Second Quarter 2019 / Office Market Report Houston Quick Stats The Houston economy improved with The healthy economy is the likely cause record-level employment while the city’s behind the growing list of proposed buildings 79,800 office market experienced a brief setback as in the market. However, except for the Jobs created during the 12 negative absorption returned and vacancy Central Business District (CBD), most recent months ending May 2019 rates increased during the second quarter. construction involved build-to-suits for This diminished activity follows three quarters specific firms wishing to upgrade their space of positive activity generating more than and image. To remain competitive, owners 3.2% 565,000 square feet (sf) of positive absorption of older class A properties are investing in May unemployment rate in during the last 12 months. Class A properties major upgrades with amenities to attract and metro Houston, down from account for almost 1.2 million square feet retain quality tenants. One and Two Riverway (msf) of the absorption during that time, 4.1% in May 2018 and Marathon Oil Tower in the West Loop while class B properties countered with more submarket are the latest to join downtown’s than 673,000 sf of negative absorption. 6.8 Houston Center, Allen Center and Total Plaza Local employment growth is a bright with significant improvements. The flight- Million square feet of available economic point as May’s unemployment to-quality factor – firms opting for office sublease space, down from a rate plunged to 3.2% – the second lowest in efficiency in newer properties – is keeping high of 11 msf in 2016 history – from 4.1% year-over-year. Data from availability high as firms leave larger, vacant the Bureau of Labor Statistics reported this office spaces behind. 0.9% drop is among the largest decreases in 16.4% unemployment rates for large metros. For the Absorption and Demand Direct vacancy in Houston’s 12 months ending May 2019, the Houston office market metro area added 79,800 jobs, a 2.6% increase Direct negative net absorption returned to the year-over-year, according to Texas Workforce office market after three consecutive quarters Commission statistics. The leading job growth of gains. The overall market registered a total 1.9 sectors were professional, scientific and negative 806,124 sf during the second quarter Msf under construction technical services (18,000); durable goods while class A properties reported direct net manufacturing (13,300); health care (9,100); gains of 45,594 sf. Combined with the first and other services (6,800). quarter, the overall for mid-year totals is a Partnership. Performance. avisonyoung.com Houston Second Quarter 2019 / Office Market Report negative 616,015 sf. Class A properties a slight increase from last quarter but a building totaling 56,000 sf in the East Fort gained 515,723 sf, while class B recorded major drop from year-over-year’s 19%. Bend/Sugar Land submarket. more than 1.1 msf of negative absorption at midyear. When sublease absorption Direct availability citywide increased The long-awaited Bank of America Tower of 409,160 sf is added to the direct total, from 20.7% last quarter to 21.1% this at 800 Capitol came on line during class A properties gained 924,873 sf quarter. Total availability, including second quarter, and the namesake during the first half of the year. sublease space, is now company started moving in. Skanska’s at a record-level class A, platinum LEED building was CBD’s class A properties were the winners 23.9%, marginally called Capitol Tower throughout its during second quarter, recording 312,843 higher than the 16.4% construction phase and is the first new square feet of direct net absorption, 23.8% recorded one DIRECT VACANCY RATE CBD building since 609 Main at Texas resulting in a mid-year gain of 263,090 sf. year prior. Leasing opened in 2017. Skanska will join the Suburban properties recorded negative activity slowed this bank as a tenant in August while the absorption in all classes for both the year compared to 2018 largest tenant, Waste Management, has quarter and the year. but increased to 3.5 msf in scheduled its move into 284,331 sf in second quarter from 2.8 msf last quarter. Broken down by submarkets, CBD January 2020. Three other suburban recorded the highest positive net Total available sublease space increased buildings were completed during the absorption during the second quarter slightly from first quarter to 6.8 msf second quarter. followed by the Woodlands submarket. during second quarter; this is a 23% At midyear, three submarkets recorded drop from 12 months prior and a 34% Asking Rates more than 