Houston Office Market Report | Q1 2024

Commentary

Houston’s key office market fundamentals reported sliding trends at all levels during the first quarter while Skanska completed its newest 386,323-square-foot building, 1550 on the Green, in the Central Business District (CBD). The new property is currently 35% leased by law firm Norton Rose Fulbright, who is estimated to move in by the third quarter of this year.

The completion of this building and one smaller Southwest property leaves the office market with only four buildings and a record-low 214,437 square feet under construction. Only one 32,000-square-foot property in the Southwest broke ground during the first quarter. CityCentre Six, a proposed 308,000-square-foot property in Katy Freeway West/Energy Corridor, will break ground during the second quarter. Construction is commencing after the project secured a lead tenant, Dow Chemical, who preleased about 75% of the building, or 229,658 square feet, back in December.

Flight-to-quality continues

The flight-to-quality trend stayed on track as Class A properties accounted for 65.5% of the first quarter’s 2.3 million square feet of leasing activity, with totals down 17.3% from the previous quarter and 41.1% year-over year. Of the quarter’s total leasing, 46.0% occurred in properties located in west Houston, including three different buildings within the CityWest Place development in Westchase. Noble Corporation topped the list in size, leasing 110,250 square feet at 2101 CityWest, Bechtel signed an expansion lease of 77,262 square feet at 2103 CityWest, and Enstor Gas leased 43,598 square feet at 2107 CityWest.

The space business is also adding to the city’s growth. Axiom Space, who recently opened a new headquarters building in the Houston Spaceport, also renewed a 63,716-square-foot space in Hercules II at 1290 Hercules in the NASA/Clear Lake submarket. In addition, Texas A&M recently announced its plans to carry on the region’s momentum to revolutionize space exploration with plans to build a cutting-edge research and training facility next to NASA’s Johnson Space Center in the submarket.

However, demand continues to lag behind supply as net absorption fell to a negative 616,399 square feet during the first quarter, following last quarter’s positive absorption. The downturn is primarily due to firms reducing their footprints as they lease new space. Among the larger examples this quarter is The Woodlands’ firm U.S. Oncology, who moved out of 200,000 square feet in 10101 Woodloch Forest into 26,530 square feet in The Woodlands Towers at The Waterway. Invesco also contributed by leaving behind 194,111 square feet in 11 Greenway Plaza as the firm signed a new downsized, 180,218-square-foot renewal back in 2022.

The CBD recorded positive absorption during the first quarter, accounting for the two largest move-ins. Cheniere Energy occupied 168,204 square feet in Texas Tower, about 20,000 square feet less than they had in Pennzoil Place North Tower, while EnLink Midstream leased and occupied 61,682 square feet in Hess Tower.

As firms relocate and downsize current spaces, the overall vacancy rate dropped to 26.7% during the first quarter, dropping 50 basis points from the previous quarter and 90 basis points year-over year. By comparison, another factor substantiating the flight-to-quality trend is the collective vacancy of 14.8% for properties built after 2015.

The vacancy rate will most likely continue sliding for a few more quarters as more tenants downsize amid a challenging economy and landlords grapple with elevated operating expenses.