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Latest data from Q2 2022 shows Houston\u2019s total office space inventory at 349.5 million square feet<\/strong>, a significant bump in supply from the mid-2021 figure of 173 million square feet. Despite the increase in stock, <\/span>there have finally been gains in occupancy<\/span><\/a>, with Q1 signalling this healthy marker for the first time since the start of the pandemic.<\/span><\/p>\n There were hints of this recovery at the end of 2021. The trend of last year\u2019s subpar market performance was bucked by Class A and trophy office space (Class A+), which accounted for more than 60% of all leasing activity in Houston<\/a> during Q3 2021. This positive influence has continued into Q2 2022, with Class A demand being the sole driver for occupancy gains in roughly half of Houston\u2019s office submarkets.<\/span><\/p>\n Recently refurbished Class A offices, in developments built after 2005, are <\/span>bucking the vacancy rate trends<\/span><\/a>. These buildings report only 17% vacancy in Q2 2022, compared to the overall Class A vacancy rate of 25.6%. The new renovation programs undertaken by these mid-age office suppliers have clearly been a hit with Houston businesses, serving to satisfy post-pandemic amenity demands better than their newly developed A Grade counterparts.<\/span><\/p>\n Despite these low vacancy rates, the five largest leasing deals during Q2 2022 were for new and Class A CBD office space. This trend can be further illustrated by the newly completed Texas Tower, with occupancy already at 70% leased, despite only opening in the first quarter of 2022. As with the vast majority of major cities in the United States, the Houston CBD appears to be the focal point for the highest activity.\u00a0<\/span><\/p>\n <\/p>\n Houston has become an attractive option for companies to relocate, particularly from West Coast states like California, where high company tax levels, especially for large enterprises in the tech and energy sectors, acts to stymie growth.<\/span><\/p>\n Signalling faith in Houston, Axiom Space moved in to their new headquarters in Q1 2022. Not just a HQ, this innovative 400,000 square foot development in Clear Lake is the world\u2019s first commercial space station. Located in the thriving tech and aerospace hub, and near the NASA Johnson Space Center research institute, the choice of location was unlikely a coincidence. ExxonMobil has also relocated to Houston, and Chevron intends to sell off their enormous 90-plus acre HQ in California, <\/span>shifting their entire operation south<\/span><\/a>. Further signalling their investment in the Houston area, Chevron has offered to cover their employees\u2019 relocation expenses to the city.\u00a0<\/span><\/p>\n In a general sense, Houston is a great option for those looking to conduct business. Since the early 1980s, the dominant sectors were focused on energy \u2013 with over 80% of employment at least tangentially linked. However, diversification in industry variety has exploded in more recent times, with nearly 50% of jobs in Houston now being in non-energy related fields<\/strong> such as tech, aerospace, medicine, and manufacturing.<\/span><\/p>\n Highlighting its relevance as a corporate center, Houston is home to 23 Fortune 500 companies<\/strong>. Adding on to this, Houston\u2019s infrastructure is highly amenable to business. Boasting the sixth-largest airport system in the world, an expansive trucking and rail system, and the<\/span> Port of Houston ranking as the largest in the U.S.<\/span><\/a> (by measurement of international tonnage) it\u2019s anticipated that Houston\u2019s high relevance for commercial enterprise will only continue.<\/span><\/p>\n Costs of conducting business, too, are an attractive pull for those considering the move to Houston. Despite the average office asking rents in the U.S. slipping 2.3% YOY to $37.75,<\/span> Houston remains an enticingly affordable option<\/span><\/a> to set up shop \u2013 with average asking rents of only $30.80 per square foot<\/strong>.<\/span><\/p>\n Additionally, Houston offers a number of incentive programs for businesses looking to expand or relocate, including tax abatement programs, favorable taxation increments, as well as enterprise and reinvestment zones conducive to both general business operations and start-ups.\u00a0<\/span><\/p>\n The observed flight-to-quality trend further expressed its influence with the increased relocation leasing activity in Q2 2022. <\/span>Relocations accounted for almost 70%<\/span><\/a> of the total leasing activity this quarter, a 32% increase YOY<\/strong>. Interest in new physical premises also contribute to this trend, with office space touring activity up almost 30% from Q2 2021 \u2013 as businesses consider different space options.<\/span><\/p>\n The biggest positive indicator of physical office space\u2019s continuing recovery in Houston is largely driven by demand in the energy sector. Along with the previously mentioned ExxonMobil, Fortune 500 natural gas company Cheniere Energy signed a new lease for 151,500 square feet of space at 845 Texas Ave in the Houston CBD, which completed construction in Q1 2022.<\/span><\/p>\n Cheniere promotes a full time, onsite work schedule, <\/span>contrary to the trend<\/span><\/a> of many firms acquiescing to remote or hybrid working models. Chevron is another non-follower, moving to reinstate in-office presence as an expectation for its Houston workforce.<\/span><\/p>\n Likely emboldened somewhat by rising energy prices, big players in energy continue to push for traditional in-office working models, going against the grain from general market consensus towards flexible and hybrid scheduling. This further signals physical office space\u2019s continued relevance for the Houston market, if only the Grade A, amenity-rich sort.