100,000 sf drop from second quarter 2017. Total Overall average asking rates have of absorption: the sublease space represents about 12% decreased slightly to $30.63 per square Woodlands (510,950 of the 55.7 msf available, and five foot (psf) gross from the previous quarter’s sf), CBD (341,283 sf) 313k sf submarkets account for 77% of all and the West Belt CBD CLASS A available sublease space. $30.73 psf but increased 3.3% from the ABSORPTION (125,164 sf). $29.65 recorded year-over-year. Quoted Construction asking rates have been stable and reported Occupancies during in the $29-$30 psf range during the last The construction pipeline remains the second quarter include five years. Throughout the downturn, limited, with nine buildings totaling Bank of America (209,674 sf) in its new landlords have offered various concessions, 1.9 msf under construction, of which tower in the CBD; Stewart Title (156,151 including year-long rent abatements and 37% is preleased. The CBD represents sf), GenOn (19,000 sf) and U.S. Well allowances covering the full cost of tenant about 60.5% of the total square footage Services (19,865 sf), all in BHP’s former improvement construction. space at 1360 Post Oak in the West Loop; with the largest building, Texas Tower Exterran Energy Solutions (58,857 sf) in at 845 Texas Avenue. Hines’ 1.1-msf Average asking rates for the different 11000 Equity in the West Belt; and Olin property is currently 33.9% preleased submarkets range from a low of and is scheduled for completion in Corporation (54,080 sf) in 16290 Katy $16.37 psf in the Southwest October 2021. Chasewood Crossing Freeway in the Katy Freeway West/ to $43.49 in the CBD. The Three, a 156,000-sf building in the Energy Corridor. $30.63 suburban submarkets with FM 1960 submarket, is scheduled to AVERAGE the highest rates include Vacancy & Availability be completed in August, while the QUOTED RATE the West Loop, Greenway only other larger suburban property The direct vacancy rate increased 30 underway, Park Place Tower River Oaks in Plaza and The Woodlands. basis points to 16.4% during the second the West Loop submarket, will deliver its Class A rates overall are also quarter from 16.1% last quarter, although 207,202 sf in March 2020. the rate is a drop from year-over-year’s marginally down to $36.45 psf from the 17.1%. Class A vacancy rates declined The largest building to break ground previous quarter but 4.5% higher than to 15.7% from last quarter’s 17.4%. during second quarter is a 180,000- second quarter 2018’s $35.05 psf. CBD Both class B and class C rates increased sf, build-to-suit project at 8770 New properties are currently quoting class this quarter; class B rose to 18.7% from Trails in the Woodlands submarket and A rates at $46.01 psf, 4.1% higher than 17.9% while class C dropped slightly to fully leased by Alight Solutions. Heavy the $44.18 recorded a year ago. Average 7.4% from 7.7% vacant. Overall vacancy Construction Systems Specialists (HCSS) suburban class A rates are currently including sublease space is now at 17.7%, also broke ground on its third campus $32.18 psf. Partnership. Performance. avisonyoung.com Asking Rates Second-Quarter Highlights $31 The newest class A, LEED-certified Construction Systems Specialists’ platinum office building at 800 56,000-sf Building 3 on its campus $30 Capitol in downtown Houston in Sugar Land and Alight Solutions’ is now complete with namesake new 180,000-sf, build-to-suit lease $29 tenant Bank of America relocating deal at 8770 New Trails Drive in The into 209,674 sf from 700 Louisiana. Woodlands. Bank of America Tower, known $28 throughout its multi-year Renovation announcements construction as Capitol Tower, is continue as older Class A buildings $27 85.5% preleased. seek to compete with newer, YE14 YE15 YE16 YE17 YE18 YTD19 amenity-filled properties. Total Vacancy Rate CityPlace 1, a 149,500-sf building Plaza at 1201 Louisiana downtown in Springwoods Village, along and Marathon Oil Tower in the 18% with two smaller buildings in the West Loop are the latest reported Northwest submarket joined Bank projects following other 1980’s of America Tower as the only other buildings including Houston 15% completions during the second Center, Allen Center and Riverway quarter. One and Three. 12% Properties breaking ground during second quarter included Heavy 9% YE14 YE15 YE16 YE17 YE18 YTD19 Trends to Watch Net Absorption With its central location within the U.S. and the Americas, Houston 8m is an important office base. The Oil The price of oil has fluctuated between following are regional updates for 6m $50 to $65 recently after a high in the key economic indicators. $70s in October 2018.