Rising Oil Prices, Positive Quarterly Absorption Spell Hope for Houston Office Market
By Blake Virgilio, SIOR, CCIM, vice president at Colliers
The Houston office market continued its very gradual stabilization with 27,000 square feet of positive absorption in the third quarter. While that volume of absorption only represents roughly one floor of office space in a typical Houston office building, it’s the first time the market has posted a quarter of positive net absorption in the last two years.
The key activities of tenant tours and the return of employees to the office continued to increase throughout the third quarter. Nonetheless, the vacancy rate rose over the course of the quarter by 400 basis points from 22.9 to 23.3 percent, a historical high.
Also in the most recent quarter, Houston’s office inventory increased slightly, with approximately 1 million square feet of new product added. There is still 3.2 million square feet of office space under construction, and most of the new inventory, which is 47 percent preleased, is expected to deliver this year. Of that total new product, about 2.3 million square feet is spec development, of which 60 percent is preleased.
Houston has one of the highest physical office occupancy rates in the country, though many larger corporations began phasing their employees back into the office in October and November. The price of oil is over $80 per barrel, with many industry experts projecting the return of $100 per barrel oil for the first time in nearly seven years. This is an undeniably positive indicator for the market.
Larger tenants are still reducing their footprints by 10 to 25 percent. This trend was prevalent before COVID-19, so it’s not necessarily a direct effect from remote or hybrid work, but rather of the constant downward pressure by corporate America to decrease costs.
Concessions are still holding steady in the tenant’s corner, with little relief in sight for landlords. The landlords that are successful right now have either: a) Class A+ product, b) a first-class amenity base or renovation program in place, or c) an uber-aggressive approach to their rates and concessions.
Being able to operate one’s building efficiently and effectively is still very important, but the space also needs to fall into at least one of those three buckets to achieve positive absorption in this competitive environment.
Landlords are rethinking amenity offerings to give tenants value propositions so those companies can encourage their employees to return to the office. The tenant that is able provide an environment that makes employees proactively want to come into the office, and not be forced to return to the office, will be more
Time will tell if this prediction holds true, but the tenants that have a welcoming and productive office where tenants genuinely want to be tend to have more success than those companies that offer solely remote work.
The importance of an outdoor space is the latest addition to the amenities arms race. Providing a fun and engaging outdoor setting is proving to be next “box-checker” for discerning tenants looking to make their employees more productive. An attractive outdoor space will see more daily utilization than a building conference room or a fitness center. These spaces also do more for employees’ well-being and productivity than any other amenity.
We are seeing more “immediate” and “asap” commencements than at any other time in recent memory. Tenants have procrastinated and delayed their office searches to wait for the dust to settle on their business outlook. Landlords with spec suites or move-in ready spaces are positioned to succeed. This issue is being exacerbated by the city’s continually slow permitting office.
The performance of our beloved permitting office — much like the Houston Texans football team — is at all-time low, with no light at the end of the tunnel. Once the market is closer to equilibrium, spec suites will represent opportunities for landlords to introduce more variable rates for their spaces, seeing up to 20 percent premiums to non-move-in ready space.
In summary, for years the Houston office market has been channeling it’s inner Bill Murray from Groundhog Day, with every quarter featuring the same highlights being mentioned — negative absorption, all-time high vacancy — but the recovery is near!
Hopefully the beginning of the fourth quarter will see the turning of the corner to a more stable and equilibrium office market.
— This article originally appeared in the November 2021 issue of Texas Real Estate Business magazine.