2Q’14 Office Market Report
The Houston Office Market
Economic Outlook
The second quarter of 2014 continued the quarter-by-quarter declining trend of the Houston Metropolitan Area’s vacant office space across all classes, which began in the third quarter of 2010. With vacancy rates steadily decreasing, the second quarter of 2014 rental rates throughout all classes rose to record high rates.
With a slight loss of momentum, 2014 is still showing signs of growth across the U.S. in the second quarter. National unemployment continues to move in a positive direction, as Texas, and New York continue to show record breaking numbers. Now that first quarter’s weather crisis is just a memory and conditions have improved, hiring has taken off again. With an estimated 288,000 jobs added in March across both small and large businesses overall unemployment rate is down to 6.1%.
At the end of the second quarter 2014, the Houston Office market’s vacancy rate stands at 11.0%, a decrease of 0.1% from its first quarter 2014 end of 11.1%. Already, this figure is low enough to match the vacancy rates seen just prior to the economic downturn, and, should the downward trend continue, vacancy may even fall beneath the 10-year low of 10.7% that the city reached at the end of the fourth quarter 2007. Rental rates continue to rise in the face of a tightening market, as well, with the average quoted price per square foot ending the quarter at $34.28 per square foot for Class A and $20.96 per square foot for Class B.
We continue to see Texas on topping the charts across the board. Texas and New York are still the only states that have restored all the jobs lost in the economic downturn, while the rest of the nation is on it’s way to a full recovery. Houston’s economic development
Vacancy among Class A properties throughout the city rose from
has played a significant role in keeping Texas at the top of the
9.2% to 9.6% over the second quarter, following net absorption of
economic charts. The Houston Business Cycle Index pins the
positive 1,240,004 square feet of space. Citywide Class A vacancy
city’s rate of economic growth at a robust 5.4% as recently as May,
shifted out of double-digit and into single-digit figures over the
a step up from an already strong 5.2% showing one year ago.
course of 2013, with vacancy rates at the end of the second quarter 0.7% lower than they were at the same time one year beforehand.
The Texas unemployment rate is down from last quarter of and stands at 5.1%, two points less than the national average and
Class B vacancy has been more stable in the recent past, and has
the lowest it has been since November of 2008. Houston’s own
not strayed more than 1% in either direction of 13.3% since the first
unemployment rate equaled the state average, at about 5.6%. A
quarter of 2012. Between the ends of the first quarter of 2014 and
slight increase in recent unemployment numbers has been seen as
the second quarter of 2014, vacancy moved 0.5% downward, from
result of an increase in the size of the labor force, not an increase
13.3 to 12.8%, as a result of net absorption of positive 733,791
in job losses.
square feet.
Between April and May, the city’s payroll employment grew at an
During the second quarter, a total of 23 new buildings delivered,
annualized rate of 5.4%. The biggest percentage gains were in
adding 1,971,823 square feet of office space to the Houston market.
the educational and health services, financial activities and other
Total inventory for the city now stands at 278,176,119 square feet
services industries. These considerations, along with strong job
of space - 116,181,912 square feet of which are housed within 365
gains in oil and gas, good performance in refining and plastics,
Class A buildings, and 121,748,342 square feet of which is housed
and overall positive labor market conditions, imply a healthy
in 2,669 Class B buildings.
economic foundation on which Houston can be expected to grow
17,760,993 square feet of office space are currently under
for some time.
construction in the Houston market at the end of the second quarter, with 17,432,204 square feet of Class A construction and 328,789 square feet of Class B construction contributing to this figure.
