Energy Remains King Of Houston’s Office Market, Starts Signing Big Leases Again

Like every office market, Houston has seen its share of fallout from the coronavirus pandemic. But more than any other metro in the country, the city's fortunes are tied to the energy industry, and right now, that is a good thing.

Despite a push toward decarbonization and renewable energy and trends from rightsizing to the flight to quality and hybrid work, energy companies make up the largest proportion of activity in Houston’s office market, propping up a significant amount of its newer Class-A space in West Houston submarkets.

For a while, it appeared energy companies were pulling back on office requirements. That seems to be reversing in recent months.

“The activity speaks for itself,” said Anya Marmuscak, senior vice president for JLL and a member of its energy focus group.

In 2022, energy and utility companies had the largest share of office leasing volume in Houston at 37.7%, according to data Avison Young provided to Bisnow. The same is true for all years provided, 2017 through 2023, though the percentage ranges from 29.1% to 39.4%.

The first years of the pandemic brought headlines about major energy companies reducing space significantly. Last year, Baker Hughes consolidated and scaled down its office space by 62%. Pipeline operator Enbridge shrunk from 600K SF to 293K SF. Energy giant Exxon Mobil Corp. was using less than half of the space available at its 385-acre campus in Spring.

But that isn't indicative of an energy company-related trend, at least not today, experts say.

Almost half of the leases signed in the first quarter were in West Houston, Marmuscak said.

“That sends a strong message that there has been momentum and large activity that's happening in West Houston,” she said.

Major leases included Kiewit Engineering Group taking 277K SF in Energy Center I in the Katy Freeway West/Energy Corridor submarket. In Q4, Wood Group renewed a 226K SF lease in the same submarket. 

Bechtel Energy signed a new 205K SF lease, and Apache Corp. signed a 202K SF lease in the Westchase submarket, although Apache is moving its headquarters to Westchase, which will likely cut its Houston office space by more than half.

Elsewhere, Callon Petroleum is upsizing its space from 75K SF with a new lease of 107K SF in Memorial City.

During the past year, the Energy Corridor has captured 14% of office leases over 10K SF, according to the Avison Young report. Westchase got another 12%, and Memorial City got 7%, totaling 33% for those West Houston submarkets. That is more than the 25% the Central Business District captured. 

Oil prices briefly plummeted in 2020, leading to an average per-barrel price of $41.96 for the year. But crude prices recovered and then some. In 2023, crude prices have averaged about $75 per barrel. 

“Big energy companies are like all companies. They're trying to figure out how to attract and retain top talent and make them more productive,” Marmuscak said. “If they can use the office space as a lever to do that, then they're going to. And energy employment has been steadily increasing since 2021.”

Energy employment in 2021 was up by about 1.3 million jobs from 2019, according to the latest world energy employment report from the International Energy Agency, which expected it to increase by another 6% in 2022. Trade association Energy Workforce & Technology Council reported that U.S. oilfield services jobs reached the highest number since March 2020 in April 2023. There were 662,454 jobs, 322,184 of which were in Texas. 

Houston had been in a challenging office leasing environment since the 2014-2016 oil bust, said Avison Young’s Ariel Guerrero, who leads the Texas and Denver region’s insight team. Things were starting to stabilize in 2019, then the pandemic hit.

Houston’s office market had a 28.1% direct availability rate in Q1, which is the highest level on record, according to the report. The vacancy rate was 25.3%, the highest of all major metros in the nation. Yet Guerrero thinks both are stabilizing. 

“A lot of the larger companies, to some extent, have already rightsized their space,” Guerrero said. “We may see some downsizing in the process of a relocation, but it's not to the extent like we saw back during Covid. There appears to be more stabilization now.” 

The bulk of new office product was built in the Energy Corridor area for energy companies prior to the downturn around 2015, Marmuscak said. That left vacant space in newer buildings in the area, which tenants took advantage of, aligning with the flight-to-quality trend, she said. 

The direct vacancy rate for Class-A office product built since 2010 is only 11.6%, less than half of the overall vacancy rate in Houston, according to the Avison Young data.