<\/span><\/p>\n Continuing high demand for quality over quantity in office space (as big players who used to have large occupancy reduce their footprint), could indicate an emergent trend for current workspace providers in Houston to reconfigure their offerings \u2013 towards tenant-centric high spec space \u2013 to be more competitive in attracting those looking to relocate.<\/span><\/p>\n Office production activity is limited and below average, and no new completions were reported in Q2 2022, unlike Q1\u2019s welcoming of Axiom\u2019s new 400,000 square foot HQ. At the time of writing, just over 788,000 square feet of office space is under construction<\/strong>, a below average figure for Houston. These new products include <\/span>five office buildings<\/span><\/a>, three of which are expected to be completed by Q3 2023, totaling just over 315,000 square feet of space. These weaker figures can be explained by recent high construction costs, due to continuing supply chain disruptions delaying project start dates, along with wider market inflation exerting downward pressure.<\/span><\/p>\n A handful of new developments on the horizon provide some positivity to the outlook, especially for the CBD. The largest new building development underway encompasses 386,000 of office space, with a <\/span>lease commitment secured<\/span><\/a> by the second-largest law firm in the U.S., Norton Rose Fulbright. Another in the pipeline is CityCentre Seven, which is expected to commence construction by year\u2019s end. Pre-leasing figures in the wider Houston market are down on pre-pandemic levels, however, with only 33% of the new office space construction securing lease commitments ahead of completion.<\/span><\/p>\n Across the entire Houston market, asking rental rates averaged out at $30.80 per square foot, closing out Q2 2022 1.012% lower than the $31.18 average at the end of Q1<\/strong>. This small movement is despite landlords generally stretching concessions in efforts to attract more tenants.<\/span><\/p>\n For <\/span>Class A office space in particular<\/span><\/a>, asking rents hold at $36.70 in Q2 2022, a 1.011% decrease from Q1\u2019s $37.13 average figure. The Katy Freeway East, CBD and Galleria\/West Loop submarkets represent the highest asking rent figures for Class A office space, with values of $44.72, $44.31 and $41.34 respectively. Class B asking rents have remained steady compared to the previous quarter, holding at $25.03.<\/span><\/p>\n The CBD, Midtown, Galleria\/West Loop, Greenway Plaza and Woodlands have the highest average asking rents in Houston, across all workspace types, at $41.21, $36.62, $34.83, $34.11 and $33.06 respectively.<\/span><\/p>\n Q2 2022\u2019s vacancy rates are holding at Q1\u2019s level of 23.4%<\/strong>, a slight reduction on 2021\u2019s year-end figure of 23.6%. Tiny positive movement here, when inspected in isolation, doesn\u2019t instill much confidence in the market. However, when compared against last year\u2019s historical highs in direct vacancy of 25%, Houston\u2019s gradual recovery becomes more apparent and less snail-paced.<\/span><\/p>\n Only last year, Houston was leading U.S. rankings for office space vacancy, mostly due to negative absorption rates when 1.8 million square feet of space was released back on to the market in mid-2021. Vacancy rates were touted to continue their upward trajectory, since there was over 3 million square feet of office space under construction and nearing completion, but only 60% of it was pre-leased at year\u2019s end.<\/span><\/p>\n Despite the influx of newly constructed office space at the start of 2022, optimism for the market\u2019s continued recovery is encouraged by the increased occupancy YOY, away from the historical vacancy highs of the previous year.\u00a0<\/span><\/p>\n In a similar state to last year, average take-up is yet to return to normal pre-COVID levels for Houston\u2019s office space market, though it\u2019s not as sluggish as 2021. Class A office space is again the big mover in this metric, with YTD leasing activity showing a healthy 3.32 million sq\/ft uptake<\/strong>. Class B has not been as strong, with only 1.92 million sq\/ft of space leased, and Class C leasing activity was very tepid in comparison to the rest of the market, with only 126,373 sq\/ft of space leased YTD.<\/span><\/p>\n Class C\u2019s poor showing over the year is almost surely due to low inventory levels (10.5 million sq\/ft) and low vacancy of just 9.1%, likely indicating those already holding long term leases are continuing their occupancy. <\/span>Take-up may have reached a stagnation<\/span><\/a>, especially since the flight-to-quality trend towards Class A and trophy office space in Houston<\/a> has been well established.<\/span><\/p>\nKey Takeaways<\/span><\/span><\/h3>\n
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<\/p>\nHouston\u2019s Office Space Market in Q2 2022 \u2013 By Class<\/span><\/span><\/h3>\n
Class A<\/em><\/span><\/h4>\n
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Class B<\/em><\/span><\/h4>\n
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Class C<\/em><\/span><\/h4>\n
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<\/p>\nBusiness Viability<\/span><\/span><\/h3>\n
Demand for Office Space<\/span><\/span><\/h3>\n
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<\/p>\nOffice Space Construction 2022<\/span><\/span><\/h3>\n
Average Office Rents<\/span><\/span><\/h3>\n
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<\/p>\nOffice Vacancy Rates<\/span><\/span><\/h3>\n
Take-up Levels<\/span><\/span><\/h3>\n