Houston office market leasing down 29%

Houston’s office market hit a snag in deal volumes during the first quarter of 2023, according to a report by real estate research firm Savills.

Leasing fell by nearly 29 percent compared to the previous quarter but was slightly up, 7.5 percent, over the first quarter of 2022. Despite the drop in deal volumes, the Houston office market experienced declining availability for the second consecutive quarter with availability falling 50 basis points year-over-year due to a decline in sublease options across the market. Sublease stock remained higher than historical averages at 7.6 million square feet, but it was noticeably lower than the 8.1 million square feet measured at the end of 2022.

However, there were some notable transactions during the period, including an expansion for Baylor College of Medicine as the city continues to make big moves in the life sciences sector. The medical school committed to 114,000 square feet of office and lab space at the Dynamic One building in TMC Helix Park. Other top deals in the first quarter include engineering contractor MODEC International and oil giant Maverick Natural Resources nabbing more than 200,000 square feet of combined office space.  

Despite the decline in deal volumes and availability, Houston’s return-to-office trends fared better than other major markets. Weekly office occupancy regularly exceeded 60 percent in the first quarter, above the 49 percent average of other metros, according to data compiled by Kastle Systems. While still below pre-pandemic levels, Houston’s return-to-office rate is second only to Austin among the top metro areas.

Several Houston tenants recalibrated their newly acquired space in the fourth quarter, which may have contributed to the decline in leasing activity during the first quarter. However, the expansion of Baylor College of Medicine and other notable deals suggest that the Houston office market remains attractive to tenants. The decline in sublease options and steady Class A availability may also indicate a stabilizing market.

Office occupancy rates are expected to remain high as many companies decide to bring their workforce back to the office despite a trend of remote work and hybrid models. However, the looming threat of rising interest rates has caused distress among Houston office property owners, with the study suggesting loan defaults could become more prevalent as the year continues. A landmark Galleria office, San Felipe Plaza, sold for $136 million below its appraised value in March, and nearly half of its 2005 sale, due to the city’s complicated office market including rising interest rates and high vacancy.