By Dustin Devine, vice president, Avison Young
In 2020, COVID-19 further compounded the issues Houston’s office market was facing with depressed oil and gas prices. With many office users implementing work-from-home policies — although a shift back to the office is in progress — and minimal business travel, there was weak demand for office space in 2020.
Houston’s office market is expecting a resurgence of sorts beginning in mid- to late-2021 due to increased vaccine rollouts and work-from-home burnout, along with commodity prices continuing to tick upward. Increased demand will not occur overnight, however, as it will take years to absorb all of the current available space.
Dustin Devine, Avison Young
Most activity at present is expiration-driven. Although Houston’s economy today is more diversified than it was in the 1980s, much of the city’s business either revolves around or touches the oil and gas industry. Avison Young’s recent Office Market Report shows that current citywide office availability is over 25 percent, with nearly 6.5 million square feet of sublease space available.
With availability rates and the amount of sublease inventory at such high levels, it is clear that many industries are hurting, including commercial real estate. As a firm, we are doing whatever we can to assist our clients’ and prospects’ real estate needs in an effort to help them reduce occupancy costs.
While we’ve had a few customers decide not to proceed with previously approved leases or purchases, the majority of our deals that were put in motion pre-COVID-19 have either been completed or are still in progress. A major impact that COVID-19 has had on leasing involves delayed expansions that would have either started or been fully executed had business continued as usual. But it is encouraging to note that since the new year began, we have experienced more client contact with regard to in-person tours and meetings.
Although we are roughly a year into the pandemic, it’s difficult to give a broad statement on exactly how office space needs will be changed moving forward, especially since these requirements are so client-specific.
Although many office users have already had employees return to the office or have begun that process, most are still not at full capacity. Many firms have continued to delay plans for larger-scale re-entries until vaccine distribution has occurred on a greater level and daily lives “return to normalcy.”
Companies want to give employees the autonomy to say whether they are comfortable coming back into the office right now. For employees that do choose to return to their offices, employers must ensure that they feel safe with workplace policies. These include enforcing proper social distancing, setting up clean workstations, providing adequate personal protective equipment and potentially reconfiguring space layouts.
Leasing activity has struggled over the past year, leading to a glut of available sublease space, but a few notable deals have still been inked. In January, automotive retailer and online marketplace Vroom signed a 102,500-square-foot office lease at Westchase Park II.
But above all else, we have come to realize that the need for office space isn’t going anywhere. The initial knee-jerk reaction from some was that work-from-home is the future for everyone. As time has progressed, studies have shown how that assessment oversimplifies a complicated and unique decision for every company.
While remote working may be a solution for some firms in perpetuity, it certainly isn’t a one-size-fits-all solution. There are so many factors to consider, which is why we are having numerous conversations with clients about their ideal workplace solutions. For example, it might be that certain employees can be remote permanently. Alternatively, other employees might have flexible hybrid schedules wherein they work from home on specific days each week.
For those employees who utilize the flex/hybrid schedule, there are some questions to be answered. Will these employees have dedicated workspaces, or will they participate in other flexible office solutions while in the building? Whatever the final workplace solution ends up being for a specific organization, most firms need a physical presence for their employees.
The main reason this requirement is likely to persist is because it’s difficult to build company culture, attract and retain talent, mentor young employees, foster relationships, entertain clients and increase productivity and collaboration through full days of scheduled virtual meetings. Humans are relational beings, and we tend to work better when we’re together in person.
As noted earlier regarding COVID-19’s impact on leasing, we are currently seeing very strong concessions packages from landlords trying to capture demand in the market. These concessions typically come in the form of extensive free-rent periods that vary by term length, large tenant-improvement allowances that can be applied toward both hard and soft project costs and abated parking charges for both reserved and unreserved parking spaces.
Landlords are offering these concessions to mitigate the severity with which they would otherwise have to alter their face rates to provide the same economic terms to tenants in the market. Landlords that are unwilling or unable to provide concessions of this magnitude risk having buildings within their competitive set outperform their asset.
That said, in addition to these extensive concession packages, we are now seeing face rates dip and landlords make extra pushes to procure tenants. The pendulum will shift back at some point to cause Houston to be a more landlord-centric market. But for today, and for the foreseeable future, Houston’s office market favors the tenant.
— This article originally appeared in the February issue of Texas Real Estate Business magazine.