Businesses looking to get a bargain on Houston office space may want to think about subleasing space from major Bayou City tenants who have downsized or are ditching their office space for newer digs.
All told, 19 percent of Houston’s 350 million square feet of office space is sitting empty right now, with 9 million square feet available to sublet, according to CoStar, and that means companies looking to rent office space can find some great deals.
“We’re seeing triple-net sublease rates offered anywhere from 25 percent to 75 percent discounts,” Itziar Aguirre, CoStar’s director of market analytics for Houston, told The Real Deal.
And it’s not just dingy retro spaces going for peanuts, Aguirre said.
“It’s crazy. Sublease rents are being offered at $12.50 per square foot in Energy Tower Three — and it’s in a five-star building. If we compare that with five-star buildings in that submarket, the Katy Freeway-West submarket, they’re going for an average of $34.50 per square foot,” Aguirre said. “That’s nearly a 65 percent discount.”
Closer to downtown, at Houston’s 12 Greenway Plaza, sublease rents are at $19.70 per square feet, compared to office rents in the Greenway Plaza submarket which are around $31.70 per square foot — a 40 percent discount, Aguirre said.
“But on a bright note, the 9 million figure is still below the 11.2 million figure square feet we saw at the end of 2016, which was a direct result of the oil bust,” she noted.
Most of Houston’s vacant office space is downtown, as companies have left the older stock there for newer spaces elsewhere, according to Aguirre.
“The Central Business District area accounts for practically a third of all of Houston’s available sublease space,” Aguirre said. “The size of the CBD is about 52 million square feet and just to put that into perspective, it’s about the same size as the next two largest markets in Houston, which are the Katy Freeway West and the Woodlands.”
Aguirre said that the best deals could be found downtown because it has older buildings that were built in the early to mid-1980s.
“For example, [Hines’] Lyric Tower on 440 Louisiana street, has space offered at anywhere from $10 to $36, it’s a four-star building and typically this type of building in downtown Houston has space renting for $35.19, so we’re looking at roughly a 71% discount,” Aguirre said.
The Bayou City’s so-called “flight to quality,” is being picked up by newer office buildings in West Houston and the Woodlands and the most subleasing activity in the Bayou City is happening in older buildings in those same submarkets, Aguirre said.
Overall, leasing volume in the Houston office market is more or less flat.
“Basically the same as last year during the same time — it’s about 3 percent higher,” Aguirre said. “So it’s basically the same but the amount of sub lets remains near all time highs.”
Right now the average office space rent across Greater Houston is $28.76 per square-foot, Aguirre said. Before the pandemic it was $29.95. In 2015, right before oil prices started coming down, office rents were averaging $30.26 across the Houston market.
Pressure on lease rates — sublease or otherwise — is expected to continue into 2023.
“We still have a lot of construction underway, unfortunately, 4.7 million square feet, ” Aguirre said. “That’s a mix of build a suit and also some spec, so that’s going to place further pressure on vacancies, and vacancies in Houston are almost 19 percent for the Houston market, which is the highest in the United States.”
Drew Morris, an executive vice president with Savills in Houston, doesn’t think the vacancy rate in Houston’s office market should be cause for alarm.
Even though he said that some of the fallout could result in prime Houston office buildings being picked up in bankruptcy and foreclosure sales, the deals could help Houston catch up to Austin and Dallas when it comes to corporate relocations.
Houston has trailed Austin and Dallas in luring the parade of companies decamping to Texas. Many outsiders see the Bayou City as being neither as hip as Austin nor as glamorous as Dallas, and incorrectly assume that the city is still totally focused on the oil and gas industry.
Houston’s famous lack of zoning may also be a factor, according to Morris, pointing out that when a company does move to the Houston area, it tends to move to the Woodlands or another nearby community that’s master planned or zoned. But he said that falling rents will eventually force Houston into contention for Texas-bound companies.
“You can get office real estate for 40 to 50 percent off” in Houston proper, Morris told TRD. “But with rents trending the way they are in a city this big, with this much Class A office space, at some point companies looking to relocate will have to seriously take a look at Houston because they’ll be able to get it for half.”
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