Houston Office Market
Houston’s office and industrial markets report significant leasing activity with positive net absorption and several speculative construction projects breaking ground, according to quarterly market research compiled by Commercial Gateway, the Commercial Division of the Houston Association of REALTORS®. Citywide, the office market recorded overall positive net absorption of 1.3 million square feet in the third quarter of the year, with Class A space recording its sixth quarter of positive absorption of 1.4 million square feet. This quarter’s absorption is primarily due to two major tenants occupying space in their new, namesake buildings in the Central Business District (CBD): Hess moved into its 844,763-square-foot building, and BG Group occupied its 354,175 square feet in its new building along with a couple other tenants. Absorption is the difference in occupied square feet, so the Hess and BG Group spaces were not counted as absorbed until they actually moved in this quarter. Positive office absorption will continue as two significant leases were signed in the last days of the quarter. GE Oil & Gas is taking over Westway Park III, an 181,814-square-foot building, along with additional space in the adjacent Westway Park II, while BP has signed for all of Three Eldridge Place, a 305,885-square-foot building; both buildings were finished in 2009 and were not previously occupied. The two companies are reported to begin moving in their space during fourth quarter. Class B buildings offset the leasing activity in Class A, accounting for negative absorption of 104,582 square feet, the fifth consecutive quarter of negative absorption, with a total negative 704,272 square feet to date. The effects of company mergers and downsizings especially in the CBD are still on the horizon, although there are indications that some Class A space is being taken before it hits the direct market. Construction activity is continuing in the suburban markets after last quarter’s Uptown/Galleria BBVA Compass building broke ground. Nexen Tower at 945 Bunker Hill is the latest building to start construction, along with CityCentre III and IV, all three in the West submarket. Other projects in the North submarket have been discussed but none yet started. Both vacancy rates and rental rates showed minimal drops this quarter. The current 14.0% vacancy rate is marginally lower than last quarter’s but is slightly higher than the 13.9% vacancy rate of a year ago. The overall annual weighted averaged gross rental rate quoted for this quarter of $22.70 per square foot is 1.9% lower than the same quarter last year, which was $23.13. By contrast, the CBD’s quoted rental rates showed a 3.5% increase to $30.63 per square foot from a year ago’s $29.58. Rental rate concessions vary across the board, but sublease rates in quality spaces with long terms are close to matching rates quoted for direct space. Overall sublease space increased to over 3 million square feet this quarter, but this amount is lower than the 3.4 million reported a year ago. Sublease space continues to fluctuate as long-term, quality space is added and then leased before it enters the direct market.Houston Industrial Market
Houston’s industrial market also recorded strong positive absorption with several major deals, including Ferguson Enterprises’ 206,926-square-foot lease at Port Crossing and Forum Energy’s 253,838-square-foot lease at 6535 Guhn Road. Other notable new leases over 100,000 square feet recently signed were K2 Logistics’ 143,214 square feet in the Hardy Distribution Center and Mahindra USA’s 134,815 square-foot lease at Satsuma Distribution Center. These larger deals contributed to this quarter’s positive absorption of 1.6 million square feet, a definite improvement from the first half of 2011, according to statistics released by Commercial Gateway. The majority of positive absorption occurred in warehouse/distribution properties, which recorded over 1.7 million square feet of net absorption this quarter, offsetting the negative absorption of 153,731 square feet recorded in the flex/service classification this quarter. Vacancy overall is 8.2%, a drop from last quarter’s 8.7%, and an improvement when compared to 8.7% a year ago. Construction is also on the rise, with more than 2.1 million square feet of mostly build-to-suit properties in the pipeline. However, spec development also increased this quarter: Liberty Property Trust broke ground on two buildings totaling 212,000 square feet in the Northwest and Prologis started construction on a 146,700-square-foot building in the North. Several other developers have smaller projects underway in the Northwest and Greenspoint/North submarkets, with Ben E. Keith Foods’ 475,000-square-foot warehouse in the Southwest noted a the largest building currently under construction, completion in 2013. Overall rental rates reversed their downward trend to increase 2.3% from last quarter, but the $5.35 rate shows a return to a similar rate from the same quarter last year. Properties classified as high-tech/R&D, the smallest segment of the market, are reporting the lowest vacancy rate of 4.7%. Manufacturing facilities are reporting the second lowest vacancy rate of 5.2%, with crane-ready buildings still in short supply. Both high tech/R&D and flex-service centers, commonly referred to as office/warehouse, showed positive absorption for the quarter at 83,767 square feet and 1,150 square feet, respectively. Sublease space reported in the third quarter continued to climb to over 2 million square feet, which represents a 12.5 percent increase for industrial sublease space reported for the same time a year ago.###
Patsy Fretwell is a senior market analyst with Commercial Gateway and has more than 20 years of experience in real estate market research. She can be reached at patsy@commgate.com.
