City awash in empty office space as companies weigh return
In many ways, there’s never been a better time to lease offices in Houston. Vast amounts of space are vacant. Prices are low. Landlords are ready to deal.
But in just as many ways, the decision to sign a lease has never been harder as companies rethink how — or if — they will bring employees back after more than a year of working at home. As Jackie Traywick, CEO of the nonprofit developer Central Houston, knows, a 10-year lease requires an eye to the future.
And the future of the office may never have been more uncertain, summed up by Traywick’s simple question “What are my needs going to be over that extended period of time?”
How executives answer that question will be key to the future of Houston’s commercial real estate market, awash in empty office space following years of nonstop building and a flood of sublease space as companies cut back during the pandemic. With vaccinations bringing the return to offices ever closer, companies face the choice of shrinking their footprints as employees work more from home, resuming the pre-pandemic normal or taking more space so workers can spread out as social distancing sensibilities linger.
So far, it’s hard to tell which way they’ll go, industry officials said. Trey Miller, a senior broker at Houston-based Boxer Property Management Corp., said most clients are not making long-term commitments. They are opting instead to extend leases for one or two years or moving from high-end offices downtown to short-term leases with cheaper rents near Loop 610.
When Snapseed, a 45person software company, had its lease come up in early 2021, it decided to go completely virtual until its employees were vaccinat
ed and it could reassess its needs for office space.
“They’re putting off a decision until the world comes back to normal,” Miller said. “The most common theme, by far, since the beginning of the year has been what I call kicking the can down the road.”
But some companies, such as Central Houston, are forging ahead. Traywick decided to move from the company’s offices in the Houston Center to a larger one within the same complex in September.
“We wanted to build in some growth for more people,” she said. “But looking down the road, whether it’s the flu or a resurgence of a COVID-like virus, it made sense to move some of those people to a more private workplace or a more isolated workplace from others.”
Density vs. rents
Office vacancies soared nationwide during the pandemic. In Houston, where the market was already dealing with the shale bust and an oversupply of office space, conditions combined to push the vacancy rate to the highest in the nation, according to the commercial real estate analytics company CoStar.
More than 63 million square feet of offices throughout the area were empty as of Thursday, 4.3 million more than a year before.
Nearly 19 percent of the region’s office space is vacant, compared with 9 percent in Seattle, the median market in CoStar’s analysis.
That has provided opportunities for companies such as Central Houston, which was able to lock in good terms and expand. During the pandemic, Traywick explained, many employees expressed concern about working in a close environment with an open floor plan.
The new space, which is 30 percent larger, will give more employees private offices, and the remaining cubicles will be scattered in groups of three or four.
Not every office tenant is opting to go big. Justin Boyar, CoStar’s director of market analytics, said individual companies will weigh many variables in the decision, including how much of employees’ work requires in-person collaboration.
While some companies will opt for more space for health reasons, he predicted many would balk at the expense, especially in a weak economy. Even before the pandemic, many firms were saving costs by creating flexible workspaces, so employees could work remotely and check into workstations as needed, reducing the space needed.
“A lot of companies will downsize their footprint,” he said, “because they’ll use their offices more for collaboration than for busy work, which they can do at home.”
Stephanie Burritt, a principal at the architecture firm Gensler’s Houston office, said so far her clients aren’t scaling back on space substantially but rather rethinking how they use the space. Clients are creating hybrid offices — where people can do part of their jobs from home and part in the office.
Reductions in space for desks are offset by an increased amount of space for collaboration, from meeting rooms to informal seating areas, Burritt said. Companies also are investing in technology so it’s easier for people in the office to meet with coworkers at home or in other cities.
“We’re starting to see that be a very big part of our project budgets,” she said.
Architects, brokers and tenants alike said the pandemic has emphasized the need for social contact, both for maintaining a healthy company culture and for sanity.
“At the end of the day, with virtual, we realize we can do a lot with technology, but there’s nothing like a face-to-face conversation,” said Laura Murillo, chief executive of the Houston Hispanic Chamber of Commerce, which chose to renew its lease in Amegy on Main downtown during the pandemic.
‘Great opportunity’
The shale bust had already pushed many companies to consolidate and downsize before the pandemic, causing a pullback in construction of new office space slated for 2022. CoStar forecasts that Houston commercial real estate market will begin recovering sooner than in tech-heavy cities that saw a more sudden reversal. Houston could see office occupancy rates increasing in early next year.
In the meantime, Boyar said, “tenants have many options.” As Traywick learned, prices are good; the market rate in Houston is down 1.2 percent from a year ago to an average $28.45 a square foot.
With 40 percent of Houston Center vacant, Central Houston had choices. Traywick chose to move from the 16th floor to the 42nd, in a location closer to the complex’s conference center and new fitness center.
“It’s a great opportunity,” she said. “Hopefully it’s inviting for (employees) to want to come back.”