Bennett said.

Zachry Engineering leased 53K SF at 3151 Briarpark in the first quarter of this year. 

“We've been inking deals within the last 12 months,” Bennett said. “We've seen 30% to 40% growth within our revenues, so the fundamentals are really strong.”

But cap rates are starting to compress, meaning owners have to settle in for a longer hold time. Two- to five-year hold plans are being replaced by five- to 10-year timelines, Lakhani said.

“You're going to be in there for a little bit longer. So just hold on for the ride and enjoy the cash flow at this point,” he said.

But that’s not the case for all Houston office owners. The market has a vacancy rate of about 24%, according to CBRE, well above the national office vacancy rate of about 18%. Though vacancy in Houston's top-tier buildings averages just 11.7%.

Panelists said occupancy rates largely depend on property amenities and location, with Houston's population migrating west and employers wanting to stay close to their workforce.

The intersection of Beltway 8 and Interstate 10 near CityCentre and Memorial City is now Houston’s population center, Lee & Associates principal Bill Insull said. Lee & Associates’ office is in the area, at 10497 Town & Country Way.

The offices in the submarket are up to 95% leased, and it is “where people want to be,” Insull said.

“They're getting the highest rents in the city, with the exception of some AA Downtown buildings,” he said. “We don't see that changing anytime soon because the growth in population is still out to the west and the southwest and the north.” 

Numerous companies, particularly energy firms, have moved their offices farther west in Houston in recent years. Apache Corp. and Bechtel both moved from the Galleria area to Westchase. LyondellBasell moved out of its namesake tower Downtown for the Galleria-area Williams Tower, the same building Camden Property Trust moved to from Greenway Plaza. 

Downtown is still seeing healthy demand from law firms and some other companies, particularly for its newer trophy buildings, Savills Executive Managing Director Lesa Nickelson French said. Texas Tower opened in 2021 and attracted law firms like Vinson & Elkins, which halved its footprint to move within the submarket, she said.

Many law, engineering, accounting and other firms are focused on getting into the best building they can, partly because they need to attract and retain young talent, who may have started their careers during the pandemic and have only experienced working from home.

“They need to understand what the real work environment looks like,” French said. “[The firms are] looking at ‘How can we best afford the best building?’” 

For investors like DML Capital and Beyond Holding Co. that are buying older office stock, amenities and upgrades are imperative. Food, such as a deli in the lobby, can be the most effective amenity, Beyond Holding Co. CEO Jenny Zhan said. 

LandPark Advisors President Bill McGrath said there’s not one magic-bullet amenity, but creating an environment with amenities like conference rooms, fitness centers and golf simulators will help give tenants the best experience. 

Landlord investment is why buildings in pockets of submarkets, like the West Galleria area, are performing strongly, Lakhani said. But most of the Houston office buildings with low occupancies that haven’t been upgraded are already too far gone, he said. 

“There's a lot of B and C-class buildings that just need to be removed from the denominator, and that'll give you the true occupancy,” Lakhani said. “Even [if] we are 20% vacant, technically, I'd say maybe 80% of those 20% [of buildings] will never come back to life.”