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Wednesday, June 4, 2014

Houston’s CBD Shows Signs of Softening

By Rand Stephens (Houston) 

The Houston commercial real estate market has thrived in recent years due to record job growth and a surge in oil and gas exploration. We have seen market rents soar, vacancy rates drop and absorption rates increase significantly. Lately, however, there have been indications that Houston’s Central Business District (CBD) office leasing market is softening.

Our research shows that there are 109 full floors of office space currently available to lease in the CBD. The vacancy rate for office properties in the CBD has remained between 9-10 percent since the beginning of 2011. It has edged up slightly from 9.2 percent to 9.8 percent in this time frame. In addition, absorption rates are staying considerably low in comparison to Houston’s strongest submarkets.

The slight increase in vacancies and decreasing absorption rates has not affected asking rents, however, which have appreciated. At the same rate, development activity has picked up and the investment market has remained active.

In contrast to the CBD, The Woodlands and Katy Freeway West (the Energy Corridor) submarkets have gained considerable strength over the last 3 years. The vacancy rate for the Energy Corridor submarket has dropped to 3.6% and 4.9% for The Woodlands.

“Surveying the Houston submarkets, the Energy Corridor and The Woodlands began to truly outperform the CBD in the first quarter of 2013. This is when Devon vacated 560,000 sf at Two Allen Center,” notes Avison Young’s Texas Research Director, Jeannie Tobin.  She continues on to say, “Since that time, there has not been notable leasing activity in the CBD like the other top submarkets in Houston.”

There are a few major events that will contribute to the continued softening of the CBD over the next few years, including: Hines proceeding with the 815,000 sf development at 609 Main without a lead tenant; the construction of Crescent’s 584,000 sf property at 6 Houston Center; lastly, Shorenstein’s repositioning of 800 Bell into class A office space when Exxon vacates in 2015.  First floors will deliver in the last quarter of 2016 and the entire building by the end of the first quarter of 2017.

As companies focus on consolidating their office space into campus-style environments in the outer areas of the city, and development activity increases, we expect the vacancy rates in Houston’s CBD to continue to rise. Regardless of the softening trend in the CBD office market, we do predict the overall Houston market to remain solid.

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