Office Tenants Getting Free Rent in Houston

HOUSTON – Landlords are offering free rent in many office leases in Houston, where a contraction in the energy industry has created softness in the office market, although other sectors of Houston commercial real estate are surging, according to CBRE.

Companies signing leases for Houston office space in Houston in 2015 are often receiving six to 12 months of free rent, says office leasing broker Lucian Bukowski, executive vice president for the CBRE commercial real estate firm in Houston.

Many tenants will also receive more generous allowances for parking and other concessions as landlords strive to keep their buildings well occupied as the office market softens.

“It’s going to be a much more attractive market for tenants in the next 18 to 20 months,” Bukowski said at the CBRE press luncheon on Tuesday.

The softness in the office market is not a severe correction, but the pace is more sustainable than it was a couple of years ago when some submarkets had Class A occupancy rates over 99 percent and rental rates surged.

Bukowski likened it to slowing down from 100 miles per hour to 70 miles per hour – still good, but not overheated.

Vacancies in the Houston office market have grown as energy companies lay off employees and retreat from expansion plans that were based on the high-growth times when oil was priced at over $100 a barrel. But oil has fallen to around $50 a barrel and plans to drill new wells have been curtailed.

The office market also is digesting a large course of new office construction in Houston as new buildings are completed which adds to the oversupply of space, reduces the city’s occupancy rate and puts downward pressure on rental rates.

CBRE reports a total of 12 million square feet of office space is under construction – buildings that were started when the Houston market was white hot and are now being completed in today’s cooler conditions.

Although the office market will suffer some bumps and bruises, the current conditions are mild compared to the catastrophic 1980s, when vacancies soared and hundreds of Texas properties fell into foreclosure.

Back then, Houston was trying to digest some 70 million square feet of space that was completed over four years in the early 1980s. The recent building boom was small, by comparison, with only 28 million square feet being built in the last six or seven years, Bukowski said.

“Is it going to be soft? Yes. … Is it going to be ugly? Yes. … It is going to be like the 1980s? … No,” Bukowski said.

As their needs for office space has contracted, a number of energy firms have place their excess office space on the market to be subleased by other firms.

CBRE reported that Houston had a total of 6.8 million square feet of office space available as sublease space, much of it hitting the market in 2015. Bukowski believes the supply of sublease space could swell to 8 million square feet by the end of the year.

Three firms – ConocoPhillips, Statoil and BP – account for 1 million square feet of sublease space that has been put on the market in recent months.

This year will not be a big year for investing in major office buildings in Houston, said Mark Taylor, senior managing director of CBRE in Houston.

Out-of-town investors, hearing about the downturn in the energy industry, are expecting to find Houston in distressed market conditions where office buildings can be picked up at bargain prices.

But Houston is not a distressed market and most building owners remain in excellent shape, Taylor said.

Other sectors:

Retail: Approximately 8 million square feet of space in proposed as developers catch up with the growth of Houston. CBRE’s Matt Keener said Dick’s Sporting Goods and the Lidl grocery chain are breaking into the Houston market.

Industrial: Vacancy rates are down (4.8 percent citywide) while construction is up. Rail-served industrial space is in very short supply, reports CBRE’s Gray Gilbert.

Multifamily: The apartment market has remaining relatively healthy, even though Houston job growth has slowed, says CBRE’s Ryan Epstein. High-rise units are proving that upscale rentals are in demand.

Epstein says 23,000 units are under construction in the Houston area, but absorption is strong. Construction will taper off and new completions will be almost non-existent by 2017.