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Houston has 51 Million Square Feet of Vacant Office Space – Can It Ever Be Filled?

Alex Taghi

HOUSTON – (Realty News Report) – Houston has 51.1 million SF of vacant office space, according to a third quarter report by NAI Partners.

The city’s office vacancy problem was amassed following an energy industry downturn and layoffs in the energy workforce. Houston, which has a total of 236 million square feet of existing office space, has a 21.6 percent vacancy rate at the end of the third quarter.

On the positive side, Houston has gained over 80,000 new jobs in the last 12 months. The inventory of sublease space has been reduced. Leasing activity has improved. And there’s a small positive absorption, a change from the recent trend, according to NAI Partners reckoning.

“Taking a look solely at office market fundamentals, Houston continues to see high vacancy due to struggling leasing absorption,” said NAI Partner’s vice president Alex Taghi in a commentary report. “With vacancy hovering above 50 million SF, positive quarterly absorption of 58,000 SF does little to move the needle. Although the availability of sublease space has dropped precipitously, a lot of the space has simply rolled back to landlords who are now tasked with filling that space on a direct basis.”

Another dark cloud hovers over the Houston market – merger and acquisition activity, Taghi noted.  More vacancy could arise as a result of Occidental Petroleum’s acquisition of Anadarko, or restructurings or anticipated layoffs at HP, McDermott and Weatherford.

Sixteen buildings with a total of 2.5 million SF are under construction. New properties report strong leasing as the “flight to quality” trend plays out.

“Landlords of the newest Class A+ projects are offering amenity-heavy services, mirroring hospitality levels offered by high end hotels in order to attract the strongest tenants. They’re well capitalized, have market mojo and momentum, and tenant interest is moving in their favor because they can offer live/work/play environments for those willing and able to pay premium rents,” said Houston office market veteran Bill Brownfield of Alpha Office Escalations.  “Contrast that with landlords of older second tier Class A and Class B office buildings. These are the majority of owners across Houston, and their product is at risk of being treated as commodity space, meaning they compete mostly on price. Yet they still need to allocate new capital to reposition their buildings just to keep up.”

NAI Partners said the 51.1 million SF of vacant space consists of 47.6 million SF of direct space and 3.5 million SF of sublease space.

Oct. 31, 2019 Realty News Report Copyright 2019

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