June 29, 2016
By: Eli Gilbert, Vice President of Research, JLL Houston
Houston’s Skyline is characterized by contradictions as tenants and landlords alike remain cautious in the face of continuing market volatility and unease over oil prices. A 37 percent drop in leasing activity in 2015 set the stage for modest negative absorption to start 2016, yet asking rents remain near all-time highs. Sublease space climbs to record levels, yet direct vacancy persists below 10 percent even with deceleration in tenant activity. Despite uncertainty facing Houston, JLL’s 2016 Skyline report reveals two important themes:
- Skyline assets significantly outperform the overall Houston Class A office market
- Rent growth and leasing activity, even within Skyline assets, have flattened
In the first quarter of 2016, Houston’s Skyline recorded a direct vacancy rate of 9.4 percent, lower than the Class A market’s 15.5 percent. Despite superior occupancy and historical leasing volumes, leverage within Houston’s Skyline will continue to shift in favor of tenants in 2016. This will manifest as decreasing rents, increased flexibility in lease terms and additional lease concessions to tenants as owners contend for fewer tenants. The Houston Skyline will remain tenant-favorable through 2017 but should return to a neutral market in 2018, given expected demand and the lack of new construction entering the pipeline.
Decrease in investment volumes
Investment volumes in Skyline markets across the U.S. dipped slightly in 2015, due to robust demand and liquidity for Skyline assets earlier in the economic cycle, as well as the generational nature of many acquisitions since the Global Financial Crisis. The scarcity of opportunities meant only 9.5 percent of the Skyline across North America traded in 2015, down from 10.7 percent in 2014. However, the decrease in investment volumes at the start of 2016 was even more severe – down more than 72 percent in primary markets and nearly 47 percent in secondary markets. Similarly, Houston’s Skyline has observed a marked drop in investment activity in 2016 thus far.
Transaction activity in multitenant buildings is noticeably quiet due to the extended downturn in the price of oil and its impact on Houston’s economy. Continued low volumes of investment activity are expected for the time being. Still, there are a multitude of investors looking for an opportunity in Houston. When activity begins to pick up, investors will chase the trophy and Class A assets that make up Houston’s Skyline, which traditionally outperform the broader office market.
Houston’s Skyline assets must maintain gold standard
Despite the increased popularity of urbanized suburban markets, assets within the Skyline are still the gold standard both in Houston and across U.S. markets. However, owners must stay mindful assets don’t tarnish with complacency. In downtown Houston that means landlords are making significant lobby and plaza upgrades.
Currently, Houston’s CBD is seeing an increased level of amenity improvement projects as a result of the understanding that trophy buildings don’t stay trophy buildings unless they are continuously upgraded to meet modern standards of top tier office space. Landlords are increasingly transforming underutilized plaza, lobby and open spaces into collaboration and co-working areas, in addition to using these spaces to address the fitness, conference and dining requirements of tenants.
For more information about the characteristics driving the Houston market, download Houston’s Skyline.
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.