Sources: NAI Houston Research, CoStar, Federal Reserve Bank of Dallas, Greater Houston Partnership, Houston Chronicle, Houston Association of Realtors
HOUSTON, T X
The Market Select Top Office Leases (In terms of square footage)
• Sasol North America: Woodbranch Plaza IV - 168,050 SF (Katy Freeway West) • GE Oil & Gas: Beltway @ Clay – 150,000 SF (FM 1960/Hwy 249) • Energy XXI Services: One City Centre – 171,216 SF Renewal/Expansion (CBD) • Memorial Development: Once Allen Center - 111,566 SF (CBD) • Motiva Enterprises: One Allen Center – 109,373 SF (CBD) • IHI: One EldridgePlace - 61,455 SF (Katy Freeway West) • NetIQ: 515 Post Oak Blvd – 55,380 SF (Post Oak Park) • Blinds.com: 10255 Richmond – 55,470 SF (Westchase) • Clear Channel Communications: 2000 West Loop - 50,180 SF (Galleria/Uptown) • HOK: Phoenix Tower - 49,018 SF (Greenway Plaza) • National Oilwell Varco: 2500 CityWest - 47,136 SF (WestChase) • Hoover Slovacek, LLP: Galleria Tower II - 44,644 SF (Galleria/Uptown) • Science Application International Corp: 2400 Nasa Parkway – 40,000 SF Renewal (NASA/Clear Lake) • RealEC TEchnologies: 20 Greenway Plaza – 38,006 SF (Greenway Plaza) • HAPAG-LLOYD (AMERICA) INC: The Reserve @ Greens Crossing II – 32,608 SF Renewal (Greenspoint/Northbelt) • NEXT Financial Group: 2500 Wilcrest Dr. – 32,569 SF Renewal (Westchase)
Select Largest Deliveries (All delivery dates listed are according to current estimates)
• Anadarko Tower 2 – 31 stories, 550,000 SF. Owned and occupied by Anadarko. (Woodlands) • Energy Tower III – 17 stories, 428,831 SF. Fully occupied by Technip. (Katy Freeway) • 11910 Katy Fwy – 14 stories, 375,000 SF. 100% occupied. (Katy Freeway) • Energy Crossing II – 8 stories, 321,508 SF. 87% occupied. (Katy Freeway) • 17320 Katy Fwy – 4 stories, 186,375 SF. 100% occupied by Mustang Engineering. (Katy Freeway) • 11340 FM 2920 – 3 stories, 140,000 SF. 100% occupied by Baker Hughes. (Woodlands) • 3990 Rogerdale Rd. – 3 stories, 125,000 SF. 100% occupied by C&J Energy Services. (Westchase) • 13411 Hilliard St. – 4 stories, 120,000 SF. 100% occupied by the United States Coast Guard. (NASA/Clear Lake)
Selected Top Construction • ConocoPhillips – 546,604 SF. Delivers Q2 2015. (Katy Freeway) • Southwestern Energy HQ – 515,000 SF. Delivers Q4 2014. (Woodlands) • Noble Energy Center II – 456,000 SF. Delivers Q2 2015. (FM 1960) • Air Liquide Center South – 452,370 SF. Delivers 4Q 2015. (Katy Freeway) • Energy Tower IV – 428,831 SF. Delivers Q4 2014. (Katy Freeway) • Hilcorp Energy Tower – 406,600 SF. Delivers Q1 2015. (Downtown) • 3737 Buffalo Speedway – 400,000 SF. Delivers Q1 2015. (Greenway Plaza) • 200 N Dairy Ashford Rd – 375,000 SF. Delivers Q1 2014. (Katy Freeway) • Two Briarlake Plaza – 337,888 SF. Delivers Q2 2014. (Westchase)
Largest Contiguous Space Building Name
Square Feet
CBD 800 Bell St 609 Main St Five Allen Center
1,314,350 1,044,883 999,000
Existing Under Construction Proposed
800 Capitol St
748,800
Proposed
Rusk St 2100-2120 Travis Ave 909 Fannin St 811 Louisiana St 1000 Louisiana St 2229 San Felipe 1201 Louisiana St 820 Fannin St 811 Main St
