Houston’s office market continues to struggle due to the downturn in the energy industry, leading to negative net absorption and decreased leasing activity. Leasing activity has dropped by 28.6% since Q3 2015 and by 13.8% over the quarter. Tenants are renewing existing leases, but more companies continue to contract than expand.
Houston’s office market posted 0.4M SF of negative net absorption during the third quarter. Even with the positive absorption year-to-date, because of the additional space completed and added to the market, Houston’s city-wide office vacancy rate rose from 16.2% to 17.1% over the quarter, and the annual rate rose significantly, increasing by 260 basis points from 14.5% in Q3 2015.
Available sublease space has increased from 7.1M SF to 12.0M SF, growing 68.6% over the year. The major energy firms, as well as the engineering companies and oilfield service firms that support them continue to suffer with the results of the significant drop in the price of oil. ConocoPhillips has almost 600,000 square feet of new, never occupied space on the market. Shell recently announced it will vacate the majority of its space in the CBD submarket, adding additional space on the sublease market. We are hopeful that Houston’s office market has hit the bottom and no more significant blocks of space will be added.
1.5M SF of new inventory delivered during Q3 2016 and 48.9% of this space is pre-leased. Houston’s office construction pipeline is shrinking and currently totals 2.9M SF, 73.0% less than the 10.8M SF under construction in Q3 2015. The majority of the new space is located in suburban submarkets and is scheduled to deliver over the next 15 months.
According to the U.S. Bureau of Labor Statistics, the Houston metropolitan area created 14,200 jobs (not seasonally adjusted) between August 2015 and August 2016. Most of the job growth occurred in education and healthcare, trade, transportation and utilities, and professional services.
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