Houston To Remain ‘A Powerhouse’ In 2025. But In Some Cases, ‘That Music Stops’
Houston brokers and analysts saw a true mixed bag in the commercial real estate industry in 2024. Deal volume exceeded expectations, lenders continued making special exceptions and a vague normalcy returned.
But despite expecting some slowdown of activity in 2025, industry players remain bullish on the Space City for the same reasons they have cited for many years: population and economic growth.
“Houston is seen as a top market from an institutional development standpoint because the fundamentals are healthy,” said Jordan Raney, senior vice president of industrial for JLL.
And while distress may make itself even more evident in 2025 and a new presidential administration could make construction more expensive, brokers say optimism reigns for Houston real estate.
Industrial A 'Good Place To Be' In ‘25
While national headlines highlight the industrial market’s slowing pace, encouraging a reining-in of expectations, Houston is operating differently, JLL Texas Research Director Rachel Alexander said.
Houston is on pace to absorb over 20M SF of industrial space in 2024, she said. That's down from the 25M SF Houston saw annually from 2021 to 2023, but the average will likely land far above the prepandemic rate, she said.
“Where that settles out — is it 15M SF? Is it 18M SF? — that’s anyone’s guess,” Alexander said. “But it’s still one-and-half times what we were doing before Covid, and I think an office broker would jump at that. That’s still a very good place to be.”
Houston’s industrial market should continue to be strong in 2025, she said. The city will lead the U.S. in industrial absorption this year, and its construction pipeline is more disciplined than other Texas markets.
At the end of the third quarter, Houston’s industrial market had just over 7% vacancy, according to JLL. That will likely stay flat or decline next year, Alexander said.
“We’re going to continue to outperform the market based on all the positives Houston has going for it,” she said.
Port Houston is one of those positives. It is having a record year and announced last month that it will spend $1.7B on landside infrastructure over the next five years, a 35% increase from the previous five years, to keep up with the region’s population growth.
Hope's Alive For More Office Momentum
Houston saw a number of planned office downsizes, moves and build-outs in 2024, signals tenants are continuing to implement their postpandemic work policies and are investing long-term in their physical workspace, JLL Executive Vice President Anya Marmuscak said.
By 2024, “we had gotten through all of those deals that needed to happen,” she said. “Maybe a tenant had done a short-term renewal, trying to decide what their office needs were going to be as they were trying out different hybrid work models, and in 2024, there were a lot more long-term, planned-out moves.”
There was a healthy volume of deals this year, though they had a smaller footprint on average, Marmuscak said.
“There weren't very many significant-sized deals, there were a few,” she said. “I’m hoping that means we’re gearing up for momentum, and as we have some lease rolls [expiring] over the next 24 to 36 months, you may see some of those, which are in the planning stages now, occur.”
Leasing activity will likely be moderate in the first half of 2025, then pick back up due to the continuous economic and population growth in Houston, Marmuscak said.
New construction will remain limited, helping landlords narrow the gap between Class-A and Class-B rents as tenants need space, she said.
Construction Could Be Curtailed
After surging 40% in just a couple of years, construction costs have been much more stable in 2024, and Skanska is projecting that will hold throughout 2025, Skanska USA Vice President and Project Executive Mark Elpers said.
Skanska is also keeping an eye on policies and tariffs from President-elect Donald Trump’s administration that could result in supply chain shortages, he said.
“It’s hard to say what the real impact of that is going to be until the new administration takes over in January,” Elpers said. “We’re on a wait-and-see [basis] to see what that is.”
But with rising costs of labor, supply chain shortages and stubbornly tight credit markets, there isn’t likely to be a new explosion of development any time soon. Construction starts for Houston asset classes like office and industrial are relatively minimal given the drop in demand and high construction costs in recent years.
Yet Hicks Ventures CEO Pat Hicks predicts there will be three to four office projects to break ground in 2025. One of those could be Stonelake Capital Partners’ 100 Park Place, a building speculated about since permits were first filed in 2022.
Construction companies are largely concentrating on the healthcare industry, which Elpers said he expects to continue into 2025.
“Healthcare is strong. It’s been strong for a long time,” Elpers said. “As the population ages, the baby boomers need a place to go to the hospital, so we’re still in the process of building healthcare, in particular research facilities and bed towers.”
