Houston’s office market in Q1 showed signs of stabilization
Key Takeaways for the Houston Office Market
- Flight to quality persists
- Net absorption losses slow
- Construction remains limited
- More smaller deals recorded
Houston Office Market Highlights
Houston’s office market continues to face headwinds in early 2025 as tenants maintain a strong preference for higher-quality space, driving the ongoing flight-to-quality trend. Despite recording a negative net absorption of 96,726 SF, the figure marks a substantial improvement from the previous quarter’s negative 838,462 SF and a similar year-over-year result. Tenants clearly preferred Class A properties, which posted positive net absorption of 55,645 SF.
The overall vacancy rate held steady at a historically high 27.9%, unchanged from the prior quarter but up 50 basis points from Q1 2024. Vacancy rates improved significantly for newer properties, underscoring the market’s preference for modern, high-quality space.
Quarterly leasing activity decreased to 2.4M SF – representing 31.8% of the previous quarter’s volume and 34.5% of the same period last year. Construction activity remains limited, with just three buildings totaling 597,413 SF underway, 80.1% of which is preleased. No new projects were delivered or initiated during the first quarter.
Class A asking rents decreased to $33.13 PSF, down from $35.03 PSF year over year, while overall gross asking rents fell to $28.92 PSF from $29.90 PSF during the same period last year.
Executive Summary
Houston’s office market showed signs of cautious optimism in the first quarter of 2025, reporting a notable reduction in negative absorption and even modest gains in Class A space. These indicators underscore the ongoing flight-to-quality trend, as tenants continue to prioritize high-quality office environments driven in part by efforts to entice employees back to the workplace.
Elevated construction costs, estimated as high as 40% over the past five years, are making new development increasingly difficult, while tenants and landlords have to contend with rising operating expenses. Recently renovated and repositioned buildings are benefiting from renewed demand since the current limited construction pipeline of three buildings reports only 120,000 available square feet.
Persistent negative absorption — recorded in five of the last eight quarters — continues to drive Houston’s elevated vacancy rate, which held steady at 27.9% in Q1 2025 but up from 27.4% year over year. However, properties built in 2015 or later tell a different story, with a collective overall vacancy rate of 14.0%, and 11.6% for direct space, further reinforcing the market’s bifurcation by asset quality.
Flight-to-quality trend remains the dominant theme
Leasing activity slowed to 2.4 million square feet during the first quarter, dropping 31.8% from last quarter and 34.5% from the same quarter last year. Class A properties accounted for 72.0% of that volume, reaffirming tenant preferences for modern, amenity-rich buildings.
The largest activity occurred in renewals within the Central Business District (CBD), with Motiva renewing 246,316 square feet in One Allen Center and Aramco renewing 166,930 square feet in Two Allen Center. The quarter was characterized by smaller transactions, with only two new leases exceeding 50,000 square feet. Mercuria signed for 64,774 square feet at Kirby Grove in Greenway Plaza while law firm Skadden leased 57,410 square feet in Texas Tower in the CBD.
The CBD led leasing activity, with 654,156 square feet, or 27.8% of the total, reporting several new deals during the quarter. The largest was Skadden, who took over the last two available floors in Hines’ Texas Tower. This pandemic-era development is now 99.0% leased, underscoring demand for premier office product.
Demand remains soft
Despite this activity, overall demand remains soft. Net absorption was a negative 96,726 square feet, an improvement over Q4 2024’s negative 838,462 square feet and the year-ago figure of negative 676,730 square feet.
A significant contributor to the quarter’s absorption dynamics was LyondellBasell’s 318,504-square-foot relocation to Williams Tower, which buoyed the West Loop’s performance. Conversely, its departure from 366,485 square feet in 1 Houston Center negatively impacted the CBD, which recorded the highest negative net absorption among the 29 submarkets tracked in contrast to recording the most leasing activity.
Noble Corporation also executed a major relocation and expansion to 110,250 square feet at CityWest Place Building 1 in Westchase, offsetting its 63,375-square-foot departure from Sugar Creek Tower I.
Outlook
Houston’s office market is likely to experience continued elevated vacancy in the near term, as tenants remain cautious amid economic uncertainty and landlords manage rising operational costs. However, well-located and updated Class A properties are expected to remain competitive as the market gradually re-balances.
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