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Houston Office and Industrial Markets Recovering

Recovering Quicker Than Expected, Ready to Close Deals in 2011

Houston’s office market, particularly Class A, is recovering quicker than expected due to increased activity in the first three months of 2011, according to the quarterly market research compiled by Commercial Gateway, the Commercial Division of the Houston Association of REALTORS®

Citywide, the office market recorded overall negative net absorption of 64,608 square feet in the first quarter of the year, with Class A space recording its fourth quarter of positive absorption of 203,564 square feet.  Class B buildings account for most of the quarter’s red ink, with negative absorption of 285,249 square feet, the third consecutive quarter of negative absorption.   Only five submarkets — Energy Corridor, Fort Bend, Northeast, Northwest and West — started the year with positive absorption.  The Energy Corridor, with a positive 311,871 square feet of absorption, was the only submarket showing over 100,000 square feet of new occupied space.

The current 13.6% vacancy rate matches the vacancy rate of a year ago although rental rates have decreased slightly. The overall annual, weighted averaged, gross rental rate quoted for this quarter of $23.48 per sq.ft. is 2.5% lower than the same quarter last year, which was $24.07.   The Central Business District’s (CBD’s) quoted rates showed minimal change, decreasing 0.6% to $31.60 from a year ago’s $31.79.  BG Group Place, CBD’s first new building in two years, came on line during first quarter and is currently 54.6% leased.

Rental rate concessions vary across the board, with tenants negotiating for the lower rates ahead of an anticipated increase in sublease space hitting the market.  Overall sublease space decreased marginally from last quarter, but, at 2.7 million square feet, shows a decrease of almost 1 million square feet from the sublease square footage reported in the same quarter a year ago.  But with the consolidation of Continental and United Airlines, the move of Hess into their new building, Devon Energy and other firms’ ongoing space realignment, the effects of anticipated sublease space on the Houston office market have yet to be fully realized.

Houston Industrial Market

Houston’s industrial market is stabilizing, recording slightly negative absorption of 34,621 square feet citywide with limited major spec construction on the horizon, according to statistics released by Commercial Gateway.   The slight negative absorption reported follows five quarters of positive absorption and a stabilization of rental rates during the last year. Vacancy overall is 8.5%, the same as last quarter, but almost a full percentage point lower when compared to 9.4% a year ago.

Properties classified as high-tech/R&D, the smallest segment of the market, are reporting the lowest vacancy rate of 3.3%.  Manufacturing facilities are reporting the second lowest vacancy rate of 4.2%, with crane-ready buildings in short supply.  Both high tech/R&D and flex-service centers, commonly referred to as office/warehouse, showed positive absorption for the quarter at 150,600 square feet and 106,543 square feet, respectively.

Rental rates have remained flat during the last year, with a quoted, weighted averaged annual rental rate of $5.37 per sq.ft. reported this quarter compared to $5.31 a year ago.  Sublease space reported in fourth quarter represents a slight increase from last quarter but a substantial drop of 763,810 square feet from this same time a year ago.

Construction picked up dramatically in the first three months of the year, with 1.6 million square feet under construction.  Of that total, 80.1 percent is planned as owner occupied, with only 300,000 square feet being built on a spec basis, which is a continuing sign of scarcity of certain product types within the market.


Patsy Fretwell is a senior market analyst with Commercial Gateway

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  1. June 20, 2011 at 6:33 am

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