April 5, 2017
By: Ronnie Deyo, executive vice president and office team lead, JLL Houston
Despite increased optimism across the city, the Houston office market has a long road ahead before it works its way through the excess supply of space that has accumulated over the last two years.
A long road ahead
Large amounts of space continue to arrive to market. Nine blocks of space of more than 100,000 square feet came to market in the first quarter of 2017. As a result, total vacancy rose for the ninth consecutive quarter to 20.9 percent. Net absorption naturally followed suit, remaining negative for the fifth consecutive quarter to the tune of more than 500,000 square feet. The domino effect continued, and the market saw average asking rents fall by 1 percent quarter-over-quarter.
Supply-side silver linings
In the midst of these challenges, silver linings have emerged. Sublease space contracted for the second consecutive quarter, settling at 11.3 million square feet. Houston is still home to the largest sublease inventory in the nation, but the decrease is a step in the right direction after sublease space peaked at 12.2 million square feet in the third quarter of 2016.
Houston’s diminishing construction pipeline also provides hope for a shift in market conditions. At just 3.2 million square feet, Houston’s office pipeline is at its lowest level since the third quarter of 2012. The reduced pipeline should ease the supply problems facing the market.
What we can expect in 2017
Given that leasing activity has underperformed its ten-year quarterly average for the past five quarters, there is no question the market has its work cut out on the demand side. While the supply side of the market provides a more optimistic reading, conditions will likely continue on their current path throughout 2017 but with less severity than what Houston experienced in 2015 and 2016.
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About the Author
Ronnie Deyo is an Executive Vice President/International Director at JLL, where he serves as the leader of JLL Houston’s Office Tenant Representation group. During his 30-year career in commercial real estate, Mr. Deyo has represented some of the most recognizable corporations including AON, KPMG, Morgan Stanley and The Williams Companies. Connect with Ronnie on LinkedIn.