July 22, 2016
By: Bruce Rutherford, International Director of JLL’s Global Energy Practice Group
No other Houston submarket has experienced greater volatility as a result of the oil downturn than the Katy Freeway West submarket, often referred to as the Energy corridor. The second quarter of 2016 further exposed the pronounced change in the Energy Corridor’s market fundamentals.
The dramatic shift in market conditions is best observed through the shrinking size of the development pipeline and the ballooning inventory of sublease space. The development pipeline, which stood at 4 million square feet across 15 buildings during the fourth quarter of 2014, is now a single 429,000-square-foot building. Citywide, more than 1 million square feet of construction delivered without preleasing commitments in the first half of 2016. The Energy Corridor was home to approximately half that inventory due to Energy Center Five, a Class A development that delivered 100 percent vacant in the second quarter of this year. Fortunately, developers have by and large tabled plans for future projects until preleasing requirements are achieved.
During this same time period, the sublease inventory in the Katy Freeway West submarket has more than doubled, jumping from 786,000 square feet during the fourth quarter of 2014 to more than 3 million square feet at the start of the third quarter of 2016. The surplus of sublease space can be largely attributed to energy sector companies, who prior to the downturn took large blocks of space for expansion, only to find themselves needing to shed the excess space months later. Today, all twenty of the top twenty largest sublease listings are being offered by energy sector companies.
As a result of the surge in sublease space, availability within the submarket currently stands at 34.3 percent. Only the Greenspoint submarket has a higher availability rate.
Leasing activity in the submarket totaled just 122,000 square feet for the quarter, the lowest quarterly total since the fourth quarter of 2004. Low leasing activity, coupled with an oversupply of space, has caused asking rents to decrease across the submarket.
Given the marked shift in performance over the past six quarters, the Energy Corridor has a long road ahead in the return to stabilization and will likely experience more bumps along the way. The silver lining for West Houston is that the end of this cycle is near-at-hand. While it will take several months for the office market to rebound after the price of oil recovers – there is a light at the end of the tunnel. Furthermore, with each new cycle in the oil and gas industry, Houston and West Houston more specifically, become a bit more diversified and resilient. Healthcare, education and manufacturing are all growing in West Houston. Additionally, technological advances driven and consumed by the energy industry are sure to be a bright spot for years to come.
In the broader landscape, Houston’s other strengths, like its port and the diversity of its population, all ensure the city’s continued prosperity in the future. Growth is inevitable, but for submarkets like the Katy Freeway West office market, it will be punctuated by the cycles of Houston’s largest industry.
By The Numbers – Katy Freeway West Office Submarket
Total inventory: 19,291,560
Total vacancy: 24.6%
Q2 2016 net absorption: 10,187
YTD net absorption: -81,357
Total under construction: 428,565
About the Author
Bruce Rutherford is an International Director within JLL Houston’s Office Tenant Representation group and is also the global leader for JLL’s Energy Practice group. With more than 33 years of experience, he has applied his expertise in tenant representation and commercial real estate consulting to numerous industries including insurance, banking, law, energy, energy services, and telecom.