'We Were Optimistic' — Houston Office Market Disappointingly Slow Even In A Strong Economy

One word to describe the Houston office market is complex. 

Absorption came in strong for the second quarter at 684K SF; however, it was counteracted by the delivery of 754K SF of office space in the Bank of America Tower in Downtown Houston, according to Transwestern.   

"The recovery has been a lot slower than we thought it would have been," Avison Young principal Charlie Neuhaus said. "At the beginning of the year, we were optimistic that we would have positive absorption for the year, but I don't think we are going to have that this year." 

The Houston office market is a long way from the heyday before oil prices dropped in 2014. There is 58M SF of vacant space citywide and availability is at 25%. 

"The high availability in the market is not likely to change over the next year," said Transwestern Executive Vice President Eric Anderson, who will be a panelist at the Houston State of Office event Aug. 28. 

Not all things are bad. Most property types, from industrial, retail and multifamily, are on fire with new developments. The local economy is strong with low unemployment and positive job and population growth. 

Texas' unemployment rate dropped to 3.5% in May, the lowest since December 1969, according to the Texas Workforce Commission. Job growth is expected to eventually improve overall absorption, though it is critical to monitor the ongoing discussion of a global recession, Anderson said. 

Tenants are the winners of this cycle, and are taking advantage of the soft market. Companies are often taking less space but have been willing to pay more for the new space, Neuhaus said. They have improved their efficiency from productivity to space requirements. Energy companies, the bread-and-butter of the Houston office market, have mastered profitability with oil prices near $50.

However, those companies are not making long-term decisions, Neuhaus said. 

"Limited activity from the energy sector has kept Houston's office absorption low despite generally strong job growth numbers," Anderson said. 

New construction activity has outpaced the rest of the market. Top-tier assets will remain at very low occupancy as most of the relevant buildings quickly stabilize, according to Neuhaus. 

"That is probably the brightest spot in the market," Neuhaus said.

Relocation to nicer product is part of a broader battle for talent, which is leading to a flight-to-quality resonating throughout the market, Anderson said. While there is no rising tide, many of the well-positioned projects will continue to be successful. 

Not everyone is moving into a new office building. Some companies are moving from Class-C to B while others are going from Class-B to A-, Neuhaus said. 

"Top-tier projects across the city with differentiating attributes are enjoying a steady flow of activity while assets with inherent challenges are struggling and are essentially donors to the higher-quality assets," Anderson said. 

The success of the new office product puts pressure on the older product, Neuhaus said. A number of landlords are pumping money into upgrading their buildings. The amenity-driven renovations include conference facilities, food services, fitness centers and tenant lounges. 

Brookfield Properties is upgrading its large portfolio of vintage buildings in Downtown Houston, one of a number of landlords focused on renovations. 

The firm is transforming Total Plaza, a 35-story tower at 1201 Louisiana St. The improvements will focus on the tunnel, street and second floor and include upgraded modern finishes. The property also recently added a fitness facility, a bike room and a destination elevator dispatch. 

Brookfield is also wrapping up renovation at Houston Center and Allen Center in late 2020. 

"The amount of money they are spending to update these building is evidence that they see in order to keep up they have to spend the money to upgrade," Neuhaus said.

Upgrades in the Galleria have been building by building. 

1800 West Loop South, a 400K SF office tower at San Felipe and Interstate 610, will add a social hub, a tenant lounge, a private patio and a fitness center, according to a release by Transwestern. Interior renovations are set to wrap up this summer. 

Greenway Plaza, situated between Downtown and Uptown, experienced some big move-outs in recent months, Neuhaus said. Building owners will have to attract tenants from the other submarkets to fill those voids.

"You are going to see organic growth there, but I think it is far from attracting the larger users to relocate from Downtown and the Galleria," he said. "They are making updates, but we haven't seen the migration yet."

Springwoods and The Woodlands continue to thrive, Anderson said. The quality of life, great schools and low cost of living are the top contributors to the success of these submarkets. 

East Houston is in need of simple and efficient office space, Neuhaus said. A four-story tilt-wall office building near Beltway 8 and Highway 225 would be ideal. He has found that office tenants want to be in the submarket to service the petrochemical and logistics businesses. But there is low availability of space. 

"Land is cheaper over there, but it has been soaked up with industrial development," he said.