Office market is showing signs of getting out of its funk
Houston’s commercial real estate market had a strong showing on all fronts except the office sector in 2018.
The region’s recovering office market, however, gained momentum in the second half of 2018, and Houston’s continued job growth should push demand for office space into neutral or positive territory in 2019, Avison Young realty brokers said last week at a media roundtable.
“We’ll see the office market continue to improve — it’s just a question of how fast,” said Rand Stephens, Avison Young principal and managing director of the Houston office.
While companies are leasing offices in new buildings in a bid to attract top employees, they frequently reduce their total footprint in the process. The new offices have more efficient layouts with shared work areas and state-of-the-art building amenities such as conference rooms, gyms and restaurants.
In Houston and nationally, companies are leaving behind more space that they’ll occupy as the square-foot-per-person ratio shrinks. Vinson & Elkins, for example, will take less space for its downtown law offices under construction at 801 Texas.
“It’s not a new trend, but it continues,” Stephens said. “That complicates a recovery as well.”
The office market is fragmented based on the location and age of properties, said Avison Young’s principal and tenant representative, Charlie Neuhaus. Landlords of older downtown buildings are under pressure to compete.
“Owners that are holding older vintage buildings are going to have to fight it out to attract tenants to move into those assets,” Neuhaus said.
Older buildings in certain regions could become candidates for redevelopment into other uses such as hotels or residences as investors look to reap tax advantages in newly created Opportunity Zones, brokers said.
For 2018, office absorption improved to negative 67,428 square feet, up from negative 1.1 million square feet in 2017, according to Avison Young. The Energy Corridor was highlighted as a region that will continue to rebound as companies seek space near employees’ homes.
With projected job growth of 70,000, Houston’s outlook for absorption of office space is forecast to be flat or positive in 2019, Avison Young said. The local market had a direct vacancy rate of 16 percent at yearend.
In the industrial sector, demand from both retailers and exporters of petrochemical products stemming from the shale boom contributed to a low year-end vacancy of 4.9 percent, Avison Young said.
Office sales recovered in 2018 and will be stronger in 2019, said Darrell Betts, a principal in Avison Young’s capital markets group. Industrial investments were down in 2018 as institutional owners held on to their properties. Prices for apartments rose, especially in strong regions such as Clear Lake, The Woodlands and Kingwood.
More than 11 million square feet of industrial space is under construction across the Houston area. About 7.7 million square feet of industrial space was absorbed in 2018, Avison Young said.
“I’m not sure that we’ll obtain that this year,” Avison Young principal Bob Berry said.