Houston Office Hits All-Time-High Vacancy Amid Statewide Slump
Houston hit its highest recorded office vacancy in the third quarter, according to a new report, as the Lone Star State took big-time lumps in its major markets.
Houston’s office vacancy reached a record high of 26.4% in Q3 due to a significant drop in leasing activity, according to an Avison Young report, with older vintage assets accounting for the bulk of the vacancy. Houston also saw 956K SF of negative absorption last quarter, according to the report.
Avison Young's data comes as Houston, Dallas and Austin top a Moody’s Analytics list of major U.S. cities with the highest office vacancy rates. Yahoo Finance called the fall for once-high-flying Texas metros a case in which the state's everything is bigger mantra means “the real estate problems are also bigger.”
About 25% of office space throughout Houston, Dallas and Austin was empty during Q3, more than double New York City’s 12% vacancy rate and well above San Francisco’s 17% vacancy rate, The Wall Street Journal reported, citing Moody’s data. Austin’s office vacancy rate was 24.2% in the third quarter, per the WSJ, up from 12.9% in Q3 2019.
Leasing activity in Houston fell by 53% compared to the previous quarter, and year-to-date deal flow is 25% behind last year, signaling a broader slowdown in economic growth, the Avison Young report says.
Houston is still creating a lot of jobs — the report says Houston has gained 64,000 jobs since its pre-pandemic peak — but there is a disconnect between job growth versus space demand, Ariel Guerrero, the Texas and Denver regional lead of innovation and insight advisory for Avison Young, told Bisnow.
Vacancies are high across Texas largely because of overbuilding in the 1980s and 1990s in part due to cheap land and relaxed regulation, per the WSJ. New office completions in Texas have outpaced the rest of the U.S. for the past 16 years, Jeff Eckert, the Dallas-based head of U.S. agency leasing for JLL, told the WSJ.
But Guerrero said that isn't necessarily the case in Houston. Although it may have felt like overdevelopment was happening in Houston when a record amount of construction came online prior to the 2015-2016 oil bust, “the reality is that all that space is leased up,” Guerrero said.
Older, obsolete office product remains the largest driver of Houston’s office vacancy, he said.
“OK, 26.4% vacancy, it seems high,” he said. “But what's really driving that is a lot of that older product that sits vacant.”
Trophy and Class-A properties have captured 83% of this year’s leasing activity, according to the report, while vacant space in buildings built prior to 2000 accounts for nearly 80% of vacancy.
Houston vacancy rates vary greatly depending on the year built. Product built from 1980 to 1999 has a 31.8% vacancy rate, while product built from 2010 to the present has an 11.3% vacancy rate, the report shows.
“There are some buildings that were built during that era that are actually performing well,” Guerrero said. “It just depends on the location of the asset. It depends on a lot of attributes and whether the building has undergone any extensive improvements for it to perform well in a market like this.”
That, plus Class-A and trophy assets capturing 85% of leasing activity since 2015, is evidence that the flight to quality has continued in Houston and isn't going away soon, he said.
“The Class-B sector is still lagging behind, and it’s going to take some time for that sector to get its footing,” Guerrero said. “There has been stabilization, but it’s mostly seen in the Class-A sector.”
Avison Young researchers said they expect vacancy to subside, with trophy and Class-A segments leading a recovery as leasing activity picks up steam. In older and Class-B assets, the report says tenants will maintain the upper hand in negotiating lower rents and attractive concessions.
