The Galleria submarket is at a tipping point

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Galleria submarketA new white paper from JLL Research finds that Houston’s Galleria submarket is at a tipping point.

The Galleria is one of the largest and most popular office submarkets in the Houston metro area, encompassing nearly 22 million square feet of Class A and B office space. With multiple ingress and egress points, an amenity-rich setting, and a vibrant shopping and residential landscape, the Galleria is a top destination for professional firms who wish to leverage its convenient centrality and dynamic live-work-play environment.

The Galleria’s tenant base is very diverse, with energy, business services, tech, construction, legal, and real estate firms all calling the submarket home; this tenant base breadth has helped to shield the Galleria, to a certain extent, from woes felt within specific industries. Despite this, and the strong leasing fundamentals seen throughout the last decade, cracks have begun to emerge in the Galleria’s armor: leasing has slowed, sublease space has jumped, and negative net absorption has shot up after a handful of large move-outs so far in 2015. Additionally, leasing seen in new development projects has been slow, meaning large blocks of space may join other vacancies once the buildings are completed. Other factors at play, including increased congestion, parking woes, and planned construction projects, are also contributing to question marks as to the submarket’s anticipated health in coming years.

The Class A building set in the Galleria is interesting because of the number of significant events which will impact occupancy in coming years – some known and some unknown. Known events like new construction completions (and the effect of anchor tenant move-ins) and large tenant relocations – both expansions and downsizes – help give an understanding of where the market may head.

However, it’s the unknown events which may have the most impact, and these are focused primarily on the volatility of the energy markets. Numerous large tenants like Apache, Schlumberger, Bechtel, Williams, and Marathon Oil, who occupy nearly two million square feet between them, may be forced to reduce their occupancy footprint if favorable oil prices and stability do not return in coming quarters.

In a recently released white paper, JLL Houston Research presents three distinct situations for the Galleria sub-market that forms a base upon which other large tenant moves can be applied and their net effect on the market implied. For a look at each scenario and to view the full report click here.

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