June 1, 2016
By: Eli Gilbert, Vice President of Research, JLL Houston
2016 continues a record pace in terms of sublease space in the Houston office market. Here’s what you need to know about the Houston office sublease market right now:
1. There is now 10 million square feet of sublease space available.
The largest blocks of sublease space are located in Houston’s CBD, Energy Corridor, Galleria and Greenspoint submarkets. The Energy Corridor alone has approximately 3.5 million square feet of sublease space. Additionally, nearly 4 million square feet of sublease space is here for the long term with five or more years of term remaining. Currently, the sublease space in Houston’s top submarkets are more than double the average inventory of sublease space for Class A and B properties within those submarkets.
2. The velocity of subleases coming to the market is not slowing.
Significant subleases have been added in 2016 including Shell, BHP Billiton, BG Group and Marathon Oil. Combined, these brought approximately 2 million square feet to the market. The prolonged downturn in the price of oil has deeply impacted Houston’s office market. As a result, Houston has seen, on average, approximately 500,000 square feet of new office sublease space come to market each month since January 2015.
3. Subleases are not being absorbed.
Sublease space is coming to the market about five times faster than it’s being leased. Only four sublease spaces larger than 20,000 square feet have been leased so far this year. The average size of subleases signed in 2016 is approximately 5,200 square feet, demonstrating that smaller tenants are taking advantage of current options. 2015 saw very light subleasing activity with only 1.24 million square feet of sublease space leased and an average deal size of about 8,400 square feet. Sublease activity so far in 2016 has demonstrated the same languid activity. Overall leasing continues to be anemic, reflecting the challenges of the oil and gas market.
Looking to the second half of 2016 and into 2017, the Houston office market can expect to see vacancy rates continue to increase and rents flatten. As the market becomes increasingly tenant-favorable, landlords may offer increased concessions. While oil prices are still recovering, deal velocity will continue to slowdown and spec construction will remain on hold. Job reductions and M&A activity will continue to mean contractions in real estate needs, and the market will continue to be tenant-favorable as more sublease space arrives to the market.
To view JLL Houston’s latest sublease report, click here.
About the Author
As JLL Houston’s Vice President and Director of Research, Eli Gilbert leads a team of four staff researchers in developing best-in-class research deliverables. He has more than 15 years of commercial real estate and research experience and is a LEED certified professional.