Houston Office Market Slides as Vacancy Hits Highest Mark in 22 Years as Negative Absorption Prevails

HOUSTON – The vacancy rose sharply in the first quarter while the Houston office market recorded 789,000 SF of negative net absorption, according to the NAI Partners real estate firm.

In layman’s terms, this means more office space became vacant since the beginning of the year. This stumble occurred even though a lot of folks believed the worst was over.

One of the biggest 2017 deals moving the needle into the red came when Freeport McMoRan completed a buyout of their lease at 717 Texas Avenue in downtown. That dropped 366,000-SF of empty space directly on the market, NAI reported.

Then, some 277,000 SF went vacant at 500 Jefferson when that building was sold. And in another downtown blemish, 93,000 SF emptied at 1401 McKinney.

So the first quarter stats came out uglier than expected. After so many positive announcements in the first quarter, a good report seemed more likely. Hines’ brand-new office tower at 801 Texas has attracted a steady stream of new tenants. The huge Hines tower is opening now with half of its space leased – a remarkable accomplishment in this down market. Then there was a big announcement that Targa Resources leased 128,000 SF in 811 Louisiana. And the fact that some developers feel confident enough to plan new buildings seemed a positive. So the market wore the aura of an actual recovery.

But the recovery was not to be. Vacancies went up in the first quarter and rents went down.

Houston’s office availability rate (regular direct vacancy plus vacant sublease space) hit 25.7 percent in the first quarter, up from 23.6 percent a year ago, NAI reports.

CBRE reports Houston’s vacancy rate is at a 22-year high and Space City has one of the worst vacancy rates in the nation.

On the positive side, there aren’t as many buildings under construction, so the supply spigot is slowing down. But there’s not going to be a quick fix and some building owners may feel some extreme pressure before it’s all over.

In a Houston press luncheon earlier this year, CBRE’s Hal Holliday, one of the nation’s most experienced voices in commercial real estate lending, said a majority of Houston building owners are well capitalized and can keep current on their debt throughout the downturn.

However, they make a willful business decision that it’s best to convey their building to the lender with a “deed in lieu of foreclosure” or by other means, Holliday said. In fact, there have already been a few cases of this already.

And although there’s a huge supply of sublease space in Houston, it’s important to note that sublease space doesn’t stay subleased forever. When the lease runs out, the space can become a burden of emptiness for the building owner.