Weak tenant demand continues drag on Houston office market

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July 5, 2017

By: Ronnie Deyo, executive vice president and office team lead, JLL Houston

tenant demandWeak tenant demand driven by ongoing uncertainty in the oil and gas industry continues to be a drag on Houston’s office market.

State of the office market

Houston continues to see more of the languid leasing activity that has come to mark this downturn.

The office market closed the second quarter with 581,086 square feet of negative net absorption, putting the market at approximately 1.4 million square feet of negative net absorption for the year. Total vacancy has risen in each of the past ten quarters, rising from a healthy 13.5 percent in the fourth quarter of 2014 to a decade-high 22.4 percent this quarter.

While significant work remains to be done on the demand side, the market has taken several important steps toward stabilizing the supply side.

Tenants are slowly chipping away at the city’s record sublease inventory, resulting in a decrease in sublease space for the third consecutive quarter. Houston’s sublease inventory currently sits at 11.1 million square feet.

The city’s diminished construction pipeline also provides hope that stabilization may be coming. At approximately 2.3 million square feet, Houston’s construction pipeline is at its lowest level since the first quarter of 2012 and is well below its 10-year quarterly average of 4.7 million square feet.

Class B office relatively stable

Amid the volatility of the Class A office sector, Class B office product has remained relatively stable over the course of the current downturn.

While it encompasses a smaller inventory altogether, Class B office recorded positive net absorption in the second quarter of this year, at the rate of 139,316 square feet. In contrast, Class A recorded 720,402 square feet of negative net absorption in the same quarter. Furthermore, total vacancy in the Class A sector sits at a record high 24 percent. The Class B total vacancy rate of 19.5 percent is only slightly elevated over its average total vacancy rate of 17.6 percent from 2006 to 2016.

The relative stability of the Class B office sector is due in large part to the tenant profile of Class B office product. In general, these tenants are smaller in size and are often local companies that do not rapidly contract or expand. On the other hand, the Class A office sector sees much more large-tenant activity in which the activity of a single tenant can put a dent in the performance of an entire submarket.

Mid-year outlook

As tenant demand remains muted, we can expect current office market conditions to persist for the remainder of the year.

CLICK HERE for our full Q2 office market insight and statistics. 

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.

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