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50 Million Square Feet Vacant in Houston: Worst Vacancy Rate in 30 Years, NAI Reports

HOUSTON – (By Ralph Bivins, Realty News Report) – The office vacancy rate in Houston hasn’t been this ugly in 30 years.

And there is no miracle cure, no magic bullet that can bring a timely healing. Energy companies – the backbone of Houston office tenancy for almost a century – are not expanding. Many are shrinking.

There will be no bailout from Amazon HQ2 and its 8 million SF office requirement. And it’s been so long since Houston scored a major league win in the corporate relocation game, it’s hard to hold hope that economic development can do anything substantive about Houston’s vacancy problem.

Fifty million square feet of office space lies vacant in Houston, according to NAI Partners’ second quarter report.

“We are seeing historically high vacancy, continued negative absorption including ongoing large-scale lease dispositions and an occupancy rate at its lowest level in 30-plus years,” NAI said.

The “direct vacancy rate” (which does not include sublease space) hit 19.2 percent in the second quarter, up from 18.3 percent a year earlier, NAI reported.

JLL, in a second quarter survey that includes direct and sublease space in Class A and B only, says the vacancy rate reached 24.5 percent. It’s the fourteenth consecutive quarter that vacancy has increased.

JLL reports leasing demand is “stagnant.” Houston has lost ground in 2018, with 2.4 million SF in negative absorption year-to-date, JLL says.

Colliers International is forecasting more negative absorption and higher vacancy in the coming months. The sublease space supply has been reduced from the 11 million SF a year ago, but it’s still very high at 9.4 million SF, Colliers reports.

So in the midst of these conditions, Hines announced earlier this month the start of a new 1 million SF building in downtown on the former Houston Chronicle site on Texas Avenue. The 47-story tower is significantly preleased with Vinson & Elkins taking 212,000 SF and Hines moving its own headquarters into 155,000 SF. A major accounting firm is also taking a hard look at the new building, which is being leased up by Michael Anderson of Colvill Office Properties.

With Houston awash in vacant space, why start a new skyscraper?

The new Class AA office buildings are the bright spot in the Houston office market. The “flight to quality” of the new buildings has momentum, says office-leasing broker Jason Presley, first vice president of CBRE.

The average rental rate for downtown’s Class A building is $44.92 per SF, CBRE says. Some new  downtown buildings quote more than $50 per SF.

The new buildings give the tenant companies an edge in employee recruitment and retention and efficiencies that make new space worthwhile.

“All of these buildings provide what many companies are looking for in today’s work environment: a lot of natural light, energy efficiency and amenities,” says Tim Relyea, executive vice chairman of Cushman & Wakefield, which represented Vinson & Elkins in the new Hines lease.

“Both 609 Main and the new building on the former Chronicle site have 10’ floor-to-ceiling windows and under-floor HVAC systems and many other base building design features such as core through restrooms, oversized freight elevators, wider fire stairwells, and in the case of the Chronicle site, three fire stairwells to accommodate the new code requirements. These new buildings also have stellar amenities such as conference centers, fitness centers and new dining options,” Relyea said.

As we move toward 2019, the new buildings attract tenants, leaving vacancy in their wake. Landlords claw and compete to remain relevant. Sublease space moves back to the landlords’ ledgers. And the market waits for the next chapter – and it may be a sad story.

July 31, 2018 Realty News Report Copyright 2018

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