Have Office Rents Peaked?

Houston’s Class-A office rents leveled off in Q3, actually sliding by $0.01. But don’t worry, says PMRG managing director Wade Bowlin; most submarkets are still on the rise.

Wade says the tiny dip in rents is largely attributed to a 7.1% rent reduction in the Greenspoint/IAH/North Belt submarket. Exxon’s looming vacancy there has driven owners to take an "occupancy over rents" outlook. On the other end of the spectrum, rents in the CBD increased 1.9% in Q3 to reach a record high of $43/SF. (They’ve gone up 11% in the past 12 months.) That’s largely due to limited space options in the Tier 1 Class-A segment (those properties are 95% occupied), which has allowed second-tier Class-A properties to capture a larger share of deals and raise rents. For example, the Allen Center leased 17k SF to Suncor Energy and is close to finalizing 24k SF to Schlumberger.

Class-A direct leasing dropped for the fourth consecutive quarter (we soaked up 6.9M SF in the last 12 months, a 40% decrease from the same time last year and 15% below our 10-year historical average), but that shouldn’t concern you, either. PM director of research Ariel Guerrero says it’s due to Class-A tightness. Significant demand is still there, and construction is still increasing to fix that problem—1.4M SF broke ground last quarter, bringing us to 19M SF underway. 

Trammell Crow poured its slab on Energy Center Five, a 527k SF spec high-rise, two weeks ago. (It's rendered here; EC4 is also under construction there.) Our construction stats are at a 30-year high, and the product is 64% spoken for. (That includes corporate-owned projects, but taking it out still puts us at 44% pre-leased.) The Katy Freeway/Energy Corridor (EC5's home) is still the development darling, accounting for 43% of deliveries year to date and 35% of all construction underway—24 office buildings are under construction there now.