Looking back at 2024, the flight-to-quality trend led the way
Key Takeaways for the Houston Office Market
- Downsizing continues
- Net absorption losses mount
- Construction limited
- Flight to quality persists
Houston Office Market Highlights
Houston’s office market faced challenges in 2024, posting negative absorption each quarter for a year-end annual loss of 1.2M SF. Vacancy rates ticked up to 27.0% in Q4 from 26.7% in Q3 and 26.2% a year ago.
Reflecting a broader trend of firms downsizing is the largest Q4 office absorption: Technip Energies moved into 171,600 SF in West Memorial Place II, reducing the firm’s footprint by 42.4%. Quarterly leasing activity rose slightly to 2.5M SF, but this marks a 16.8% year-over-year decline.
Annual leasing totaled 11.9M SF, the lowest since 2009, with the Katy Freeway West/Energy Corridor leading all activity with 1.5M SF. Notable leases in 2024 included Subsea7’s 177,100-SF in Westgate I in Katy Freeway West/Energy Corridor in Q4 and Ovintiv’s 168,805-SF renewal at Four Waterway in The Woodlands in Q2; Vitol’s new 146,003-SF lease at 3120 Buffalo Speedway in Greenway Plaza will take up all space in the new building underway.
The construction pipeline remains tight, with just three buildings totaling 597,413 SF under construction at 80% preleased. No new projects were delivered or started in Q4, and only Norton Rose Fulbright’s CBD headquarters was completed earlier in the year. Class A rental rates fell to $35.25 PSF from $36.24 year-over-year, while overall gross rents declined to $30.41 PSF from $31.25 last year.
Executive Summary
Houston 2024 Office Market Retrospective
FIRST QUARTER
- Declining fundamentals alongside a continued flight-toquality trend.
- Slight improvements in vacancy rates, driven by positive absorption in select Class A properties.
SECOND QUARTER
- A growing preference for quality office spaces with modern amenities, spurred by hybrid work trends.
- Intense competition for Class A properties, despite rising interest rates.
THIRD QUARTER
- Rising construction costs and tighter financial conditions, creating headwinds for landlords.
- Increased emphasis on tenant-landlord collaboration to address tenant improvement (TI) allowances and buildout expenses.
FOURTH QUARTER
- Negative absorption totaled 1.2 million square feet for the year, driving vacancy rates to 27.0%.
- Leasing volume, while slightly improved from the prior quarter, remained at its lowest year-to-date level since 2009.
- Prime submarkets – Katy Freeway West/Energy Corridor, West Loop, CBD and The Woodlands – each reported over 1.2 million square feet of leasing activity during the year, reflecting tenant interest in top locations.
- The flight-to-quality trend persisted, with buildings constructed since 2015 achieving an 11.2% vacancy rate and 957,240 square feet of annual positive absorption.
- Quoted rental rates continued to decline under market pressure.
- Operating expenses surged, led by increased insurance costs.
- New construction slowed significantly, with just three projects underway and 80% preleased.
INSIGHTS & OUTLOOK
Certain industries saw growth during the fourth quarter, particularly among smaller companies that previously adopted a cautious approach to their space requirements. These businesses are now actively seeking expansion opportunities to accommodate their evolving needs. In contrast, larger companies continued the trend of shifting toward smaller, more efficient spaces, focusing on rightsizing to optimize costs and adapt to hybrid work models. The sustained demand for high-quality office spaces underscores the market’s resilience, even amid economic uncertainties. To navigate these evolving dynamics, strategic collaboration between landlords and tenants, coupled with flexible leasing strategies, will be essential.
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