Houston office space had a sluggish quarter with signs of a potential recession on the horizon. Tight labor markets have caused rising vacancy rates as employers struggle to get workers back into the office. Leasing activity was also subpar, despite a quarterly increase.
Like most other markets in the nation, rising interest rates could delay new construction projects as financing costs become too high. Landlords should be defensive in the short-term to ensure they have enough reserve capital to get past this foreseen downturn.
General Area Overview & Demographics
The largest city in Texas and the fourth most populous in the nation, Houston has a population of 2,345,606 as of 2022.
The average age in the city is 33.3 and the median household income is $53,600. Houston is a global city with representation from numerous countries around the world and is a major hub for energy, technology, and software. Houston has consistently ranked as one of the best cities for business and investment over the past decade and has a vibrant artistic and sports culture.
Houston has a subtropical climate characterized by hot wet summers and mild winters. The city itself sits upon an expansive geography of swamps, forests, marshes, and coastal grasslands. This topography makes the region relatively prone to flooding during the wet season.
Houston’s urban sprawl spans 11 districts and over 80 distinct neighborhoods. The city’s lack of formal zoning regulations has resulted in mixed commercial/residential regions with multiple centers of employment.
Summary of Houston Office Space Performance in Q3 2022
Houston recorded negative net absorption this quarter at -409,185 square feet. Despite an overall increase in available product inventory, vacancies continue to rise as demand for office space in Houston remains relatively low. Although Houston has done a decent job getting workers back into the office, the demand for remote work has slowed leasing activity.
Houston’s current unemployment rate is 4.6%, slightly higher than the national average of 3.7%. Construction of new space remains decent, with over two million square feet of product under construction.
Vacancy rates, however, rose to 23.3% in Q3 2022 from 23.1% in Q2 2022. As a tight labor market slows demand for new office space, vacancy rates are projected to rise in the short term.
What Are Office Space Rents Like in Houston?
Overall lease asking rates were $20.96 per square foot at the end of Q3 2022, slightly down from an average of $20.96 per square foot in Q2 2022. However, average asking rates for triple-net (NNN) leases rose despite the quarterly drop.
Similarly, average rents for Class A office space saw a year-over-year increase but showed a quarterly drop from $36.37 per square foot in Q2 2022 to $35.59 per square foot in Q3 2022. Submarkets that had the highest rental asking rates include Allen Parkway, The Woodlands, West Loop, and Greenway Plaza at $34.32, $34.22, $34.08, and $33.58 per square foot, respectively.
Purchase & Leasing Activity
Leasing activity for Houston office space increased from 3.4 million square feet in Q2 2022 to 3.7 million square feet in Q 3 2022. Although leasing activity increased this quarter, it was still relatively subdued compared to historic leasing activity.
Like many other metro areas, Houston saw a sharp spike in subleasing activity this past quarter. Subleased space jumped from around 7.5 million square feet in Q2 2022 to slightly over 8 million in Q3 2022. The increase in subleasing activity was in Class A office properties—subleasing activity for Class B office space, in contrast, fell slightly.
The reduction in leasing activity is due to difficulties getting employees back in the office. Nearly 58% of Houston’s workforce has come back to the office, but momentum is slow as employers are left navigating increased demands for remote work.
Notable Office Space Deals in Houston in Q3 2022
Despite relatively low leasing activity, Houston saw a handful of notable real estate transactions this quarter:
- Greystar’s 68,000 square foot lease at 730 Town & Country Blvd.;
- Centric’s 52,600 square foot lease at 9950 Woodloch Forest Dr.;
- Perry Homes 77,000 square foot lease at 3200 Southwest Fwy; and
- Baker Botts 172,000 square foot lease renewal at 910 Louisiana St.
Although many Houston businesses are getting workers back into the office, demand remains low. Landlords are compensating for reduced demand by offering high-class accommodations and tenant improvement packages.
New Office Space Development Activity in Houston in Q3 2022
Total office space under construction increased to 2,053,000 square feet in Q3 2022 from 1,903,000 square feet at the end of Q2 2022.
Construction activity is characterized by smaller ‘spec suites’ that landlords can lease to tenants that want to quickly occupy space. Despite the quarterly increase, new office space development is down year-over-year.
Below is a table summarizing major construction efforts in the Houston office space market.
Market Forecast for Houston’s Office Space Market in 2023
2022 has been a relatively slow year for the Houston commercial real estate market. Despite several new construction projects and the addition of nearly 1 million square feet in new office space supply, landlords are having trouble leasing due to low demand for office space.
One strategy that has risen to prominence is constructing small (<5,000 square feet) speculative units that tenants can quickly occupy without a protracted build out process. To attract quality clients, landlords are forgoing short leases in favor of long-term leases with generous amenities and concessions.
Takeaways for Office Space Investors
The Houston office space market is showing signs of a possible recession thanks to rising vacancy rates and slow leasing activity. There are still some hot submarkets in the Houston area—most notably The Woodlands, Allen Parkway, and the West Loop.
In order to attract long term tenants, landlords should focus on acquiring high-quality Class A space with amenities that can attract workers back to the office. Additionally, landlords should be open to subleasing space to offset high vacancy rates.
Like always, be diligent, do your research, and happy investing!