608,232 273,000 234,333 188,695 150,774 150,277 124,083 111,112 106,005
Proposed Under Renovation Existing Existing Existing Under Construction Existing Existing Existing
W Loop South 2425 West Loop South 515 Post Oak Blvd 1885 Saint James Pl 2700 Post Oak Blvd 5444 Westheimer Rd 5051 Westheimer Rd 1233 West Loop S
368,000 218,846 166,206 156,316 140,618 135,826 124,651 111,250
Proposed Existing Existing Proposed Existing Existing Existing Existing
1333 West Loop S
111,250
Existing
1717 W Loop Fwy S
100,000
Proposed
Galleria
Energy Corridor/Westchase 915 N Eldridge Pky Core Park West CityWestPlace 6 11750 Katy Fwy Eldridge & Enclave Pky Core Park West
500,090 445,777 387,200 376,819 349,188 321,317
Proposed Proposed Under Construction Proposed Proposed Proposed
Building Name
Square Feet
11700 Katy Fwy 1430 Enclave Pky CityWestPlace 5 1414 Enclave 16200 Park Row 3600 W Sam Houston Pky S 9811 Katy Fwy 10496 Old Katy Rd 16200 Park Row 700 Town & Country Blvd 10496 Old Katy Rd 19219 Katy Fwy Greenhouse Rd Greenhouse Rd Barker Cypress and Highwa 15375 Memorial Dr Grand Pky & Franz Rd Grand Pky & Franz Rd 2050 W Sam Houston Pky S 6004 Rogerdale Rd 1212 W Beltway 8 N Greenhouse Rd Greenhouse Rd I 10 & Grand Pky 16001 Park Ten Place Dr Grand Pky & Franz Rd Grand Pky & Franz Rd
320,528 312,564 306,900 300,907 300,000 300,000 281,412 264,000 261,103 254,466 207,000 203,149 200,000 200,000 176,000 169,159 165,000 165,000 160,569 153,342 150,000 150,000 150,000 139,169 136,950 130,200 130,200
Existing Existing Proposed Under Construction Under Construction Under Construction Under Construction Proposed Under Construction Under Construction Existing Proposed Proposed Proposed Proposed Under Construction Proposed Proposed Existing Proposed Proposed Proposed Proposed Proposed Existing Proposed Proposed
21700 Merchants Way
127,953
Under Construction
1001 Campbell Rd
125,000
Proposed
2929 W Sam Houston Pky N
120,000 119,703
Proposed
100,000
Proposed
3151 Briarpark Dr Queensbury Ln and Town & Blvd
Existing
Vacancy • Decreased to 11.0% to end Q2-2014 citywide for Class A & B buildings.
• Class B projects reported a 12.8% Vacancy Rate citywide. • Overall Vacancy Rates downtown decreased slightly to 10.6%
• Class A projects reported a 9.4% Vacancy Rate citywide.
Rental Rates (Building Classes A & B Combined)
• Average Rental Rates rose to $27.62 PSF
• L andlord concessions such as free rent, parking charge abatements, etc. are on the decline.
New Construction (Building Classes A & B Combined)
• E nding Q2 2014, there were 12,599,197 SF of new office buildings under construction.
• By comparison, Q2 2013 had 11,466,279 SF of new office buildings under construction.
Sublease Space • Inventory of sublease space available citywide has increased in class A & B Buildings by 68,231 SF to a total of 1,880,574 SF at the end of Q1.
Absorption: Measure of Demand in Square Footage for Office Space (All Office Space)
Total Net Absorption for 2Q 2014 YTD: 2,042,698 SF All Classes (Down from 2,672,285 SF in 1Q 2014) The Class A buildings recorded net absorption of 1,240,004 SF, while Class B buildings posted a positive absorption of 733,791 SF for the quarter.
