Houston’s office sector hit major setbacks in the third quarter, showing deflated leasing activity and record-high vacancies, following positive signs in the previous quarter.
Vacancy rates reached their highest point on record, surging to 26 percent in the third quarter, according to Avison Young.
Leasing activity declined 53 percent from the second quarter. It was the first time since 2020 that total leasing activity in the third quarter fell below that of the second quarter.
Leasing volume in the third quarter fell 45 percent year-over-year. Deal flow is down by 25 percent year-to-date.
But that’s not the only bad news for Houston’s office market.
Net absorption, which initially showed signs of stabilization with positive absorption in the first half of the year, saw major setbacks in the third quarter. Negative absorption of 956,000 square feet was recorded, with 79 percent of these losses occurring in class B properties, according to Avison Young.
Occupiers are shedding space and, in some instances, upgrading to newer facilities.
Oilfield services company Baker Hughes bid adieu to multiple Class B buildings in the Greenspoint and West Belt submarkets, opting for Class A space with lots of amenities, the 130,000-square-foot 575 North Dairy Ashford Road, within the Katy Freeway West submarket. That resulted in a loss of approximately 346,000 square feet of net office space.
National Oilwell Varco also vacated its Class B former headquarters, the Parkwood Campus, near the corner of Parkwood Circle Drive and Beechnut Street. It moved to the 22-story Millennium Tower II in Westchase.
Buildings constructed before 2000 are grappling with the effects of the flight-to-quality trend and the rise of the hybrid work model, in Houston and across the country. Aging office properties account for nearly 80 percent of all vacant office space in Houston. Trophy and Class A properties have accounted for 83 percent of leasing activity year-to-date.
Houston’s office sector is also dealing with a slew of quickly maturing commercial mortgage-backed securities. Twenty-six properties with a collective loan balance of nearly $973 million are in distress, accounting for 23 percent of all office CMBS loans in the city.
Those impending loan maturities could pose challenges if owners refrain from refinancing or selling their assets. One of the city’s largest office complexes, the 4.3-million-square-foot Greenway Plaza, saw a 59 percent drop in valuation in Q3, falling from $1 billion to $425 million, due to a loan maturity the complex has struggled to pay off during a protracted forbearance period.
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