Houston Office Market Struggles to Regain Pre-Pandemic Footing

Story by Boyd Commercial Editor / August 12, 2022

Mid-way through 2022 and the Houston office market is showing signs of promise. For the first time in a few years, net absorption was positive for the first half of the year and leasing volume is up 5% compared with the same period a year ago. 12-month rent growth is nominal, at 0.2%, with the CBD commanding the highest rents in metro Houston, at $36 per-square-foot, while The Woodlands is not far behind at $33 a foot. With the overall vacancy running a tad above 19%, landlords are forced to concede generous concession packages to attract tenants throughout Houston’s submarkets.

Even so, leasing activity continues to improve in 2022, with landlords and tenants coming to terms on 2,280 leases during the first half of the year and office leasing commitments in excess of 7.8 million square feet. For the past 12 months, Houston’s office net absorption was positive and approximately 1.1 million square feet.

Currently there is 4.7 million square feet of new office inventory under construction. The biggest projects are large trophy assets in the South Main/Medical Center, the CBD, Katy Freeway East and The Woodlands submarkets. The product mix includes life sciences, spec office and build-to-suit offices.

Houston does have one of the highest return-to-the-office rates in the country, with Kastle Systems, the building card-swipe company, reporting that 55% of Houston’s offices have been re-occupied since the pandemic. By comparison, New York City and Silicon Valley occupancy rates remain in the mid-to-high 30%.

Sublease space continues to be a drag on the local office market, however, with approximately 8.3 million square feet of sublease space available for lease. That’s about 2.3% of the metros total inventory. Put in perspective, available sublease space is up from about 5.1 million square feet at the start of 2020 yet still lower than the 11.2 million square feet of sublease space that Houston experienced in the fourth quarter of 2016 that resulted in the oil bust of 2015 and 2016. Not surprisingly and because of the size of the CBD as a submarket – the biggest in the metro area with 52 million square feet, about one-third of the sublease space is in the central business district.

Investors traded some $2.7 billion in office properties during the first half of 2022 with an average price-per-foot of $220. Cap rates on office building sales have crept up to 7.9% on average, or a bit higher than comparable markets such as Dallas-Fort Worth (7%) and Atlanta’s (7.2%) cap rates.

Categories: Houston Commercial Real Estate Trends