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Houston Q2 office vacancy at highest rate since 1994

by Jody Barhanovich

Houston’s office market vacancy rate increased by 40 basis points to 18.8 percent — the highest rate since 1994 — and by 230 basis points annually in second quarter 2017, according to Colliers. The rate was at 18.4 percent in first quarter 2017 and 16.5 percent in fourth quarter 2016.

Over the quarter, the average suburban vacancy rate increased 30 basis points from 18.2 percent to 18.5 percent, and the average CBD vacancy rate increased 50 basis points from 19.3 percent to 19.8 percent.

The average CBD class A vacancy rate increased 20 basis points from 17.1 percent to 17.3 percent over the quarter, while the average CBD class B vacancy rate increased 100 basis points from 27.7 percent to 28.7 percent. The average suburban class A vacancy rate increased 60 basis points from 20.8 percent to 21.4 percent, and in contrast, the average suburban class B vacancy rate fell 30 basis points between quarters from 16.7 percent to 16.4 percent.

Net absorption remained flat, posting about 700,000 square feet of negative net absorption. Suburban class A space recorded the largest loss, with 754,825 square feet of negative net absorption, while suburban class B posted the largest gain with 336,469 square feet of positive net absorption.

Available sublease space decreased slightly, which was primarily due to expiring terms and the space going back to direct marketing by the landlord. There were a few instances where the sublease space was withdrawn by the sublessor. The majority of the sublease space in the market now has 1-3 years of term remaining.

According to the U.S. Bureau of Labor Statistics, the Houston metropolitan area created 45,300 jobs (not seasonally adjusted) between May 2016 and May 2017. Most of the recent quarterly job growth occurred in employment services, public education, food services and drinking places, health care, and fabricated metal products.

Houston’s office market also continues to struggle as global oil futures trade below $50 a barrel. With no indication that prices will rise in the immediate future, it will take awhile to absorb all of the space the energy industry has placed on the market over the past few years. The good news is most of the larger office projects that were started before the oil slump have delivered, and the projects that were in the construction pipeline were put on hold.

However, there are some tenants in the market with a preference for newer innovative space, and certain developers are willing to meet these requirements even in an oversaturated market. For example, Skanska USA recently signed a deal with Bank of America to occupy 200,000 square feet in a new building known as Capitol Tower in the CBD and broke ground during the second quarter with the building scheduled to deliver in 2019.

 

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