The Road to Recovery: Houston’s Office Market in 2023
Key Takeaways for the Houston Office Market
- The office vacancy rate nudges down
- Sublease space continues to decline
- Net absorption was positive for Q4 and year
- Leasing volume decreases
Houston Office Market Highlights
Houston’s office market posted a positive net absorption of 753,312 SF during the fourth quarter, reversing the negative totals from the third quarter and ending 2023 with a positive 301,014 SF. The overall average vacancy rate decreased marginally to 22.5% from 22.6% in the previous quarter. Leasing activity declined to 1.8 million SF for the fourth quarter to end the year with 9.8 million SF, representing a 27.9% drop from 2022.
The Katy Freeway submarket accounted for 29% of that annual total, while three other submarkets, including The Woodlands, West Loop, and CBD, leased more than one million SF each. The under-construction pipeline remains limited at 721,503 SF, while four buildings totaling 515,694 SF were delivered during the fourth quarter. Houston’s overall average gross rental rates nudged up to $30.11 from the previous quarter but declined from the same period last year. Houston’s Class A average rental rate decreased marginally to $35.90 per square foot from $35.96 in Q3 2023.
Net absorption reversed third quarter’s negative course to record positive absorption for both the fourth quarter and the year. New supply has been limited but popular for those seeking quality space while overall leasing activity experienced a slowdown.
The overall vacancy rate decreased marginally due to a couple of large move-ins but will likely continue rising within the next year as tenants occupy their new downsized offices and leave larger spaces vacant. Sublease space declined 23.3% from the same quarter last year.
Commentary
In the ever-changing landscape of commercial real estate, the Houston office market has demonstrated amazing resilience and recovery, as described in Colliers’ 2023 Q4 Office Houston Report. This is critical information for Houston office tenants and commercial building owners, providing insight into the market’s current situation and future prospects.
Positive Absorption: A Sign of Market Revival
One of the most encouraging signs from the report is the positive net absorption recorded in the fourth quarter of 2023. After a rollercoaster year, the Houston office market ended on a high note, reversing the negative absorption trends witnessed in the third quarter. This shift is indicative of a market that is not only stabilizing but also showing growth potential.
Tenant Migration and Demand
The report highlights a significant trend in tenant migration and demand, particularly towards the western and northern corridors of Houston. Submarkets like Katy Freeway, Westchase, and The Woodlands have become hotspots for businesses, reflecting a strategic shift in location preferences. This movement is crucial for office building owners, as it points to where investments and developments could be most beneficial.
Vacancy Rates and Leasing Activity
While the overall average vacancy rate experienced a marginal decrease to 22.5%, this slight improvement signals a step towards market stabilization. The leasing activity, though lower than the previous year, still showed significant transactions, especially in key submarkets. These indicators are essential for understanding the current market dynamics and planning future leasing strategies.
The Sublease Market: A Changing Landscape
The report also sheds light on the sublease market, a critical factor for both tenants and owners. The decrease in sublease space availability, particularly in larger blocks, suggests a shift in the market where direct leases might become more prevalent. This trend could affect leasing negotiations and tenant decisions moving forward.
Looking Ahead: Cautious Optimism for 2024
As we look towards 2024, the Houston office market exhibits cautious optimism. Economic resilience, especially in the job market, bodes well for the demand for office spaces. However, the market still faces challenges, including adapting to the changing dynamics of office use in a post-pandemic world.
Understanding these market trends is critical for Houston office tenants and commercial building owners who want to make informed decisions. The 2023 Q4 report demonstrates the recovery indicators in the Houston office market, which lay the foundation for strategic planning and investment. As the market evolves, staying on top of these trends will be critical for navigating Houston’s commercial real estate landscape.
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