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CBRE: ‘Landlords are Nervous’ About Upcoming Challenges in Houston Office Market

HOUSTON – The third-quarter statistics for the Houston office market showed some improvement, but the market is waiting for the other shoe to drop.

Third quarter numbers from CBRE showed Houston’s average office rental rate of $27.74 was up 6 percent from a year ago.

Other positives: 1.5 million SF was absorbed in quarter, raising the year-to-date absorption to 3.6 million SF. However, the positive absorption was boosted by delivery of huge new single-tenant and build-to-suit buildings.

The overall vacancy rate went down slightly in the third quarter to 13.2 percent, the first improvement of the year, CBRE reported.

But more layoffs are occurring in the energy industry, more sublease space is coming on the market and a supply bulge of 10.7 million SF is under construction.

Then, there’s the big, dark unknown:  Eight mergers/acquisitions are in the pipeline and the companies involved occupy 10 million SF in Houston, CBRE reports. The M&A activity will spin off a lot of empty space. No one knows how much, but it could be another hard blow.

“Landlords are nervous,” says Jon Lee, a tenant rep broker for CBRE Houston. “There are pockets of distress showing up everywhere.”

Many landlords are offering more concessions to get deals done, Lee told the CBRE Press Luncheon last week. Free rent has made its way back into the Houston office market.

CBRE reports sublease space has doubled from 3.6 million SF in the third quarter of 2014 to 7.1 million SF in the third quarter of this year. The sublease supply is expected to increase.

Lee notes that a sizable portion of the sublease space was relatively short-term space, with only a couple of years remaining on the contract. Most companies will not consider leasing space for only two or three years, Lee says.

Only a few tenants are currently in the market looking for large blocks of space, Lee says, so leasing activity will be subdued in the coming year.

“We’re cautious about the next 12 months,” Lee says.

By Ralph Bivins – Oct. 26, 2015

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