CBD Leasing Activity Rebounds in Q3 amid Ongoing Sublease Glut

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Oct. 3, 2016

leasing activityQ3 2016 Houston Office Insight & Market Statistics

How many ways can you say excess supply?

The Houston office market continues to be gripped by its significant sublease inventory. While leasing activity picked up in select submarkets during the third quarter, the overwhelming impact of 12.2 million square feet of sublease space remained the dominant force, particularly in Houston’s Class A office sector.

With 77.3 percent of sublease space on the market in the Class A category, Houston’s sublease inventory has created downward pressure on Class A direct asking rental rates, narrowing the gap between Class A and B rates. Since the second quarter of 2015, the spread between Class A and B direct asking rental rates has decreased by 778 basis points. Over that same time period, Class A rents have posted negative growth in four out of five quarters. Conversely, Class B rents have seen positive growth in four out of five quarters. With the vast majority of sublease space on the market in the Class A category, Class A landlords have been forced to compete with subleases for tenants more so than Class B landlords.

Furthermore, the amount of sublease space coming to the market shows no signs of slowing. Move-outs in sublease space have pushed net absorption deeper into the red. Net absorption remained negative during the third quarter to the tune of 789,872 square feet. With the energy sector responsible for 77.8 percent of available subleases market-wide, sublease outflows are anticipated to contribute toward negative net absorption for quarters to come.

A bright spot in the Houston office market’s third quarter performance was an uptick in leasing activity in the Central Business District. After a tepid second quarter performance, downtown Houston experienced a significant uptick in leasing activity during the third quarter. Total leasing volume increased from 158,000 square feet in Q2 to 637,000 square feet in Q3.

Houston stands in stark contrast to other office markets across the United States, which largely remain stable and growing. Across the U.S., vacancy fell, quarterly net absorption outpaced new deliveries, preleasing is up and the construction pipeline is at its highest level of this cycle. With leasing activity in other markets still primarily expansionary, most other markets are in a state of peaking. Tenant demand and solid office market fundamentals are maintaining landlord-favorable conditions for most U.S. office markets and should continue to do so through the remainder of 2016 and into 2017. Houston, on the other hand, is heavily tenant-favorable and is expected to remain so through 2017.

Click on the links below for the full Q3 2016 Houston office market report and statistics.

Q3 2016 Houston Office Insight

Q3 2016 Houston Office Statistics

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