Office Workers Are Coming Back To Downtown Houston, Boosting Other Sectors

Office workers shunned the city’s tallest towers, conventions were unceremoniously canceled, and large-scale sports and entertainment events evaporated. By almost every measure, Downtown Houston was a virtual ghost town in 2020.

Though those trends persisted into 2021, Texas’ reopening efforts, vaccine availability and pent-up demand have led to a steep increase in the number of people returning to Downtown Houston. Office occupancy is rising, and with it, positive outcomes for other sectors in the submarket, including retail, hospitality and entertainment.

“As we get to the end of the summer and approach Labor Day [and] school starting, we're hearing a lot of folks saying they really would be looking at 100% [office occupancy] at that point,” Houston Downtown Management District Executive Director Bob Eury said.

During normal times, Downtown Houston’s gleaming office buildings draw tens of thousands of office workers each day. But as concerns around the coronavirus pandemic began to ramp up in mid-March 2020, visitors began to fall sharply.

Downtown Houston had 741,328 office visitors in April 2019, according to monthly foot traffic data from Advan Research. But in April 2020, the first full month of the pandemic, monthly office visitors fell to 176,426 — the lowest month on record, according to Advan data stretching back to 2016.

Throughout the rest of 2020, monthly office visitors usually averaged fewer than 220,000. But starting in January, the numbers began to rise. By March, monthly office visitors spiked to 300,473, the highest number since the same month a year prior. Foot traffic fell in April and May before it rose to 283,221 in June, Advan data showed.

Overall, the rising foot traffic is translating into higher daily occupancy. Eury told Bisnow that based on surveys of building managers and owners in Downtown Houston, office buildings in the submarket are now averaging between 30% and 35% occupancy on a daily basis.

CBRE Senior Associate Nina Seyyedin said that while the average may be hovering around 30%, some buildings in Downtown Houston are seeing higher daily occupancy rates.

“I had a conversation with one of my leasing partners today who has a large building downtown, and they're at 70%. So, it's certainly hovering probably right around 30% [on average], but it could definitely be higher than that, depending on the building,” Seyyedin said.

It’s positive news for Downtown Houston, which is commonly cited as the hardest-hit submarket in the entire city. Similar to other submarkets, office vacancies have been ticking up: In the fourth quarter of 2019, office vacancy in that submarket was 17%. As of Q2 2021, office vacancy was 24.3%, according to CBRE’s latest office market report.

Despite the increase, Seyyedin said that CBRE hasn’t seen any office tenants in Downtown Houston opt to downsize in a major way since the pandemic began. There was a rightsizing trend underway before the pandemic, where users were looking to be more efficient with space. That has continued, according to Seyyedin, especially since tenants are now seriously rethinking their layouts.

“Occupiers were looking to rightsize even before the pandemic. So you're probably going to see a change in the physical office space, the way it's laid out. But certainly not a huge change in companies' footprint,” Seyyedin said.

Without a doubt, Eury said, there will be an increase in the number of workers who switch to full-time remote work, or some kind of hybrid model, where they are in the office a few days a week. However, Eury said it’s still too early to tell if there will be any major reduction in how much office space companies want to occupy.

He pointed to the Houston Downtown Management District’s own recent decision to move into a slightly larger space with a different layout, which he hopes will be a little more comfortable and safe, with more conference room space.

“There's a lot of variables in that. It is not just, fewer workers present equals less space,” Eury said.

Returning Workers Boost Retail Trade

The office sector is the biggest daily driver of activity in Downtown Houston, and those workers have a direct impact on the health of other asset types. In particular, the retail sector takes many of its cues from office, with workers driving the majority of weekday sales. 

In April 2019, Downtown Houston had 856,462 monthly retail visitors. But in April 2021, during the first full month of the pandemic, that number fell to 194,459, according to Advan data. 

Retail numbers have increased even more strongly over the past year than office because retail captures visitors from other asset types, like residential, hotels and entertainment. In June, monthly retail visitors in Downtown Houston hit 486,889. 

Transwestern Managing Director Crystal Allen said that right now, retail sales in Downtown Houston appear to be a direct reflection of office occupancy, with many businesses averaging roughly the same percentage of sales.

“If you compare six months, January to the middle of this year, then they've all done essentially about 30 to 35% of what they did in 2019,” Allen said. 

Like Eury, Allen said general sentiment in the market is that by Labor Day, there will be another large increase in retail sales.

“I think that if you can get the events and the office population and everything at least up to about 60%, if restaurants could then start doing 60% of the volume they were doing, that really will get them into a place where they're back to least healthy and where they're making money,” she said.

There have been some permanent retail and restaurant closures in Downtown Houston, but not as many as expected, according to Allen. And those losses have been offset by several restaurant deals signed this year, especially by out-of-town restaurant groups looking to establish flagship full-service locations. 

Allen noted that many business owners want to be ready as office occupancy returns. She has seen an uptick in activity from smaller retail and food tenants, both in the Downtown Houston tunnel system and in food halls, which were gaining popularity before the pandemic.

“We haven't seen this type of activity across the city in retail in a long time,” Allen said.

Hotels Continue To Correct Course

Downtown Houston is a hub for convention and event activity in the city. Houston First Corp. said that 16 conventions and events are planned in the city between July and December, which could potentially bring more than 200,000 people to either stay or attend events in the area. That’s in addition to in-person sports events, theater events and other entertainment that has started up again in 2021. 

Monthly hotel traffic in Downtown Houston was 272,854 in January, before jumping to 433,339 in March and 759,016 in June, Advan data showed.

Hotel owners and developers previously told Bisnow that Downtown Houston’s hotels were among the hardest-hit in the city, but that trend began to reverse in March, boosted by spring break and Texas Gov. Greg Abbott’s decision to allow businesses to open at 100% capacity.

Eury noted that during the pandemic, and even now, hotel occupancy remains dominated by leisure travelers on the weekends, rather than the business travelers that used to fill those hotels during weekdays. But airlines and travel agents say that pent-up demand should send business travelers back on the road soon — a trend that should accelerate as office workers return.

Houston’s office brokers, as well as other market observers, have been saying for months that Labor Day is shaping up to be the major turning point for workers returning to the office. Eury said that everything is moving in the right direction, though Downtown Houston’s office market will probably struggle the most of any asset class to return to pre-pandemic performance.

“Without any doubt, I think the largest challenge probably will be in the office sector,” Eury said.

Workers are more likely to return to Downtown Houston on a permanent basis than in other major cities, Seyyedin said, because the city had fewer remote or hybrid workers prior to the pandemic. The market is also seeing a large uptick in office inquiries, which have been growing over the past three or four months.

“I think it's important to note that the data tells one story,” Seyyedin said. “We're getting inquiries and tours right now. So a lot of those will materialize into deals … whether it's next quarter or a couple quarters from now.”

CORRECTION, July 16, 8:45 A.M. CT: A previous version of this story said that monthly foot traffic numbers climbed from March to June. They fell in April and May, before rising in June.