As The Population Goes, So Goes Healthcare
The healthcare industry continued to see good occupancy and rent fundamentals in 2024, JLL National Director of Medical Property Management Connie O’Murray said.
That will continue into 2025, which could be an even busier year since interest rate cuts will encourage investors and developers on the sidelines to jump back in, she said.
Medical systems are also building more facilities within communities, instead of expecting all of the Houston region to travel to the Medical Center.
“Healthcare follows population,” O’Murray said. “Growth in population and incomes … especially in the hubs where the growth is, the 290 Corridor, Sugar Land, The Woodlands, you’re going to continue to see growth in those areas.”
The medical sector is focusing on cost control, utilizing space efficiently and moving administrative staff to office buildings rather than hospitals, which can make their overall footprint smaller, O’Murray said. But the industry will continue to grow as needed.
By 2030, the population of people 80 and older will grow by 36%, while the overall population will only grow by 5%, O’Murray said.
“Obviously a trend right now is the aging population,” she said. “That’s driving growth in the medical sector.”
2024 Retail Rev-Up Could Mean Fewer Deals Next Year
Transwestern Managing Director of Houston Retail Crystal Allen spent the week before Christmas taking last-minute meetings, closing land deals and executing leases for tenants.
Houston’s retail has been strong in 2024, with more activity than most people expected, Allen said. Retail vacancy was just 4.5% at the end of the third quarter.
“If you talked about it last year and what 2024 was going to be, we all said it was ‘a ramp-up,’” she said. “I think 2024 ended up being better than what people have expected.”
The surprising burst of activity in 2024 means there may not be many “tangible deals” in 2025, Allen said. People got creative to make deals happen this year, but the limited construction pipeline and tight supply means there may not be many more to be done.
“The space that’s left is gone, then things are breaking ground right now,” Allen said. “Everything is a ‘26, ‘27 delivery and opening.”
One of those projects is The RO, a 17-acre mixed-use district at West Alabama Street and Buffalo Speedway that will have at least 75K SF of retail space. Transwestern broke ground on the project in July and plans to complete it in 2027.
“A lot of projects that have been set to the side to wait for the right timing and wait for the right environment are now about to go,” Allen said.
Overall, the retail market enters 2025 at its most stable point since before the pandemic, and she expects that to pay off, she said.
“You have a landslide in ‘20, so ‘21 was a total rebuild even though it was on fire,” Allen said. “So ‘22, ‘23 and this year have been consistent to where you finally could have solid ground to stand on.”
Multifamily Music Stops?
Multifamily investment sales also saw much more action in 2024 than 2023 as some normalcy in cap rates returned to the market, Berkadia Managing Director Joey Rippel said.
“We’ve seen a lot of capital come back to the market ready to make bets again, buying good assets in good locations,” Rippel said. “That trend has helped our pipeline tremendously and we expect 2025 to continue that way.”
A wave of distress has threatened to crash over the multifamily industry for years now, with investors buying Class-B and C assets for much more than they were worth in 2021 and 2022. But people still found a way to extend and pretend in 2024, Berkadia Senior Managing Director Chris Curry said.
“Towards the tail end of this year, particularly Class-B and C workforce housing deals start to go back to lenders,” Curry said. “[So much] distress has built up in the system that we can see, you would think it would be a lot more than what was taken over by lenders at this point. So that music stops leading into next year.”
The biggest difference in 2025 will be more sellers coming to the market, largely by force, Rippel said.
“Nobody would like to sell in this current environment if they can avoid it,” Curry said. “So they kicked the can. Ultimately, that can can’t be kicked much farther. That will force a lot of deals to the market to clear at whatever price. That’s what’s going to get capital really excited, when there’s a lot more opportunity to buy with market-rate sellers.”
Like Houston CRE players in most asset classes, Curry and Rippel said they remain bullish on Houston.
“Our supply pipeline was shut off much quicker than most of the other major metros that are still seeing tons of new supply hit the market,” Rippel said.
Houston will see 8,000 to 10,000 new units delivered next year, which is well below the city’s historical average of about 20,000, he said. That will provide much relief to the supply pipeline and boost positive absorption, he said.
“Capital has recognized Houston’s position in the U.S. economy and it will continue to be a major powerhouse going forward,” Rippel said. “We’re getting a lot of eyes on our market, rightfully so.”