OFFICE
Leasing
Class A & B Office Buildings, Citywide | Past 9 Quarters
Absorption & Deliveries Class A Net Absorption
4,000,000
Class A RBA Delivered
Class B Net Absorption
Class B RBA Delivered
3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0
2012 2Q
2012 3Q
2012 4Q
2013 1Q
2013 2Q
2013 3Q
2013 4Q
2014 1Q
2014 2Q
(500,000)
Vacancy Rates 16.0%
Direct Vacant % Class A
Direct Vacant % Class B
14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%
2012 2Q
2012 3Q
2012 4Q
2013 1Q
2013 2Q
2013 3Q
2013 4Q
2014 1Q
2Q 2014
Rental Rates $36.00
Avg Direct Rate Class A
$34.00
Avg Direct Rate Class B
$32.00 $30.00 $28.00 $26.00 $24.00 $22.00 $20.00 $18.00 $16.00 $14.00 $12.00 $10.00
2012 2Q
2012 3Q
2012 4Q
2013 1Q
2013 2Q
2013 3Q
2013 4Q
2014 1Q
2014 2Q
New Construction 20,000,000
RBA Under Const Class A
RBA Under Const Class B
18,000,000 16,000,000 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 -
2012 2Q
2012 3Q
2012 4Q
2013 1Q
2013 2Q
2013 3Q
2013 4Q
2014 1Q
2014 2Q
5
Select Sales Include: Property Address
Sale Price
1111 Bagby St (Sold with 430 Lamar Ave)
Sale Date
Price Per SF
$416,025,257
2/20/14
$340.07
5300 W Sam Houston Pky N
$21,650,000
1/10/14
$214.27
13131 Dairy Ashford Rd (Sold with 13135 Dairy Ashford Rd)
$41,416,864
4/15/14
$202.24
13135 Dairy Ashford Rd (Sold with 13131 Dairy Ashford Rd)
$41,416,864
4/15/14
$202.24
6001 Rogerdale Rd
$27,425,000
5/15/14
$181.62
$9,674,743
0/20/2014
$178.07
7700 San Felipe St
$15,500,000
2/13/14
$153.90
9801 Westheimer Rd
$29,000,000
3/19/14
$137.36
12012 Wickchester Ln
$15,000,000
1/14/14
$137.02
16010 Barkers Point Ln
$13,950,000
3/11/14
$115.62
2900 Weslayan St
$14,075,000
2/25/14
$102.96
222 Benmar Dr
$16,100,000
5/30/14
$81.21
363 N Sam Houston Pky E
$24,100,000
5/6/14
$62.39
430 Lamar Ave (Sold with 1111 Bagby St)
Office Space Statistical Changes Class A & B Year-over-Year and Quarter-over-Quarter
2Q13 vs. 2Q14 VACANCY RATE
NET ABSORPTION
CONSTRUCTION
1Q14 vs. 2Q14 NET ABSORPTION
ASKING RATES
VACANCY RATE
CONSTRUCTION
ASKING RATES
Recent Deliveries of Office Space (Houston, Tx)
Leased & Un-Leased Square Footage in Deliveries Since 2009 Chart Title 8,000,000 7,000,000
Square Feet
6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0
2009
2010
2011 Leased
2012 Un-Leased
2013
2014
CLASS A & B
Office Space
Total Employment Growth
Highlight Total Number of Jobs Added per Year
Office Square Footage per Employee by Industry Based Upon All Tenants
Square Feet 0
50
100
150
200
250
300
350
400
450
LAW FIRMS AGRI-MINING/UTIL RETAILERS/WHOLES SERVICES TRANSPORTATION FINANCE/INS/RE COMMUNICATIONS BUSINESS-SERVICE ENGINEERS/ARCHIT GOVERNMENT ACCOUNTANTS MANUFACTURING MEDICAL
7
SUBMARKET
Reports Class A Market Statistics Existing Inventory Submarket
# Blds
Vacancy
Total RBA SF
Direct SF
Under Const SF
Quoted Rates
Bellaire
7
1,203,314
97,890
0
$25.78
Downtown
39
33,477,725
2,826,227
1,634,306
$40.89
E Fort Bend Co/Sugar Land
20
4,066,127
454,427
57,000
$26.79
FM 1960
21
3,854,007
522,683
770,000
$27.17
Greenway Plaza
16
6,224,406
429,253
660,437
$36.21
Gulf Freeway/Pasadena
1
22,706
1,363
0
$27.59
I-10 East
0
0
0
0
$0.00
Katy Freeway
76
18,471,154
558,756
5,337,133
$33.47
Kingwood/Humble
2
131,665
45,736
