Houston office leasing bounced back in Q2

Houston’s struggling office market showed signs of a rebound in the second quarter of this year, amid a boom of activity in West Houston’s Energy Corridor, according to JLL. 

The Bayou City saw a 35 percent increase in leasing activity April to June, after a shaky first quarter, which saw a 29 percent dip.

At the midyear mark, Houston boasted the highest leasing activity of any Texas market, with a deal volume exceeding 3.1 million square feet. 

Houston’s office market experienced positive net absorption for the first time in four consecutive quarters with 380,000 square feet. Consequently, the total vacancy rate decreased by 20 basis points to slightly over 25 percent compared to the previous quarter’s 26 percent vacancy rate.

Demand for Class A properties is driving the trend, with 86 percent of leasing activity occurring in this asset class. 

West Houston submarkets, with Katy Freeway West leading the charge, accounted for 48 percent of the total leasing volume recorded in the second quarter. 

The fracking boom resulted in a lot of office construction that came online around 2016 in the Energy Corridor of the West Houston submarket, said Rachel Alexander, JLL’s director of Houston research.

“If you look at downtown, there’s one building currently underway because it’s very difficult to get buildings financed right now, especially given the size of the footprints,” Alexander said. “That flight-to-quality space doesn’t exist there. Where it does exist is in West Houston.”

Corporate sorting is another phenomenon in Houston’s office leasing market.

After nearly four decades in Sugar Land, Fluor Corporation leased the entire 308,000-square-foot Three Eldridge Place in the Katy Freeway West submarket, the city’s second-largest office transaction in the second quarter. 

Meanwhile, Technip Energies secured 172,000 square feet at West Memorial Place II to relocate its U.S. headquarters to 15377 Memorial Drive within the same Katy Freeway West submarket. 

West Houston accounted for seven out of 10 of Greater Houston’s top 10 office transactions last quarter, according to real estate research firm Savills. Five of those seven were relocations. The energy sector accounted for nearly 40 percent of Greater Houston’s leasing activity. 

“Companies are trying to get their employees back to the office, and they’re trying to locate close to where the employee base lives in order to do so,” said Tyler Garrett of JLL. “So it’s kind of twofold: you’ve got a flight to quality because there’s a lot of high-quality options in West Houston, but it also checks a big box on getting closer to the employees so that their commutes are reduced.”

Last year, the Kinder Institute noted that Greater Houston’s population center is steadily shifting northwest as the north and west suburbs continue to see steady population growth.  

Houston’s office market has all but bounced back from the first quarter’s blues, and market tightening is expected in West Houston’s office market throughout the rest of the year. 

While the second quarter showed positive trends, Alexander expects office leasing activity to head south as the metro continues to find its footing. Although newly constructed offices performed remarkably well, with Class A properties driving positive absorption, construction activity dropped 15 percent to 740,000 square feet in the second quarter from 880,000 square feet in the first quarter. 

“We do expect to see that positive absorption slip back into negative,” she said. “I do think what we’re seeing is probably a one-quarter pop of positive net absorption because there were really no significant moves this quarter. We won’t see vacancies skyrocket by any means, but we do still have a ways to go as we work through these occupier moves in the coming quarters.”

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