Waiting For The Bounce As Houston Rebounds

Those waiting for Houston to bounce back will have to wait a while longer. Houston has made plenty of gains this year, signing 3.2M SF of office leases in Q2 alone, but with 11M SF of sublease space still on the market and more multifamily units opening every month, Houston’s rebound is hard to see.  

Office

Houston’s office market has borne the brunt of the market's downturn. Vacancy increased 60 basis points to 17.4% in Q2 as several large sublease terms expired, adding more than 600K SF of direct available space, according to CBRE data. Even with the removal of expired listings and increased sublease transactions, available sublease rose to 11.1M SF as more than 1M SF of new sublease listings were added this quarter. The combined result is Houston’s sixth consecutive quarter of negative absorption.

Flight to quality is expected to continue as tenants benefit from lower rates and increased concessions. Long-term leases in prime locations are offering an average of 12 months free rent and $100/SF in tenant improvement allotments.

Industrial 

Houston’s industrial sector has been keeping the area afloat. CBRE’s Tom Lynch joked that nearly every metro in the country would love to have Houston’s vacancy rate at 5.5%. Q2 marks 24 consecutive quarters below the 6% vacancy mark.

More than 60% of the 5.5M SF under construction can be attributed to four large projects, with an average building size of 850K SF. These major build-to-suits have dwarfed spec development recently: Only one spec project greater than 100K SF broke ground in the second quarter out of 1.4M SF of total starts.

Retail 

This year leasing activity is struggling to keep up with the blistering pace set last year. A deficit of quality space has slowed leasing, CBRE research shows, causing Houston retailers to take down only 808K SF so far in 2017 (which is still double the 10-year average). In Q2 2017, approximately 774K SF was occupied in new projects. As the development pipeline slows, Houston's net absorption continues to taper.

Grocery expansion has slowed. The pipeline is mostly speculative strip centers and mixed-use developments. Only 1.2M SF of retail is under construction, a third of which is grocery-anchored. Development activity is concentrated in the Far North and Far West submarkets.

Multifamily 

So far this year, Houston has delivered just over 10,000 units and absorbed just over 11,000, causing occupancy to increase. There are still roughly 7,800 units under construction across the city, for a total of nearly 18,000 units to deliver in 2017, ranking third in the nation. The building boom is pushing rents lower, down 1.9% from this time last year, according to Axiometrics.

CBRE’s Hal Holliday said by 2019, Houston’s pipeline will be down to only about 2,000 units.

“It’s just a matter of time until we hit equilibrium. By the second half of 2019 we’ll be in a landlord’s market,” Holliday said.