0
$31.58
NASA/Clear Lake
14
1,968,551
138,274
55,000
$24.34
North Belt
24
5,437,586
530,916
0
$30.34
Northeast Near
0
0
0
0
$0.00
Northwest
23
4,025,406
439,012
1,519,973
$27.22
Richmond/Fountainview
0
0
0
0
$0.00
San Felipe/Voss
3
1,714,929
256,930
0
$32.97
South
2
250,000
0
0
$27.19
South Hwy 35
0
0
0
0
$0.00
South Main/Medical Center
15
4,568,943
251,618
52,362
$28.49
Southwest
9
2,058,852
326,324
0
$17.39
West Loop
40
15,769,497
1,507,490
782,899
$35.39
Westchase
28
7,697,646
896,219
1,923,992
$37.29
Woodlands
25
5,239,398
524,365
4,639,102
$34.09
Totals
365
116,181,912
9,807,483
17,432,204
$34.28
SUBMARKET
Reports Class B Market Statistics Existing Inventory Submarket
# Blds
Total RBA SF
Vacancy Direct SF
Under Const SF
Quoted Rates
Bellaire
32
3,019,949
151,798
0
$22.33
Downtown
167
19,658,592
1,809,012
0
$27.17
E Fort Bend Co/Sugar Land
225
4,441,607
496,182
13,060
$22.39
FM 1960
355
8,450,673
1,339,147
39,170
$17.13
Greenway Plaza
47
4,141,880
316,718
13,575
$24.60
Gulf Freeway/Pasadena
149
3,380,865
404,939
0
$20.50
I-10 East
25
731,906
88,219
0
$16.45
Katy Freeway
319
13,387,994
1,216,655
137,755
$22.53
Kingwood/Humble
69
1,657,962
101,841
104,223
$21.05
NASA/Clear Lake
208
5,645,216
1,158,310
4,500
$18.61
North Belt
77
6,636,466
1,220,013
0
$16.37
Northeast Near
27
662,292
120,062
0
$19.58
Northwest
159
8,547,044
1,369,348
3,106
$20.25
Richmond/Fountainview
26
953,495
220,199
0
$17.07
San Felipe/Voss
38
3,573,005
301,772
0
$21.70
South
80
1,614,169
199,899
0
$26.87
South Hwy 35
33
350,280
8,082
0
$15.60
South Main/Medical Center
64
4,838,288
523,663
0
$24.44
Southwest
143
7,671,713
1,859,605
0
$16.48
West Loop
63
7,088,200
868,186
0
$26.26
Westchase
73
7,888,629
729,104
0
$20.31
Woodlands
284
7,339,781
537,881
13,400
$26.34
121,680,006
15,040,635
328,789
$20.96
Totals
2,663
9
SUBMARKET
Reports Total Office Market Statistics Existing Inventory Submarket
# Blds
Total RBA SF
Vacancy Direct SF
Under Const SF
Quoted Rates
Bellaire
39
4,223,263
249,688
0
$24.11
Downtown
206
53,136,317
4,635,239
1,634,306
$36.57
E Fort Bend Co/Sugar Land
245
8,507,734
950,609
70,060
$24.10
FM 1960
376
12,304,680
1,861,830
809,170
$19.42
Greenway Plaza
63
10,366,286
745,971
674,012
$30.61
Gulf Freeway/Pasadena
150
3,403,571
406,302
0
$18.71
I-10 East
25
731,906
88,219
0
$16.04
Katy Freeway
395
31,859,148
1,775,411
5,474,888
$28.49
Kingwood/Humble
71
1,789,627
147,577
104,223
$22.09
NASA/Clear Lake
222
7,613,767
1,296,584
59,500
$19.32
North Belt
101
12,074,052
1,750,929
0
$23.66
Northeast Near
27
662,292
120,062
0
$17.95
Northwest
182
12,572,450
1,808,360
1,523,079
$22.70
Richmond/Fountainview
26
953,495
220,199
0
$15.71
San Felipe/Voss
41
5,287,934
558,702
0
$27.08
South
82
1,864,169
199,899
0
$24.10
South Hwy 35
33
350,280
8,082
0
$15.56
South Main/Medical Center
79
9,407,231
775,281
52,362
$24.85
Southwest
152
9,730,565
2,185,929
0
$16.30
West Loop
103
22,857,697
2,375,676
782,899
$32.43
Westchase
101
15,586,275
1,625,323
1,923,992
$30.88
Woodlands
309
12,579,179
1,062,246
4,652,502
$29.89
3,028
237,861,918
24,848,118
17,760,993
$27.62
Totals
Methodology | Definitions | Submarket Map 22 9
Absorption (Net) The change in occupied space in a given time period.
