As the national market recession began in 2008, and started to settle in throughout the city of Houston around mid-year 2009, businesses focused on the implementation of efficiency, accomplishing more with fewer resources applied to the daily routine. In most business models, the most expensive resources are the current staff, followed closely by office space. In that most office leases are illiquid, downsizing of non-essential personnel is logically the most expedient way to an immediate impact on the bottom line during an economic downturn. However, this also results in an immediate surplus of office space per person or phantom vacancy; a pattern logically should trend downward during a recessionary cycle in the economy.
According to CoStar data from the 3rd quarter 2011 webinar, the average square footage per worker has increased by almost 10% since 2008, and leveling off after 2009 without significant decrease. Certainly, the trend is quite the opposite of what we would expect today, arguably even in a stable economy as the trend is increasingly toward efficiency. However, such excess may not only be to the lack of the ability to dispose of such vacancy, but the intentional positioning where employers are seeking to recruit quality personnel and provide them with inner office amenities, such as collaboration, break, conference, fitness rooms, etc. to inspire long term retention. A great example of this in Houston can be found in the new Exxon campus under construction just north of the city.
HOUSTON MARKET ON THE MOVE
By studying movement in the Houston real estate market while taking in to consideration the typical points of measurement such as job growth, oil rig counts, commercial backed securities markets, and vacancy/space absorption, all signs point toward stabilization for Houston. Houston is leading the recovery for office rents, in particular Class A product in the Central Business District, Galleria & Energy Corridor submarkets, with major drivers pushing rental rates due to the limited availability of office space inventory, low cost of living, and a healthy energy & medical based economy. Class B & C product are still reporting negative absorption; however, the overall economy for all building classes is still showing improvement with lower vacancy rates.
NEW DEVELOPMENT
Developers are capitalizing on this lack of quality large blocks of Class A space available in particular in the Galleria, with four office buildings and new retail centers coming out of the ground scheduled for completion by 2013. Rumors of development are on the rise in the CBD, Energy corridor, and The Woodlands, but not yet confirmed, and, just south of Houston in the Clear Lake area, development activity has also been seen with a new mixed-use development nearly complete to include a 4- story office building, 70,000 square feet of retail space, a Marriott Hotel, 313 Residential apartment complex, city hall and conference center.
GOOD TIMING
In addition, the timing is now. Many business decisions have been held off as long as possible, and with uncertainty surrounding the national economy and direction of federal government, business owners have acted in 2011 to secure the best deals they can. Tenants that can lock in favorable terms now, before all the demand is satisfied, will benefit in going forward. Through 3rd quarter 2011, tenants were continuing to take advantage of landlord aggressive concessions strategically staged to increase momentum for static building vacancies. However, landlords are sensing a more favorable climate as we approach year-end 2011 and concessions for quality products will be limited. The energy & medical industry is booming in Houston, and jobs are flooding the city (reported at nearly 65,000 added since 9/2010 by the US Labor Statistics), which has enhanced market movement. Housing prices are relatively modest compared to the rest of the country, making Houston a desired location for many businesses.
As fewer quality choices are available, vacancy subsides, unemployment continues to drop, (assuming oil prices retain their current value), we are likely to see concessions decrease, rental rates to increase, and conditions to continue to favor the landlord in the future. A slowdown in activity is anticipated for 2012 due to the absence of quality avails and decreased concessions, but a landlord market is a positive sign of impending stabilization to come.
— Chris Lewis, executive partner of Houston-based CORE Global, a strategic partner with Griffin Partners.