4
Available Square Footage
12
290
13
Average Asking Rental Rate
90
90
8
59
290
7
90
10
ton Tollway
West Park Hous
19
Sam Houston Tollway
21
Westheimer
99
Building Class
15 20 2 5 14 1
10
10
6
225
18
6
90
288
59
3
Fo rt Bend Tollway
Class A Product is office space of steel and concrete construction, built after 1980, quality tenants, excellent amenities & premium rates. Class B product is office space built after 1980, fair to good finishes & wide range of tenants.
11
6
Net rentable area considered available for lease; excludes sublease space.
Rental rate as quoted from each building’s owner/ management company. For office space, a full service rate was requested; for retail, a triple net rate requested; for industrial, a NN basis.
6
59
45
16
10
Direct Vacancy Space currently available for lease directly with the landlord or building owner.
Market Size Includes all existing and under construction office buildings (office, office condo, office loft, office medical, all classes and all sizes, both multi-tenant and single-tenant, including owneroccupied buildings) within each market.
17
Overall Vacancy All physically unoccupied lease space, either direct or sublease.
SF/PSF Square foot/per square foot, used as a unit of measurement.
Sublease Arrangement in which a tenant leases rental property to another, and the tenant becomes the landlord to the subtenant.
Sublease Space Total square footage being marketed for lease by the tenant.
1. Bellaire
12. N ortheast Near
2. D owntown - CBD + Midtown
13. N orthwest = North Loop West + Northwest Far_ Northwest Near
3. E Fort Bend Co/Sugar Land 4. Fm 1960 + FM 1960/Champions + Fm 1960/Hwy 249 + FM 1960/I-45 North 5. Greenway Plaza 6. Gulf Freeway/Pasadena 7. I-10 East 8. Katy Freeway = Katy Freeway East + Katy Freeway West 9. Kingwood/Humble 10. N asa/Clear Lake 11. N orth Belt = North Belt East + North Belt West/Greenspoint
14. Richmond 15. San Felipe/Voss 16. South 17. South Hwy 35 18. South Main/Medical Center 19. Southwest = Southwest Beltway 8 + Southwest/Hillcroft 20. Westloop = Galleria/Uptown + Riverway + Post Oak Park 21. Westchase = Westchase East + Westchase West 22. Woodlands
Sublease Vacancy Space currently available in the market for sublease with an existing tenant within a building acting as the landlord.
11
Office Market Report
“ “
“ “
2Q’14
a fresh perspective... With Houston being the energy capital of the world, the city has made strides throughout the nations downturn in economy much quicker than other cities. With a leading economy brings new businesses to the area reducing vacancies to record lows. Companies are finding it more important than ever to seek the added value of a commercial real estate expert to combat the rising cost of occupying office space, even in a landlords market.
-Lane Morgan
Associate, NAI Houston
3rd quarter economics remain very strong for Houston commercial Landlords with Class B owners continuing to draft off the ever increasing Class A rental rates.
1900 West Loop South, Suite 500 Houston, TX 77027 tel 713 629 0500 www.naihouston.com
-Drew Crawford Associate, NAI Houston